The International Edge: Why It’s Working Now
May 2026, From the Field
- Key Insights
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- Higher rates and inflation have boosted European and Japanese banks, improving ROE and strengthening shareholder returns.
- Growth has broadened beyond tech, with industrials benefiting from reshoring, infrastructure, defense, power, and AI-driven investment.
- Japanese corporate reform and stronger international earnings growth have narrowed the gap with the U.S. and supported valuation improvement.
Post the pandemic and post the Ukraine war, I think we've seen some significant changes, though, that have kind of leveled the playing field a little bit further.
So firstly, deflation has very obviously changed to inflation. We've seen interest rates go from negative to positive pretty much everywhere around the world. And that's had a significant impact on financial companies, particularly financial companies in Europe and Japan. So, I think bank business models really aren't designed to work with negative interest rates. Positive interest rates has been a major driver in improving ROE and improving returns to shareholders.
We've also, I think, had a broadening in the sources of growth and the sources of economic profit within the economy. So again, the prior decade was driven by companies really fueled by intangible assets. We started to see better conditions for companies that kind of make stuff, specifically industrial stuff more than consumer. So coming out of the pandemic, we found that a lot of supply chains didn't work as well as we would have liked, a lot of infrastructure perhaps didn't live up to what we wanted from it. So we're seeing significant expenditure on those fronts, significant expenditure to reshore, to sort of bring supply chains in some ways back from China, more to the West. We're also seeing expenditure around power generation, power grids, defense, and I guess AI is now proving to be the kicker again. So a lot of the companies sort of making industrial products are looking at record order books, and that's dragging through a lot of materials to support those. And those companies tend to be sort of heavier into the indices in international. So we've broadened the source of profits growth.
I think the third factor that's been there for international is perhaps not a macro factor, but we've seen a change towards corporate restructuring, particularly in Japan, where we've started to see through a mixture of sticks and carrots, more focus on ROE for companies, release of excess assets. And that's sort of driven earnings growth as well.
So the combination of those three things have kind of seen international earnings growth go from kind of pitiful 1% per annum levels up to about five, still below the U.S. But again, the gap is roughly halved. And that sort of allowed the valuation discount to come through.
Has recent market dislocation derailed the broadening of the market that saw value-oriented sectors and small caps finally outperform?
Sébastien Page, T. Rowe Price’s head of Global Multi-Asset and chief investment officer; moderator Christina Noonan, multi-asset portfolio manager; and special guest Colin McQueen, portfolio manager of the T. Rowe Price International Value Equity Strategy as they share perspectives on where markets may be heading next. View here to catch the full replay of the valuable discussion.
Colin McQueen
Portfolio Manager
April 2026
From the Field
Webinar replay: Q2 '26 Asset Allocation Viewpoints
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