Don't give up on foreign stocks due to geopolitical tensions

International equities have cratered due to the Iran war, falling far more than U.S. stocks. Advisors, nevertheless, are telling clients not to give up on foreign stocks and maybe even add some more.

The iShares Core MSCI Total International Stock ETF (Ticker: IXUS), which tracks a multi-cap index of non-U.S. equities, is down over 6% since hostilities in the Middle East began last week compared with a slightly more than 1% drop in the S&P 500. Over the past year, the IXUS is up more than 26% versus a 17% gain in the U.S-based S&P 500.   

Julian McManus, portfolio manager at Janus Henderson Investors, says investors should consider adding international equities to their asset mix due to their dual benefit. Not only do they provide welcome diversification at a time when the market is looking to broaden out from the Mag 7 in his view, but they also trade at attractive valuations compared to their U.S. counterparts.

“Taiwan Semiconductor (Ticker: TSM), for example, trades at a PE in the high teens, roughly half that of say, Apple (Ticker: AAPL) or Nvidia (Ticker: NVDA), despite manufacturing all of the latter’s silicon,” McManus said, adding that he is also bullish on defense sector plays like BAE Systems (Ticker: BAESY) as European nations step up their military spending.

Michael Beck, co-portfolio manager for the Parnassus International Equity Fund, meanwhile, says investors must recognize that markets are now moving on geopolitical shocks, not fundamentals. As equity investors, he thinks the best way to navigate this market dynamic is through actively managed strategies that apply diligent fundamental research to find the companies best positioned for long-term success.

“We’re finding compelling opportunities in areas where structural demand should persist regardless of short-term geopolitical noise. Examples include electrification and grid investment in Europe, where we like National Grid and Iberdrola, the largest power networks in the U.K. and Spain. Both companies benefit from faster electricity demand growth, higher renewables penetration, aging grid infrastructure, and increasing focus on energy security,” Beck said.

He also likes innovative healthcare companies like France-based Sartorius Stedim Biotech, a leader in bioprocessing equipment that is benefitting from secular growth in biologic drug manufacturing, as well as mission-critical semiconductor leaders like Netherlands-based ASML (Ticker: ASML).

Moving on, Dina Ting, head of global index portfolio management at Franklin Templeton, believes commodity-linked markets like Canada and Brazil may benefit if elevated energy prices persist, while other regions are earlier in their monetary and earnings cycles.

India, as a significant net importer of oil, may face heightened sensitivity to geopolitical and energy developments, according to Ting. Sustained higher energy prices could pressure inflation and corporate margins, and disruptions around key maritime corridors could weigh on export flows. Over the longer term, however, she calls India’s structural story compelling.

“It is projected to remain one of the fastest-growing major economies, supported by resilient domestic demand, infrastructure investment, digital public platforms and ongoing reform,” Ting said.

One typical misconception that persists among US investors, Ting says, is that international markets are lower-growth and technology-light compared with the U.S.

“It’s true, the U.S. is the 800-pound gorilla in AI capital, but markets such as China, South Korea and Japan capture value in the infrastructure, manufacturing and deployment layers of the AI stack that are often missed in U.S.-centric growth narratives. South Korea, for example, dominates memory chips, and Japan integrates AI into industrial productivity in ways that support durable earnings outside the U.S. tech bubble,” Ting said.