Value equities have faced years of tough sledding, outside a run of outperformance following “vaccine day” and the lift-off from zero rates. Broadly, this has left value stocks extraordinarily cheap relative to growth.1 However, looking closer, the cheapest 20% of stocks – what we call “deep value” – trades unusually cheap today despite offering surprisingly attractive fundamentals.
We have commented on this phenomenon in the U.S.,2 and we see a similar dislocation in developed ex-U.S. equities. As of May 31, 2023, that group traded near its widest discount to the market over its history (4th percentile dating back to 1983).
We said cheap, not junk...
Investors should not rely solely on reported financials and index definitions of value to dial into this compelling opportunity, as we believe doing so could misjudge it. GMO recently launched the International Opportunistic Value Strategy, which uses proprietary valuation models to select a portfolio of international deep value stocks. At the end of May, this portfolio was priced at significant discounts to the market and was also cheap relative to broad value, trading 15-25% cheaper than MSCI World ex-U.S. Value across valuation metrics.