International Equities Monthly
- The U.S. dollar weakened sharply in 2025, falling 7.3% on a trade weighted basis. Moves of this magnitude are unusual; historically, annual dollar volatility has averaged below 5%. Last year’s decline ranks above the 75th percentile of historical outcomes.
- The dollar’s weakness reflected a confluence of shifting policy expectations. Most importantly, interest rate expectations changed as the Fed pivoted toward rate cuts in response to a cooling labor market. At the same time, growth prospects abroad improved, encouraging capital flows into non-U.S. equities and currencies. Tariffs and other “America first” policies also prompted some central banks and traditional dollar holders to diversify reserves toward alternatives such as gold.
- The Japanese Yen rallied in early 2025 but gave back those gains and continued to weaken into 2026. A weaker yen raises import prices and fuels inflation. The Bank of Japan has been slow to respond, wary of tightening policy while consumers are already strained by higher living costs. Meanwhile, the government has leaned toward fiscal stimulus to support households, a stance that runs counter to monetary policy and has contributed to further yen weakness. Export-oriented Japanese companies have benefited from the weak currency, offsetting negative currency effects for U.S. investors.
- European currencies, including the euro and the pound, all rallied against the dollar in 2025. This outperformance came in the first half of the year as expectations for Fed rate cuts grew. The eurozone further benefited from capital inflows and relatively stronger-than-expected growth signals. Investor sentiment toward European assets improved just as safe haven demand for the dollar faded.
- Emerging market currencies showed more mixed performance, but in aggregate posted modest gains against the dollar. China, which actively manages its currency, allowed the yuan to rise by about 4%. The yuan is expected to continue appreciating in 2026, supported by undervaluation, growing trade surplus, and policy tilts toward stability.
- The MSCI EAFE index delivered a 32% return for U.S. investors in 2025, its best return since 2009. In local-currency terms, the return was 21.2%, implying that dollar weakness contributed 10.8 percentage points to U.S. dollar returns. Even excluding currency effects, EAFE outperformed the S&P 500.
- Spain was the top-performing country, with an 82% return. Financials account for roughly half of the Spanish index and returned 124%. Banks were major contributors across EAFE more broadly, as both Europe and Japan transitioned from a regime of negative interest rates to positive and rising rates, significantly improving bank profitability.
- The Value style significantly outperformed Growth. The MSCI EAFE Value index returned 43.5% in U.S. dollars, compared to 21.2% for the Growth index. Strong returns from Financials, Utilities, Industrials, and Energy drove the performance gap. Value has now outperformed Growth over the past five years. This is a significant departure from U.S. style returns. Historically, EAFE style returns moved largely in sync with the U.S. This has led to lower correlations between the indexes, increasing the importance of EAFE as a diversifier.
- While Growth lagged Value, EAFE Growth still outperformed the Russell 1000 Growth index in U.S. dollar terms, with currency playing a large role in the return differential. In local currency terms, EAFE Growth would have underperformed US Growth. The EAFE Growth index has significantly less technology exposure. Only two technology stocks are in the top ten. As with the broader EAFE index, EAFE Growth offers more diversified and less concentrated exposure relative to U.S. Growth stocks.
- Looking ahead, we believe developed international equities continue to offer long-term advantages - including lower valuations, higher dividend yields, potential currency tailwinds, and less reliance on a narrow set of U.S. mega cap stocks.
- The MSCI EM index returned 34.3% for U.S. investors in 2025. In local currencies, the return was 32.1%, meaning currency effects contributed a modest 2.2 percentage points for U.S. investors.
- Style returns were closely aligned. The MSCI EM Growth index returned 34.7%, while the Value index returned 33.8%. This balance is reflected in the two top-performing sectors, Materials and Technology. Materials benefited from strong performance in precious-metal and copper miners, while Technology gains were driven by AI supply chain companies as well as a reawakening of a number of past China favorites such as Tencent and Baidu.
- Earnings growth appeared modest at roughly 8%, which may seem low relative to overall returns. However, this headline figure masks important regional differences. China, the largest index weight, was the primary drag on earnings growth, but entered 2025 trading at historically depressed valuations amid growth and tariff concerns. Sentiment on China improved over the course of the year as growth surprised to the upside and amid signs of an ability to manage tariff threats. Earnings for other EM countries were much stronger.
- Korea and Taiwan were significant contributors to performance, reflecting the performance of leading contributors to the AI supply chain. Semiconductor companies TSMC, Samsung, and SK Hynix consistently exceeded earnings expectations and raised guidance.
- Currency effects played a bigger role for Mexico and Brazil. In Mexico, market gains were anchored by solid earnings as healthy trade with the U.S. helped support the economy. Brazil’s performance was more valuation-driven. Equities began the year deeply discounted, and sentiment improved as metal and agricultural commodity prices rose while growth expectations improved.
- EM’s robust performance in 2025 does not preclude further gains. Valuations remain attractive relative to developed markets, and low-teens earnings growth expectations appear reasonable and supportive.
Equity Indexes Characteristics
The Indexes mentioned are unmanaged statistical composites of stock market or bond market performance. Investing in an index is not possible.
Glossary of Investment Terms and Index Definitions
*Local currency earnings estimates are not available for broad indexes with a mix of currencies.
Source: Bloomberg. Percent ranks are based on 30 years of monthly data as of the end of November; EPS growth estimates based on consensus bottom-up analyst estimates.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of Crit Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA – Vice President and Senior Fixed Income Strategist, and Tim Paulin, CFA – Senior Vice President, Investment Research and Product Management, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800.638.8194 for more information.
A Word About Risk
Investing in equities is subject to market volatility and loss. Investing in foreign and emerging markets securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The risks associated with investing in foreign markets are magnified in emerging markets due to their smaller economies. Events in the U.S. and global financial markets, including actions taken to stimulate or stabilize economic growth may at times result in unusually high market volatility, which could negatively impact asset class performance. Banks and financial services companies could suffer losses if interest rates rise or economic conditions deteriorate.
Performance data quoted represents past performance, which is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data given. For performance information current to the most recent month-end, visit TouchstoneInvestments.com/mutual-funds.
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
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