From the artificial-intelligence boom to the effects of the Iran war, global investors face myriad opportunities and risks. Kristina Hooper, chief market strategist at Man Group, studies the possibilities, advising portfolio managers and clients of the global alternative investment management firm how to navigate macroeconomic shifts. She also draws a bead on which markets are poised to outperform.

Before joining Man Group in 2025, Hooper was chief global market strategist at Invesco, and worked at Allianz Global Investors. Man Group is headquartered in London, with offices around the world. Hooper is based in New York.

Barron's spoke with Hooper in late August and early September about the long-term growth drivers for global equities, particularly markets in the U.S., Canada, and Europe. An edited version of the discussions follows.

Barron's: What are your current thoughts about U.S. equities?

Kristina Hooper: I worry that U.S. equity valuations have gotten frothy. Although some stocks have reasonable valuations, many technology names are trading at sky-high price/earnings ratios. I worry about the vulnerabilities created by what has been an extremely strong multiyear rally.

Such as?

Rising bond yields are at or near the top of my list because they are a reflection of several different risks. One is the alarming U.S. debt trajectory. Geopolitical concerns can factor in, as well. It could be that investors, especially foreign investors, are concerned about an overexposure to the U.S. because policy is more unpredictable today.

I also have concerns about whether the U.S. will be able to keep inflation under control, and whether the economy is entering a stagflationary environment. Add to that the potential crowding out of some buyers of Treasuries because there has been so much corporate-debt issuance, especially coming from the artificial-intelligence-related arena, specifically the hyperscalers.

Have markets adequately priced in these risks?

If markets have priced them in, they have assigned a pretty low value to them relative to the value they have assigned to earnings growth, although that could change. We could see a scenario in which earnings growth weakens and the headwinds suddenly become more important.

Rising yields on long-dated bonds have often had a negative impact on equities, in particular on long-duration assets like tech stocks. We are starting to see the beginnings of that now.

What does this mean for your recommended asset allocation? Are you trimming or avoiding U.S. exposure?

I certainly wouldn't avoid the U.S. The overarching theme right now is uncertainty. We're at multiple crossroads. There is the potential for AI-related capital spending to continue and for U.S. stocks to do well. It's just that the probabilities have increased for other outcomes. This is a time to be well diversified. Have exposure to the U.S. because the strength we have seen could continue, but have exposure elsewhere because other scenarios could unfold.

What other equity markets look attractive?

We expect to see the European economy gain momentum and European stocks to perform well. It isn't a coincidence that European equities performed well last year and are still popular this year, after a few months of investor hesitation around the Iran war.

Many investors in the U.S. are underexposed to international equities, in general, and European stocks, in particular. But their low expectations for Europe can be met and surpassed. Valuations in Europe are lower than in the U.S., so the vulnerabilities are lower, as well.

That said, valuations are rarely predictive in the shorter term. There has to be some kind of catalyst, and it has to be powerful. Europe has a number of catalysts that could lead to higher stock prices. One is increased defense spending. There is a commitment on the part of almost every European nation and NATO to lift defense spending to 5% of gross domestic product by 2035, and there is an incentive to get there even sooner. Russia is very close, and it's a growing threat. To me, there is little that can derail the defense-spending juggernaut and hasn't been fully priced in.

Also, while investors have focused on massive AI-related capex [capital expenditure] in the U.S., they have overlooked the fact that many purchases made with this money are benefiting countries outside the U.S., such as South Korea. In Europe, we are much more likely to see spending remain within the euro zone economy or Ukraine, because of rules tied to the loans.

How does spending move beyond the defense sector or companies focused on AI-related capital expansion?

We concentrate largely on the defense and industrial areas in the European economy. But we are also focused on the consumer because of the multiplier effect created by defense and especially infrastructure spending, which benefits the consumer. We have a few other catalysts, including a commitment to regulatory reform on behalf of the euro zone. For instance, the European Commission has committed to reduce administrative burdens by at least 25% for all businesses, aiming to improve European competitiveness and attract greater investment. It could be successful and move the needle for the economy.

What investment approach do you take with Europe?

An active management approach makes sense in this environment. In general, European equities are an attractive complement to U.S. equities. In the U.S., the S&P 500 index continues to grow its exposure to technology. European indexes have relatively low exposure to tech and heavy exposure to old-economy stocks such as industrials and energy. That, too, can offer diversification, and many of these companies have higher dividend yields.

What are some characteristics you favor in searching for companies that might outperform during a market downturn?

Among the key factors are price/earnings ratios and dividend yields. I favor relatively low P/E ratios and relatively high dividend yields, plus a catalyst, since valuations are rarely predictive in the short term. Also, higher-valuation stocks, which tend to be "longer duration" in that investors have to wait longer for the earnings, have typically been more vulnerable to higher yields. Dividend-paying stocks typically hold up better in stock market downturns.

Beyond that, there is some investor enthusiasm for companies with stock-buyback programs, as buybacks can be a short-term catalyst for gains. Buyback yields have improved not only among European companies but United Kingdom companies, as well. We also consider business models and industries. We expect energy stocks to continue doing well, given elevated oil prices.

You were bullish about Japan earlier this year. Are you still? We are somewhat excited by the continued fiscal stimulus, but there are challenges, too. I have less conviction in Japanese equities than I did previously, but I remain positive.

The Japanese stock market has benefited from AI capex, but there are questions about whether spending will continue at the current pace. We are also conflicted because while the fiscal side has been stimulative, the central bank wants to "normalize" monetary policy [raise interest rates]. Plus, the yen has depreciated in value, and that could encourage the Bank of Japan to tighten policy more, which would put it at even greater cross-purposes with the government's fiscal agenda.

I see greater opportunity in Canada. Prime Minister Mark Carney has talked about the rise of the middle powers [the increasing cooperation of countries such as Canada, Australia, and those in the European Union]. Europe is front and center, and the U.K. is included, but I would also add Canada. Canada is benefiting from the makeup of its economy. The oil-and-gas industry and the mining industry have benefited from the significant increase in energy prices since the Iran war began and the rise in metals prices that we have seen for some time now. Manufacturing has also been doing well.

Has the latest tariff dispute between the U.S. and Canada altered your positive outlook on Canadian equities?

Admittedly, the additional tariffs are likely to place pressure on the Canadian economy, but they haven't done much to change my positive view on Canadian equities. However, it means one needs to be active and selective when investing in Canadian stocks, recognizing that specific industries have been materially impacted by the tariffs.

Are Canadian equity valuations as attractive as European valuations?

They aren't as attractive as in Europe, but they are still attractive, and more so than in the U.S. I think it's part of greater diversification, especially if we see shifting alliances. I think of Canadian stocks as cousins to European equities, and another complement to U.S. exposure. The Canadian market has different sector allocations than the U.S., and isn't as exposed to tech or AI.

I recommend having more exposure to Canadian and German government bonds, in addition to Treasuries, for those who have a government sleeve in their fixed-income portfolio.

How do emerging markets look relative to developed markets?

I'm positive on emerging markets, as well. Having adequate exposure to emerging markets is part of the diversification story. We are likely to see less impact from Federal Reserve tightening on emerging markets now than in the past. Their economies have become more mature and resilient, with reduced dollar-denominated debt, improved foreign currency reserves, and greater central bank credibility. They also have more fiscal discipline, with lower overall public debt-to-gross-domestic-product levels than developed economies. All of this means they are likely to be more insulated from Fed tightening.