Portfolio Managers Christopher O'Malley and Julian McManus discuss the factors supporting markets outside the U.S. and where they continue to find attractive opportunities.

Source: Bloomberg. Chart shows the annual difference in total return (%) between non-U.S. equities, as represented by the MSCI ACWI ex USA Index, and U.S. equities, as represented by the S&P 500® Index. Positive values indicate years in which international equities outperformed U.S. equities. *Data for 2026 is year-to-date as of 31 July 2026. Past performance does not predict future results.

While a fluid macro environment may continue to drive bouts of volatility, we do not believe last year's strong performance from ex-U.S. equities should be viewed as an aberration. In our view, a combination of secular trends and long-term structural shifts are shaping an attractive environment for active stock selection. European banks have generated their strongest profitability in more than a decade while still trading at a discount to many U.S. peers, and defense firms stand to benefit from a sustained ramp-up in military spending. We also see opportunities in leading technology suppliers at the heart of the AI buildout, select luxury consumer companies, and Japanese financials positioned to benefit from a supportive rate backdrop.

Christopher O'Malley, Portfolio Manager

• After outperforming U.S. equities by the widest margin since 2009 last year, international stocks extended their lead through the first half of 2026. If the trend holds, it would mark the first consecutive years of ex-U.S. relative outperformance since before the Global Financial Crisis (GFC) in 2008-2009 - a period that saw a multi-year stretch in which non-U.S. equities outpaced their U.S. peers.
• While U.S. equities should continue to benefit from powerful secular trends, we believe many investors accustomed to U.S. leadership may be overlooking the potential of international equities as a source of differentiated returns. In addition to providing access to themes such as artificial intelligence (AI) and the related infrastructure buildout, overseas markets offer a broader mix of geographies, policy environments, and sector exposures, creating a diverse set of potential return drivers.
• We continue to find attractive opportunities in companies with durable competitive advantages, strong free cash flow growth, and valuations that do not fully reflect their long-term potential.

*Data for 2026 is year-to-date as of 31 July 2026. Past performance does not predict future results.

IMPORTANT INFORMATION

Actively managed investment portfolios are subject to the risk that the investment strategies and research process employed may fail to produce the intended results. Accordingly, a portfolio may underperform its benchmark index or other investment products with similar investment objectives.

Aerospace and defense industries can be significantly affected by changes in the economy, fuel prices, labor relations, and government regulation and spending.

Artificial intelligence ("AI") focused companies, including those that develop or utilize AI technologies, may face rapid product obsolescence, intense competition, and increased regulatory scrutiny. These companies often rely heavily on intellectual property, invest significantly in research and development, and depend on maintaining and growing consumer demand. Their securities may be more volatile than those of companies offering more established technologies and may be affected by risks tied to the use of AI in business operations, including legal liability or reputational harm.

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.

Financials industries can be significantly affected by extensive government regulation, subject to relatively rapid change due to increasingly blurred distinctions between service segments, and significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.

Environmental, social and governance (ESG) ratings now sit inside many investment processes. They can influence portfolio construction, risk management, stewardship priorities, product design and client reporting. Yet the same company can be rated a sustainability leader by one provider and a laggard by another.

This isn't a simple data problem. It reflects different judgements about what to measure, how to measure it and how much weight to give each issue. Importantly for active managers, rating discrepancies can create opportunities.

The scale and sources of disagreement

Academic research¹²³⁴⁵ shows that the correlations between major ESG rating providers are often only moderate. Some studies⁶ suggest that around half of listed companies receive conflicting ESG classifications in the same year, despite better disclosure and more regulatory scrutiny.

Research identifies three main drivers of divergence: 

• Measurement: providers use different indicators for the same issue.

• Scope: providers include or exclude different ESG topics.

• Weighting: providers aggregate indicators in different ways and place different importance on the same issues.

Measurement differences explain most of the disagreement. ESG ratings aren't interchangeable measures of one truth, but analytical views shaped by the provider's lens. Regulators recognise this issue. The EU ESG Ratings Regulation, applying from July 2026, introduces authorisation, transparency and governance requirements for providers.

What are ESG ratings measuring?

ESG scores often blur two different concepts: financial materiality and impact materiality.

Financial materiality asks how environmental and social factors affect a company's profits, cash flows, asset values, borrowing costs and downside risk.

Impact materiality asks how a company's operations affect the environment and society, and whether or not markets price those effects today.

It's not always clear which of these two objectives an ESG score is answering. When financial risks and impact risks are conflated, reliance on a headline ESG score becomes problematic for investment decisions.

What are the consequences for investment outcomes?

Disagreement over ESG ratings has practical consequences for investors. 

• Asset pricing and risk

  When providers agree, markets may price ESG risks more easily. When they disagree, the signal weakens. Some studies⁷ link higher disagreement with higher volatility or higher required returns. For active investors, this mispricing can represent opportunities rather than noise. 

• Portfolio construction and investability

  Requiring agreement between two providers can exclude more than half of an investable universe. Stricter consensus increases confidence, but reduces diversification and raises tracking error; looser approaches preserve diversification, but risk including companies with contested ESG profiles. 

• Capital allocation signals

  Mechanical use of ESG scores risks rewarding form over substance. Mixed ESG signals make it difficult to understand which sustainability investments are rewarded by markets. This can lead to inefficient ESG investment behaviour, including underinvestment in financially material issues and overinvestment in visible but less substantive activities. 

• Stewardship challenges

  Disagreement can distort engagement priorities, making stewardship provider-led rather than investor-led, which reduces effectiveness and credibility.  

Methodology changes can move ratings

Recent ESG methodology revisions illustrate how provider-specific choices can move ratings without any change in company behaviour. MSCI's March 2026 update changed ratings for around one-third of the companies covered, with slightly more upgrades than downgrades.

For strategies using discrete rating thresholds, even modest methodology changes can trigger portfolio changes unrelated to fundamentals.

Our active approach

At Aberdeen Investments, we believe third-party ESG data is a valuable input, but outsourcing judgement to a single provider is inconsistent with our fiduciary responsibility.

Our framework combines governance assessments, operational ESG risks analysis and product-level information. This helps portfolio managers assess ESG issues through a financial materiality lens. Internal specialists challenge inconsistencies and add context from research and engagement, keeping accountability with the investment team rather than the data provider.

Active ownership strengthens the process by testing company claims, challenging assumptions, and focusing engagement on financially relevant risks. These insights feed back into analysis, which aligns stewardship and investment outcomes over time.

Our approach is built on resource depth, analytical ownership and active judgement. We don't rely on a single data source or an external composite rating to screen portfolios. Our ESG process isn't mechanistic score-following.

Final thoughts...

ESG rating disagreement is structural, persistent and economically meaningful. Much of this disagreement reflects not just data challenges, but deeper ambiguity about whether ESG assessments are targeting financial materiality or impact materiality.

Rather than solely relying on third-party scores, we combine financially material ESG integration with an impact-focused view to form our own judgement. In a world of divergent ESG opinions, investment conviction comes from clear objectives, robust frameworks and active judgement about what truly drives long-term value and risk.