In the final quarter of 2025, global equity markets experienced a robust close, with international equities notably surpassing their U.S. counterparts. This marked the most significant annual outperformance for international markets since the Great Financial Crisis, fueled by a depreciating dollar, converging interest rate differentials, and compelling relative valuations. Despite this overall trend, the Baird Chautauqua International Growth Fund saw a modest return of +0.11%, lagging behind the MSCI ACWI ex-U.S. Index® ND. Key developments included a trade agreement between Presidents Trump and Xi, leading to reduced fentanyl-related tariffs on Chinese goods, and strong performance from companies like Fanuc, which reported better-than-expected earnings and raised its profit outlook.
The landscape of global equities demonstrated a clear shift in 2025, with non-U.S. markets exhibiting substantial growth. This resurgence was underpinned by several macroeconomic factors. The dollar's depreciation made international assets more attractive to investors holding other currencies, while the gradual narrowing of interest rate disparities between various global economies fostered a more balanced investment environment. Furthermore, many international markets presented more favorable valuations compared to their U.S. counterparts, drawing capital seeking higher potential returns.
Amidst this backdrop, specific corporate performances highlighted the nuances within the international market. Fanuc, a prominent player, reported impressive September quarter results that exceeded market expectations. The company also upwardly revised its full-year operating profit guidance by 10%, signaling a strong recovery in demand across its sectors. This positive performance from individual companies contributed to the overall buoyancy of international equities, reflecting underlying strength in various global industries.
Geopolitical and trade dynamics also played a crucial role. The agreement between Presidents Trump and Xi in October led to a reduction in fentanyl-related tariffs on Chinese goods. Such policy adjustments can have widespread implications for global trade and investment flows, influencing market sentiment and corporate strategies, particularly for companies with significant cross-border operations. The strategic positioning of management, favoring international equities and employing a selective investment approach, aimed to mitigate risks associated with tariffs and other policy uncertainties.
Looking ahead, management expresses continued confidence in the potential of international equities. Their strategy emphasizes a selective approach, focusing on companies with strong fundamentals and growth prospects. This deliberate investment philosophy is designed to navigate potential tariff-related risks and capitalize on attractive opportunities within the diverse international market landscape. The goal is to leverage the robust performance seen in international markets while carefully managing exposure to volatile geopolitical and economic factors.
The remarkable outperformance of international equities against U.S. equities in 2025 underscores a pivotal shift in global financial dynamics. This period was characterized by a confluence of a weaker dollar, shrinking rate differentials, and appealing international valuations. While the Baird Chautauqua International Growth Fund's returns were subdued, the broader market saw significant moves, influenced by trade agreements and strong corporate earnings from entities like Fanuc, indicating a vibrant, albeit complex, global investment climate.
