MW The anywhere-but-America trade has been working. But there are limits.

By Steve Goldstein

It's logical to think that if the U.S. enters a recession - and odds of a downturn are rising - so will leading industrialized nations

Investors have been rewarded for investing outside the United States this year - but real headwinds are emerging that could limit the successful trade.

Heading into Tuesday, the Vanguard Total International Stock exchange-traded fund VXUS has gained 6% this year, and funds invested specifically in Europe and China have done even better: The Vanguard FTSE Europe ETF VGK has gained 13% and the KraneShares CSI China Internet ETF KWEB has shot up 21%. The S&P 500 SPX, by contrast, has dropped 5%.

That said, the anywhere-but-America trade is still very much dependent on America. According to FactSet, the companies in the Vanguard FTSE Europe get 24% of their sales from the U.S., more than any other individual country. In fact, Europe as a whole still does not represent a majority of sales for European stocks.

Even excluding the issue of tariffs, if the U.S. coughs, the rest of the world is going to catch a cold, as the old adage says. That's backed up by hard data.

Using International Monetary Fund data going back to 1980, there's a high 0.75 correlation between growth in the U.S. and growth in the rest of the Group of Seven countries. So it's logical to think that if the U.S. enters a recession - and odds of a downturn are rising - so will leading industrialized nations, even if they could placate President Donald Trump on trade, which it very much looks like they cannot.

Furthermore, much of the enthusiasm for Germany and Europe stocks stems from pledges by the countries' leaders to spend more. That's easier said than done, as shown by the resistance from the Green Party in Germany to a package that needs to be completed this month before the next government takes office. European leaders similarly have not yet agreed to a EUR800 billion defense package put forward by the European Union.

Granted, Chinese internet stocks don't have the problem of being too dependent on the U.S., because an array of roadblocks both in China and the U.S. have largely splintered the tech market in half.

But UBS's global wealth management office has downgraded Chinese tech stocks to neutral from attractive.

"We no longer believe that markets underappreciate the potential for China internet stocks, and we believe further tariff escalation between the U.S. and China is likely as structural concerns remain unaddressed," they said.

-Steve Goldstein

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March 11, 2025 12:05 ET (16:05 GMT)

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