CONTRIBUTORS
Dina Ting, CFA
Head of Global Index Portfolio Management,
Franklin Templeton ETFs
Six months after “Liberation Day”—when sweeping US tariff reversals and revisions redefined the global trade landscape—investors are positioning for asynchronous recoveries shaped by domestic policy, trade integration and technological competitiveness.
The dispersion among global equities had already begun widening in the final quarter of 2024, revealing a performance gap between the top and bottom markets that now exceeds 60 percentage points—a vivid illustration of how post-tariff dynamics have redrawn the investment map.
For now, the scoreboard is clear: South Korea, Mexico and China have been this year’s breakout winners.
Australia, India and Saudi Arabia may be the next cycle’s sleepers.
The big picture: A world of divergence
From Asia’s chip exporters to Latin America’s nearshoring hubs, the market response has been strikingly uneven. Total returns in 2025 show the power of policy normalization and supply-chain realignment: South Korea (+64%), Mexico (+42%), and China (+37%) are leading global markets, while Australia (+17%), India (+3%), and Saudi Arabia (+2%) round out the year’s laggards so far.1
We believe macro shifts and trade reordering have made country-level differentiation essential. This is leading many investors to turn to specific countries for tactical exposure, layering allocations to markets that most directly benefit from evolving tariff and growth dynamics.
We evaluated about a dozen economies for their role in global index composition.
The top three: Reordering global leadership
The Top Three
a. Source: “Tariffs: Korea Gets A Deal.” Barclays. July 31, 2025.b. Source: “Latin America Economic Outlook & Strategy.” Citi Research. September 29, 2025.
c. Includes Hong Kong and Macau.
d. Source: “State of U.S. Tariffs: October 17, 2025.” The Budget Lab at Yale.
e. Source: EIU Country Report, October 15, 2025
Sources: FactSet, official government statistics, Center for Global Development, Nomura, Barclays, Budget Lab at Yale, Citi Research, Latin America Economic Outlook & Strategy, Economist Intelligence Unit.
South Korea: Tech-led takeoff
No market has benefited more since “Liberation Day” than South Korea. Korean stocks are up nearly 64% year-to-date in US dollar terms, marking the strongest global equity performance in 2025.2 The unwinding of semiconductor export tariffs, coupled with booming artificial intelligence (AI) infrastructure demand, has revitalized Korea’s manufacturing base. If global chip investment remains strong and memory prices continue rising, we believe Korea’s export momentum should persist. While we remain alert to potential escalations in geopolitical tensions, we will also be watching for any slowdown in technology spending, which could lead the market’s cyclicality to reassert itself. That said, we view Seoul’s consistently elevated trade surplus with the United States through mid-2025 as a signal that net exports remain well-placed to make a meaningful contribution to gross domestic product (GDP) growth.
Complementing these strong external fundamentals, domestic policy shifts are also shaping investor sentiment. In a notable policy reversal, President Lee Jae Myung’s administration scrapped plans to lower the capital-gains-tax threshold for stock investors after pushback from retail shareholders. The decision, initially intended to bolster fiscal revenues, instead reaffirmed the government’s focus on supporting market confidence and sustaining the equity rally.
Still, in our analysis, Korea’s ongoing corporate-governance reforms and deep integration in regional trade networks make it a core tactical overweight for investors seeking exposure to technology-driven growth.
Last year, the country’s current account surplus with the United States grew to more than US$118 billion—from about US$88 billion previously, reflecting underlying external-sector strength in the face of global headwinds.3
Mexico: Still a nearshoring star
Mexico’s 42% year-to-date total return highlights its renewed momentum as North America’s manufacturing backbone.4 As global companies diversify away from China, Mexico has capitalized on its proximity to US supply chains and improving logistics infrastructure.
Recently, the Organisation for Economic Co‑operation and Development (OECD) lifted its 2025 growth forecast for Mexico to roughly 0.8 % based on surprisingly resilient exports, underscoring how the external sector is offsetting domestic weakness. At the same time, we continue to see downside risks in slowed formal job creation, somewhat faltering investment and ongoing inflation pressures—a reminder that structural hurdles remain.
Notably, the materials and financials sectors have been among the best performing year-to-date. Materials stocks are benefiting from nearshoring tailwinds and rising demand for metals and inputs tied to supply-chain reshoring. Meanwhile, financials appear to be benefiting from stable currency dynamics, export-led credit extension and improving corporate profitability.
We expect tariff exemptions for goods compliant with the United States-Mexico-Canada Agreement (USMCA) to stay in place, reducing the tariff-related drag on exports. If US industrial demand stays solid and recent tariff disputes can remain contained, we believe Mexico could sustain this performance into 2026. A stronger rule of law under President Claudia Sheinbaum’s administration could provide additional upside, bolstering investor confidence and governance credibility. If US growth slows, near-term earnings may moderate, but we believe structural tailwinds should continue to support Mexico’s medium-term outlook.
Investors have used Mexico allocations as a clear play on the “friendshoring” theme, highlighting the appeal of its currency stability, export momentum and strengthening fiscal discipline.
China: From friction to fragile rebound
A renewed US-China trade row, triggered by fresh rhetoric and tariff threats from Washington, briefly unsettled markets in early October. Yet China’s measured response—in reaffirming its commitment to the June détente that paused retaliatory tariffs—helped calm investors and underscored Beijing’s intent to preserve stability. More recently, both sides announced a preliminary framework agreement to suspend new tariffs and relax certain export restrictions, signaling a tangible de-escalation in tensions. The move boosted market sentiment globally and reinforced expectations for steadier trade and supply-chain conditions. At the same time, China continues to balance firmness with pragmatism, using its leverage in rare earths and permanent magnets—critical to defense systems, electric vehicles and green technologies—more as a bargaining tool than an active weapon. Against that backdrop, the 37% year-to-date return of China’s stock markets marks a stunning reversal from last year’s underperformance.5 Improved business confidence and firmer export orders point to the early payoff from easing trade frictions and targeted domestic stimulus.
During the extended Golden Week holiday in early October, travel and consumer activity surged. Government data showed nearly 890 million passenger trips and about US$114 billion in spending—both up roughly 15% year-on-year—pointing to renewed momentum in the services and retail sectors. Combined with the upcoming Singles Day shopping season in November, these trends may bode well for a turnaround in China’s household spending.
On the supply-chain front, Beijing’s recent export curbs on heavy rare-earth materials underscores China’s enduring importance in global tech and clean-energy value chains—a structural strength we believe should not be overlooked when considering allocation to China.
If domestic stimulus endures and local governments manage debt effectively, China could maintain its recovery momentum. Structural shifts toward electric vehicles, renewables and advanced manufacturing reinforce a cautiously optimistic case for a more durable market rerating.
Notable midfield momentum: Emerging rotation
The Midfielders
a. Source: “US tariffs on Brazilian goods: Economic consequences and dividend outlook.” S&P Global. September 23, 2025.
b. Source: “Taiwan: Tariff scenarios and 2H outlook.” DBS Bank. July 18, 2025.
c. Source: “State of U.S. Tariffs: October 17, 2025.” The Budget Lab at Yale.
d. Source: “Japan: FY25-27 economic outlook revisions.” Nomura. September 8, 2025.
Sources: FactSet, official government statistics, Center for Global Development, S&P Global, DBS Bank, Budget Lab at Yale, Nomura, Congress.gov.
While our focus for this article is spotlighting this year’s standouts and laggards, several markets in the middle of the global pack also merit attention. Brazil, Taiwan and the United Kingdom have each shown mid-tier strength that reflects solid fundamentals rather than cyclical exuberance. Brazil’s commodity resilience, interest-rate cuts and renewed fiscal credibility have fueled market gains of nearly 31%.6 Taiwan continues to ride AI-driven semiconductor demand despite intermittent outflows and its market gained 26.5% year-to-date.7 The United Kingdom’s improving inflation backdrop and revived fiscal confidence have helped deliver returns near 25%.8 We will examine these “next-wave markets” in greater depth in an upcoming commentary exploring the rotation across secondary outperformers.
Global ETF Flows
Year-to-Date through October 14, 2025
Source: Bloomberg.
Japan: Policy-driven renewal amid structural shifts
Japan’s equities have delivered about 21% year-to-date in US dollar terms,9 supported by stronger earnings, governance improvements and renewed investor interest. Global asset managers are returning to Japanese stocks and bonds, drawn by the potential of a reflation-driven government and the relative attractiveness compared with higher-priced US and European markets.
Fresh off leadership of the ruling Liberal Democratic Party, Sanae Takaichi recently became Japan’s first female prime minister. Her appointment triggered what market observers are calling the “Takaichi trade”—a surge in equity appetite as the market priced in increased fiscal stimulus and policy continuity.
At the same time, a recent International Monetary Fund (IMF) upgrade of Japan’s 2025 growth forecast to 1.1% (from 0.7%) adds weight to its turnaround story. Furthermore, a Bank of Japan manufacturing survey also showed a second consecutive quarter of improved sentiment, which we believe may signal traction gaining among corporate capital spending.
Nevertheless, risks persist. Japan’s newly formed coalition lacks a parliamentary majority, policy execution may prove inconsistent and US tariff policy and softness in global growth are notable among potential external headwinds.
If Takaichi’s administration can execute on its reflation agenda and drive stronger global trade ties, we believe Japan could move from midfield to outperformer in 2026. For now, we believe its policy refresh, corporate catalysts and improved sentiment make it a compelling pivot point in the global rotation story.
The bottom three: Value beneath the surface
The Bottom Three
a. Source: “Research note: The impact of US tariffs on Australian industry.” AiGroup
b. Source: ING.
c. Source: IMF.
Sources: FactSet, official government statistics, Oxford Economics, Center for Global Development, S&P Global, DBS Bank, Budget Lab at Yale, Nomura, IMF, MUFG Research, AIG Group.
Australia: A cautious anchor in transition
Australia’s equity market has gained about 16.7% year-to-date in US dollar terms,10 a modest but steady performance reflecting balance rather than exuberance. Growth has been supported by resilient commodity exports, improving consumption and cautious monetary easing. The Reserve Bank of Australia’s recent rate cuts have helped stabilize housing and consumer confidence while keeping inflation on a downward path. Mining and financials have led returns, offsetting weakness in discretionary sectors, even as softer Chinese demand weighs on iron ore and lithium. Canberra’s fiscal stance remains expansionary, with targeted investment in energy transition and infrastructure to maintain employment. Still, productivity growth continues to lag its long-term trend, tempering longer-term optimism. For global investors, we believe Australia serves as a low-volatility, income-oriented anchor—an economy underpinned by policy stability and fiscal discipline but constrained by external dependency. If China’s recovery falters or commodity prices soften, export momentum could slow. However, in our analysis, diversified fiscal support and resource exposure leave Australia better positioned than many peers to navigate global uncertainty.
India: The pause before the next leg
India’s equities advanced just about 3% year-to-date in US dollar terms,11 cooling after two strong years of outperformance. Elevated valuations, ebbing foreign inflows and slower corporate earnings growth have tempered sentiment, though we believe the subcontinent’s underlying domestic story remains robust. Ongoing infrastructure expansion and rapid digital adoption are delivering measurable productivity gains in India.
Government capital spending has more than quintupled over the past decade, amounting to about 3.4% of GDP in fiscal year 2025–26, while private sector capital expenditure is also at record highs. On the digital front, initiatives like the Unified Payments Interface (UPI), expanding broadband penetration and logistics digitization are improving transaction efficiency and reducing costs. In late July, US President Trump announced a 25% tariff on all goods imported from India, effective August 1, 2025. A week later, however, he issued an executive order adding another 25% levy, taking total tariffs on many Indian products to roughly 50%. Recently announced US tariff exemptions for select consumer electronics assembled in India—particularly in the premium smartphone segment—have, however, reinforced the country’s position in global high-tech supply chains. These shifts are helping streamline operations, raise capacity utilization and improve output—factors increasingly reflected in stronger total factor productivity metrics. Rural employment programs and government-led capital spending have supported demand, but export-facing sectors have softened as global manufacturing slows. Some investors have rotated toward more attractively priced Asian peers, yet India’s long-term appeal—anchored in its demographic dividend, manufacturing expansion and reform momentum—remains compelling, in our analysis. Key initiatives such as industrial corridor development, renewable energy build-out and streamlined logistics should sustain medium-term growth. If fiscal prudence holds and private investment rebounds, India could reassert leadership among emerging markets in 2026, making the current consolidation a potential entry point rather than a structural setback.
Saudi Arabia: Patience amid a shifting energy map
Saudi Arabia’s market has been the weakest among major peers this year, rising only about 2.2% in US dollar terms,12 as subdued oil prices and reduced foreign participation weighed on returns. Brent’s slide below US$80 per barrel earlier in the year compressed fiscal surpluses and energy-sector earnings, dampening investor appetite. Yet, the non-oil economy continues to expand at over 4%, driven by record tourism arrivals, real estate development and large-scale Vision 2030 projects. The government’s willingness to tolerate budget deficits reflects a deliberate strategy—funding near-term imbalances to accelerate long-term diversification away from hydrocarbons. In essence, Saudi Arabia is trading short-term fiscal comfort for structural transformation, underpinned by its strong reserves and modest debt load. The Public Investment Fund (PIF) remains a central stabilizer, channeling sovereign wealth into green energy, infrastructure and logistics hubs. Despite near-term market softness, capital-market liberalization and diversification efforts are progressing, with new regulations encouraging greater institutional participation. The IPO pipeline has been slower than expected, but renewed listings in 2026 could revive sentiment. For long-term investors, Saudi Arabia offers a contrarian value story—short-term headwinds mask the steady transformation of its growth model from hydrocarbons to services and technology. As reforms mature, we believe a gradual rerating of Saudi assets appears increasingly plausible.
Endnotes
- Source: Bloomberg as of October 15, 2025. The FTSE RIC Capped Net Tax Indexes represent the performance of their respective countries’ large- and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Bloomberg, as of October 15, 2025. The FTSE South Korea RIC Capped Net Tax Index represents the performance of South Korean large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Yonhap News Agency, June 20, 2025
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Source: Bloomberg, as of October 15, 2025. The FTSE Mexico RIC Capped Net Tax Index represents the performance of Mexican large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Bloomberg, as of October 15, 2025. The FTSE China RIC Capped Net Tax Index represents the performance of Chinese large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Bloomberg, as of October 15, 2025. The FTSE Brazil RIC Capped Net Tax Index represents the performance of Brazilian large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Bloomberg, as of October 15, 2025. The FTSE Taiwan RIC Capped Net Tax Index represents the performance of Taiwanese large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Bloomberg, as of October 15, 2025. The FTSE UK RIC Capped Net Tax Index represents the performance of UK large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Bloomberg, as of October 15, 2025. The FTSE Japan RIC Capped Net Tax Index represents the performance of Japanese large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Bloomberg, as of October 15, 2025. The FTSE Australia RIC Capped Net Tax Index represents the performance of Australian large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Bloomberg, as of October 15, 2025. The FTSE India RIC Capped Net Tax Index represents the performance of Indian large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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Source: Bloomberg, as of October 15, 2025. The FTSE Saudi Arabia RIC Capped Net Tax Index represents the performance of Saudi Arabian large-and mid-capitalization stocks. Securities are weighted based on their free-float-adjusted market capitalization and reviewed semiannually. Net Tax indicates that the index's performance is calculated after accounting for the net withholding tax on dividends received by a US Regulated Investment Company. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
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