After a mega, multi-year run of outperformance in U.S. equities over non-U.S. equities, investors have begun to question their regional equity weights.
From 2014 to the end of 2024, the weight of U.S. equities within the MSCI World Index grew from approximately 60% to nearly 75%. Better relative fundamental performance drove stronger returns in the U.S., but the superlative growth was concentrated in a narrow group of stocks.
Today, U.S. valuations are significantly higher, with investors extrapolating good times far into the future. The U.S. dollar is expensive, U.S. fiscal deficits remain large, volatile policies have dented the pristine trust in some U.S. institutions, and higher tariffs cloud the economic path ahead.
These dynamics are prompting many investors to rethink their global equity allocations and seek more balanced exposure.
We believe there are three particularly attractive ways to boost international equity exposure today:
1. Build a Core with International Quality
We believe international quality offers a compelling complement to U.S. equities. Many leading global businesses are based outside the U.S. and exhibit strong capital discipline and durable competitive advantages.
GMO Solution: The GMO International Quality ETF (QLTI) targets companies with high and stable returns on capital and strong balance sheets, while avoiding “quality traps” that often plague international benchmarks.
2. Exploit the Deep Discount in Value
Value stocks are currently trading at a historical discount to growth stocks in international markets.
GMO Solution: The GMO International Value ETF (GMOI) takes a top-down approach, concentrating exposure in the cheapest 20% of developed non-U.S. stocks. It uses proprietary valuation models, seeking to avoid the pitfalls of traditional accounting metrics and index definitions.
GMO Solution: The GMO International Equity Fund (GMOIX) seeks to generate high total return by investing in non-U.S. developed market equities. It leverages a multi-factor valuation model – augmented by momentum and corporate alerts – to identify undervalued securities.
3. Target Country-Specific Opportunities…Like Japan
After decades of deflation and sluggish growth, Japan is finally exiting its deflationary malaise. Corporate reforms have also crossed a tipping point, with management teams increasingly focused on improving return on equity, enhancing shareholder returns, and unwinding cross-shareholdings.
GMO Solution: The GMO Usonian Japan Value Creation Fund (GMAKX) is designed to capitalize on these trends. It employs a bottom-up, fundamental approach that seeks to identify undervalued Japanese companies with strong balance sheets and high potential for shareholder value creation. The investment team also engages collaboratively with corporate management with the goals of unlocking shareholder value and mitigating risk.