Thesis: Policy is easing abroad, global capex is re-accelerating, and money is rotating into under-owned international beta and value. The first stop for big allocators is liquid, under-owned international beta.
Flow magnets (EWZ, EWJ, EZU, UK) capture benchmark reweighting and valuation mean reversion.
Convex optionality (DGS, Israel) buys dispersion.
Size China to manage policy and headline risk.
The main spoiler is a dollar surge, so a small UUP call hedge protects the FX channel without dulling upside. I discuss how to keep a defined dollar hedge.
1) Flow Magnets
EWZ, EWJ, EZU, UK split FKU/EWU, Mexico split EXX/FLMX
EWZ – resource exporter, rate-cut tailwinds, reform chatter, FX. Rides commodity reflation, BCB rate cuts, and dividend-rich SOEs.
EWJ – buybacks and governance, capex cycle, yen optionality. Buybacks and a still-soft yen that helps exporters
EZU – benefits from ECB cuts, industrials catching a capex upcycle, and a big valuation discount closing.
UK split – LSE is under-owned: FKU small-cap tilt for domestic beta, EWU broad value. Captures value-heavy energy, banks, and small-cap M&A with BoE cuts as a tailwind
Mexico split - Nearshoring into the U.S., rising FDI, manufacturing build-out, cross-border rail and trucking, resilient banks and staples. EWW: telco, staples, banks, materials, airports. FLMX is a cheaper broad alternative. Risk checks: Pemex/energy policy, peso volatility, headline politics.
2) Convex Optionality
DGS, Israel (EIS/ISRA)
DGS – EM small-cap dividend tilt, quasi ex-China. Idiosyncratic winners, cheaper multiples, local demand. Taps EM small-cap domestic demand with dividend discipline and less China headline risk. This way we can have separate China exposure.
Israel (EIS/ISRA 50/50) – Tech/cyber security/pharma/biotech/defense crossover = sticky export demand. Reflects a stabilizing shekel after a deep de-rate. Event risk already priced in. Will re-rate up on normalization or procurement upside.
3) Opportunistic / High Beta
A) U.S. small-cap barbell: IWN, IWO, IJR
Value plus growth plus core. Lower rates and onshoring help operating leverage. Vol is a feature, not a bug.
B) China sleeve: ECNS, KSTR, FXI, KWEB
Setup: under-owned, cheap vs history, policy easing bias, and targeted stimulus. Position for a series of small positive surprises rather than one big one. Keep sizing disciplined.
ECNS - MSCI China small cap. Domestic demand and policy stimulus exposure. Less platform-reg risk than mega-cap internet. Higher dispersion so good stock-picker beta in an ETF wrapper. Plays services, health care, consumer, local industrials.
KSTR - SSE STAR 50. On-shore tech and semis tied to industrial policy. Capex and import-substitution theme. Cleaner line to RMB funding conditions and local liquidity. Higher volatility but direct leverage to the Chinese “build it at home” push.
FXI - Hong Kong large caps. Liquid SOE beta with dividends. Banks, telco, energy. Beneficiary of SOE reform, payout mandates, and any broad reflation bid. Works as the simple “China up” toggle and a place to scale in or out.
KWEB - China internet platforms. Regulatory cycle past peak. Focus back on profits, buybacks, and AI-enabled cloud and ads. Consumer recovery optionality without needing property to boom.
Dollar hedge with UUP
UUP (Invesco U.S. Dollar Index Bullish ETF).
When: engage if DXY accelerates, tariffs bite, or EMs rolls over.
How:
Buy UUP calls 1 to 3 months out, 25 to 35 delta. Simple, capped cost.
Or call spreads if IV is hot.
Alt: UDN puts for the same view.
Size: small premium, roughly 0.5 to 1.5 percent of book, scale if EM leg weakens.
Pairing: hedge sleeves most exposed to FX – EWZ, EZU, UK, DGS, China.
Exit cues: dollar breaks its short-term trend or equities sell on growth not FX.