US Growth Stocks To Lose Their Crown To International Value In Coming Years | John Thorndike, GMO
Summary
Market Outlook: GMO sees a concentrated bubble reminiscent of 2000, with extreme enthusiasm around AI while many other areas offer attractive value and dispersion opportunities.
International Value: Strong preference for non-US value stocks with 6-7% real return forecasts plus a currency tailwind, potentially lifting returns toward low double digits.
US Value Stocks: Selective exposure favored as a relative value play versus US large-cap growth, but GMO still prefers international value on absolute return potential.
European Banks: Big gains driven by low starting valuations and tailwinds from reindustrialization, defense buildout, and modest fiscal impulse; trimming after strong appreciation but still a key value area.
Japan Equities: Positive on Japanese industrials benefiting from supply-chain shifts away from China and corporate reforms (cross-shareholding reductions, better balance-sheet use).
AI: Believes AI is real but overhyped; expectations likely to rerate violently, with potential market pressure from flows tied to mega-cap AI names and possible large IPOs (OpenAI), impacting holders of Nvidia and Microsoft.
Currencies & Treasuries: Dollar seen as expensive with a multi-year weakening bias, boosting non-US returns; US Treasuries offer acceptable real yields even if inflation runs near 3%.
Portfolio Positioning: GMO favors non-US value equities, liquid alternatives, and Treasuries while avoiding credit due to historically tight spreads; it launched the multi-asset ETF GMOD for dynamic, tax-efficient allocation.
Transcript
So if you look at this chart, it's important to recognize that a normal real return to stocks is somewhere around four and a half, five, maybe five and a half percent. So you're getting paid better than that for owning uh value stocks outside of the US for sure. The other thing to note about this chart as it says in the on the left hand side is these are real return forecasts uh and they're also in local currency. Now since the US dollar looks quite expensive that tends to be a tailwind for US investors who are uh owners of non- US assets. So we think the expected returns from uh from these blue bars should be augmented by an expected currency return that pushes some of these six or seven and a half% returns up closer into the high single digits low double digits. [music] Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagert. I always say the most valuable people to interview are capital allocators because they've got to answer to their clients for their market calls. They're judged not by their opinions, but by their results. So today we're fortunate to hear from one of the most respected capital management firms in the world, Grantham Mayo Ven Otterloo, otherwise known as GMO, which was co-founded by the great investor Jeremy Grantham and currently manages over $65 billion worth of client assets. Specifically, we're sitting down with John Thorndike, co-head of asset allocation, who co-manages GMO's dynamic allocation and international value ETFs. We'll discuss GMO's outlook for 2026 and where the firm sees the biggest risks and opportunities for investors. John, thanks so much for joining us today. >> Thanks for having me, Adam. >> Well, it's a real pleasure, John. And um you you may look familiar to some of the viewers here because you spoke at Thoughtful Money's spring online conference this year. Um this is your first appearance on the public channel. Um so very excited for that. We have a lot of people who are huge fans of your co-founder there, Jeremy Grantham. And uh very interested to hear what his firm is thinking these days and we got a lot of great feedback when you appeared on the the conference early in the year. So I know folks are going to be excited to have you have you back, at least those who've seen you before. Um really quick before we dive into the discussion, um I just want to give a little caveat. Um as a lot of my audience who follows me on the social media knows, um I'm on day five of a fiveday fast right now. and I actually feel fine, but you know, if I start slurring or pass out or anything like that, don't take it personally. John, >> sounds good. That's quite a feat. >> Okay. You know, it's it's it's a quick way to get a lot of uh undue respect from a lot of people is to tell them that you're doing a fast. Um it it really isn't as as crazy as it sounds, but to a lot of people, they're just like, I cannot believe you're doing that. And trust me, the I I enjoy all the kind words and praise, but I I feel like I deserve almost none of it. Um but but enough of that. So look, um a lot to talk about with you, John. Um as I mentioned, you know, several times already, your firm is just highly respected. So why don't we just start with this? um what is your and and taking into your answer kind of what you know of GMO's uh perspective as well what is your current assessment of a global economy and financial markets I'd say on the economy in a word uncertain I mean we have been living in highly uncertain times that continues today we don't know where policy is headed uh we don't know how many parts of the economy are reacting to changes in the labor force course changes in tariff policy, um changes in immigration enforcement, what may be coming from the Supreme Court on tariffs, so many uncertainties, um that as financial market investors, we continue to do what we've always done within the GMO asset allocation team, which is let valuations be the guide to us of where the best opportunities are and where the most worrisome risks are in markets. And there I'd say in terms of financial markets probably the word would be dispersion. There are some parts of the markets that to us look quite risky and worth staying away from and there's certain parts that are worth leaning into. So you know we can go back and talk about how today's environment compares to other periods in time that have been interesting inflection points in markets and maybe compare and contrast some of those. Uh but today very much feels like an environment where there's a lot worth doing and some parts of the markets that are definitely worth avoiding. >> Okay. Um well, why don't we just go right there? So um if history rhymes, what is this current cycle making you think of in terms of past periods? >> Well, I know it's it's quite an analogy to draw, but probably the closest time period that this feels like to us is the tech bubble around 2000. Uh if you think about that market environment, obviously there were some very frothy parts, you know, the TMT sector at at the time. Um but the thing about 2000, there were a lot of great investment opportunities. You could buy REITs at high yields. You could buy old industrial companies at attractive valuations. You could buy small caps. You could buy non- US stocks. You just had to avoid the, you know, internet darlings. And today feels a lot like that as well. Uh we think you get paid well for owning stocks outside the US. We think there's some value stocks within the US that can pay you all right. Uh the fixed income market in terms of interest rate duration certainly has some risks associated with it, but you're getting paid okay. Credit might be another place that we would stay away from. We can talk more about that. But if you contrast that to the other more bubbly times that we've lived through over the past 20 25 years, you know, 2008 was an entirely different bubble-like environment. That was an environment where uh one thing that we look at is what we call the risk curve. So we look at different asset classes and and assess our forecasts against the risk or the volatility of that asset class. And in 2008, the slope of the line of best fit of those forecasts was negative. If you took more risk, you expected to earn less return. >> So the right thing to do in 2008 clearly was just go and hide. Like we went and hid in quality stocks in in safe fixed income, cash, treasuries, those sorts of things. That's not the environment today. The environment today, you still get paid for taking risk. You just need to avoid US large cap growth. So today doesn't look like 2008. It also doesn't look like 2021. 2021 was an environment where expected returns everywhere were very low. Right? You were getting paid next to nothing. Negative real yields for owning treasuries. You were getting paid very little for owning risk assets, especially outside of emerging markets. So in 2021, basically anything with duration looked expensive. And the thing to do back then was hide and we thought liquid alternatives. We had 60% of our portfolio in liquid alternatives back then. So you know there the market does get overenthusiastic about different themes from time to time but u but history isn't always analogous to the last time we had a bubble. We think this one looks a lot more like what we faced in 2000 than it does in 2008 or 2021. >> All right. So, so would it be fair to say that unlike 2008 which was a bubble which was just go and hide. Uh unlike 2021 which you could say was sort of a valuation extreme as well where there just really weren't any really good opportunities. So you you hung out in tea bills or liquid alternatives. Um, would you want to call this one like a like a demi-bubble or a halfbubble where it's like some parts to our value you don't want to go touch but good opportunities in some other areas? >> Yeah, I'd say maybe it's a concentrated bubble or a focused bubble, right? It is really anything associated with AI today looks like it has a lot of enthusiasm priced in. Let's put it that way. But the further that you venture away from that theme, you know, we think that you can earn attractive, even high double-digit returns from some non- US value stocks. Um, and you know, that's just marketkedly different than the environment looked like in 2021. you know. >> Okay, John, as you're talking here, I'm just going to pull up a chart from one of GMO's recent reports here, which is showing the 7-year asset class return forecasts. >> Yes. >> Um, so this does sort of track well what you just said, right, which you said, um, you know, you're seeing some parts of the market that you should lean into and here, uh, it looks like, uh, you know, deep value, uh, international deep value for sure. um but US uh deep value as well. Uh they all seem to have pretty good seven-year um average real return forecasts. Um while the US large caps in particular have pretty pronounced negative ones and and I'm guessing because the MAG 7, you know, make up so much of the performance of the US indices that as you know they're basically dragging the US large caps down. It's some the mag seven uh but it's also just a much broader set of US stocks. In fact, my colleagues looked the other day uh at developed market equities. So, US and developed non- US stocks. And what they did was they went and they broke the whole global market up into decileis based on what do analysts expect the next two years of earnings growth to be for any given company. >> Right? So they took the market, they broke it up into 10 different deciles on analyst expected earnings growth. So not GMO's view, just what does the street expect? Each bucket has US stocks and it has non- US stocks. So fastest growers might have a Door Dash in the US, but would also have say a Spotify outside of the US. And we looked at the valuation discount of non- US stocks relative to US stocks in each of those deciles. So basically comparing like tol like expected growth and you would generally find non- US stocks at 40 50% discounts to the US counterparts even ones that had same expected growth. So this isn't just about seven stocks. >> Uh some of those seven stocks look cheap to us some of them look quite expensive but it's really about this priced in assumption about US exceptionalism that drives those forecasts for the US markets down. uh and it's completely lacking from non- US markets. So if you look at this chart, it's important to recognize that a normal real return to stocks is somewhere around four and a half, five, maybe five and a half percent. So you're getting paid better than that for owning uh value stocks outside of the US for sure. The other thing to note about this chart as it says in the on the left hand side is these are real return forecasts uh and they're also in local currency. Now since the US dollar looks quite expensive that tends to be a tailwind for US investors who are uh owners of non- US assets. So, we think the expected returns from uh from these blue bars should be augmented by an expected currency return that pushes some of these six or seven and a half% returns up closer into the high single digits, low double digits. >> All right. Um so, okay, super interesting. Um looking forward to getting this more deeply with you. Let let me just ask you this real quick. Um, you know, so much of the S&P and and a great deal more of the NASDAQ is made up of of companies that have a ton of their valuation in AI, right? Um, can So, I guess first off, is your base case that the AI sector just kind of cools and these stocks just kind of flatline or or or maybe go down a little bit, right? Or is it do we get those negative -6% returns real returns over the next seven years because there's some massive uh repricing downwards like we had in the dotcom bubble when you know the the world just said you know what we we we've overbuilt we overestimated. Yes, this thing probably will deliver a lot of the benefits we think it will. They're just going to take a lot longer to manifest. Um, and if it's the latter where you think it's more likely to be kind of a big correction because these stocks make up such big percentages of the market, can they correct without kind of taking everything down with them, at least in the near term? >> So, you know, the market doesn't tend to just move in a straight line as it figures these things out, >> right? So while it may be the case, indeed it probably will be the case that AI is a gamechanging technology, right? The internet in 2000 was a game-changing technology. We all do things now that we couldn't do 25 years ago, >> undoubtedly, >> right? So the thesis was ultimately right, just the pricing was insane. Um, I think that today the thesis is probably right that we will all be using AI even more than we already are. Um, but the expectations have probably run way ahead. And when those rerate, I suspect you'll see, you know, a more violent price reaction than even the fundamentals would necessarily warrant. And so you won't just see people >> rerate these stocks down a little bit at a time. You know, if you if you look at what happens to the market based on its starting valuation, its starting valuation doesn't really tell you a lot about what's going to happen next month or next quarter, but it does tell you that when you start at a high valuation and stocks go up, they don't tend to go up by as much as they usually do. >> And when you start at a high valuation and stocks go down, they tend to go down by more than they usually do. So high valuations, low expected returns, high expected risk. There's just a lot is already priced in. >> All right. So, so we're going to talk in depth about why you like value and and international stocks um in just a moment. The this the reason why I asked that question was let's say you convince viewers here during this this discussion. Okay, GMO is really on to something here. I want to start considering value stocks and and international stocks. Um, is it the kind of thing where they should be, you know, building positions now or is it the kind of thing where they should say, well, let me wait for kind of this mania that's over uh to get played out in the AI space and let the market do whatever it's going to do. You know, maybe sit in safety until then. Um, and then once you know the ripple effects of that begin to to die out, then I'll go in and buy this stuff. In other words, is there I I know these things are trading at much greater discounts relative to the the AI stocks, but might it make sense or or is is there a risk of buying into them now and then have them correct, you know, maybe not 30 40% like the AI stocks might, but 15 20% and maybe if I just waited, I could wait for all that carnage to end and then start buying in. Do you have a strong opinion on way or that? And I know I'm asking you to kind of guesstimate a lot here. >> Yeah, my opinion is that's really hard to do, right? That owning cheap stocks that end up trading cheaper hurts, right? Nobody likes looking at their account and seeing that you've taken a loss on a position, but you've bought it at a reasonable price. Earning a reasonable earnings yield or dividend yield or buyback yield, whatever it is. Um, and you know, you continue to have the right to that cash flow stream even if it's gotten priced down to a lower level. What's hard is if you think back to when the tech bubble broke in the US, uh, you know, over periods where the US was coming down, emerging markets, which tended to be high beta stocks, actually made money over some of those periods of time, right? So the market has the ability to differentiate and say this is a problem over here and it's not a problem over here. >> And so well some of the viewers might see that and think I'm going to wait for the correction and then I'm going to be the first one in. >> Well, there's a lot of smart people who will out there be trying to do the same thing at probably the same time. And maybe you'll beat them, maybe you're not. If you buy stocks today at reasonable valuations, when you come back and you look at your account 10 years from now, you're going to have made a decent return. >> Okay. So, when you talk about reasonable valuations, are the value stocks and international stocks right now, are they reasonably valued on an absolute basis or just reasonably valued relative to the overpriced, you know, stocks that we've been talking about? So value stocks outside of the US we think are definitely priced at reasonable valuations in absolute terms. Right? You saw those forecasts of six to seven% real, add a couple points on for inflation, add a couple points on for the currency and you're talking about earning low double digit returns on equities. >> Um you know that's completely consistent with what equities have delivered historically. value stocks in the US is a bit of a tougher absolute return argument. We think that there are some of them that are priced to to deliver you in a reasonable absolute return. They're a much better relative value trade though than they are an absolute value trade. >> Okay. Okay. Um so fair to say that that even though you like US value right now, you like internet value more? Yeah. So if you look at our multi-asset portfolios, we have significantly more money invested in non- US stocks than we do in US value stocks. >> Okay? And you got to forgive me, I have not um looked at uh the performance history of international uh value stocks prior to this this interview. How have they done in recent years? So, our international value strategies up about 35% year to date. Um, so it's kind of startling. Yeah, it's kind of startling to see something that's up that much still look really cheap. Uh, it's one of the cool things about value is value doesn't need its discount to the market to shrink in order for it to perform well because what can happen is value recycles. I think we talked about this for your conference last time we spoke is that, you know, if I'm a value investor, some of my stocks end up doing better than expected. I sell them to you at a premium. I buy your disappointment uh stocks at a lower price and I just keep churning things along. So, we've had a bit of that in our performance where we still have a portfolio that's trading at a deep discount relative to the broad market, yet we've managed to deliver pretty good returns. >> Okay. Wow, that's super exciting. Well, so uh looking internationally right now, um which countries slash regions, uh interest you the most right now? >> Uh so, you know, we've done really well by the European banks. I think our portfolio of European financials this year is up something like 85%. Uh that's a place where we've made some of the easy money, we think, and we're trimming back. Uh but we like some of the Japanese industrial companies. We like some of the global pharmaceutical companies that are traded outside of the US. We like some of the ones that are inside the US as well. I think pharma is a good example though of what we mean when we talk about value doesn't just mean a junky company that's trading at a very low price to book. >> Right? For us, value is you're trading at a steep discount to, you know, an intrinsic value of what your company is actually worth. And we think some of the pharma companies look, lots of near-term risk around uh drug pricing, around insurance pricing, certainly here in the US. Uh so there's always plenty of hair around value names. Um but they're not your traditional deep discount on price to book opportunity. >> Okay. [snorts] And okay, so European banks, Japanese industrials, global pharma. I I know there's more than this in the portfolio, but you're being kind and giving us kind of your big themes here. Can you just give us if you can just a quick like rationale for each one of those things? So what is what has made European banks perform so well this year? >> Oh, part of that was just very low expectations going into the year, right? >> Okay. They were just so beaten down. >> Everybody thought European the European economy was a mess. Europe generally a mess. Uh price to book were significantly below one for many of these companies. And what's changed I think is a thesis around okay if Europe is going to re-industrialize if Europe is going to build out a defense sector somebody's going to have to finance it. uh if Europe is going to be doing a little bit more fiscal, you know, that's going to lead to more growth and even these small changes on the margin when you've got banks trading at significant discounts to tangible book, um that can lead to pretty violent price moves upwards. >> Got it. Okay. How about with the Japanese industrials? The Japanese industrials I think have also benefited from some of thesis around um supply chains moving away from a concentration in China >> have moved a bit from the defense theme as well and then Japan has just generally caught a bit. We think it's a country that deserves to outperform from here as well. uh a lot going on on the ground in terms of corporate reform uh pressure from the stock exchange as well as the government in terms of uh getting rid of cross shareholdings of better use of balance sheet. Uh so there's some themes in Japan generally that I think have benefited some of those companies as well. >> All right. So sort of Japan cleaning up its act and benefiting from the move away from China. Is it the same with global pharma? You know pharmaceuticals have been at the one of the issues near the heart of the US China trade issues. Is this just other China's business for pharma maybe going to some other countries? >> I think it more they're uh the theme is really about these are highquality businesses that have short-term questions around them where their history is generating a very good return on capital and so we think that they are are high quality companies that are trading at around a market multiple and deserve to be trading a little bit higher than that. So they haven't they've performed okay. They haven't performed as well as the European banks or the Japanese industrials have for example. So we think that's still an opportunity of value there. >> Okay. Um one more region and then I'll I'll get to a more thematic question. I didn't hear India uh from you yet. That was a a country that had done kind of great over 2024 through a lot of 2025. Is that a place you're still interested in or did that just get too overpriced? India has generally been one of the emerging markets that we've found expensive. Uh so as we have found value to be particularly cheap, it's been one of the countries that we've been more underweight relative to overweight. >> Okay. And in your back to the chart that that we showed a few minutes ago, um you mentioned that uh a continuing to weaken dollar would be a tailwind to the returns for those countries, right? Um, first off, do those real returns you had on there over the next seven years, do they make an assumption about the direction of the dollar or do they just say, "Hey, if the dollar sort of stays where it is, this is what we'll get and then it could be better or worse based upon how the dollar performs." >> It's more the latter. So, those are local forecasts. So, they don't make an assumption about where the currency is going to go. What you've tend to find historically is that stocks that trade in countries with cheap currencies tend to get a tailwind for one of two reasons. Either the currency appreciates you moves sort of back towards fair value and you get a benefit from that >> or [clears throat] the companies benefit from having a cost advantage. >> Right? >> So you either will tend to see faster earnings growth or a currency rerating. Uh, and so when we do our forecasting in US dollar common currency space, we'll add a little bit above all of those blue bars that you showed on the chart for the dollar's current expensiveness or the cheapness of of the other currencies. >> Okay. So, what is GMO's expectation for the dollar from here? Does it expect it uh and you can tell me whether it's easier to predict over the next seven years or whether it's able easier to predict over the next seven months. um te to tell me which you guys are thinking. >> Yeah, we generally think it's a lot easier to predict over seven years than seven months. >> Uh and we think that the dollar continues to trade expensive relative to a basket of other currencies. So it's definitely come down obviously this year relative to where it was starting the year, >> but it remains expensive. Uh and when you add on to that, you know, pressures around, we continue to see inflation running at a a relatively high rate here. Um and have increased questions about what is the Federal Reserve willing or able to do uh in the context of that sustained inflation but also a slowing economy. Um you know, those can put pressure on the dollar as well. Okay. So, sorry, but is is that just saying over the next seven years, you sort of expect a progressive weakening of the dollar versus other currencies? >> Yeah. >> Okay. >> Um and and since you mentioned it, um what what what is your take um on the Fed ending QT um having restarted a a rate cutting cycle um without inflation being down at their 2% target? Do you expect inflation to to to be sustained going forward then? >> I think it's u I think it's hard to believe that they are really insistent on getting to 2% inflation if you look at their current actions. Now, is 2% a magic number that you have to get to? >> I'm [clears throat] not convinced that it is. Uh what we tend to look at is okay let's let's just imagine that we're not in a world of 2% inflation but we're in a world of 3% inflation. Well if you've got treasuries trading at 4% at the 10-year roughly four to four and a quarter you're still getting 100 basis points over inflation maybe a little bit more. That's okay. Uh that's a reasonable return from say fixed income. If you get a recession, obviously inflation will come down and there's room then for your bond yields to come down. So we think that treasuries, even if the Fed isn't targeting two, maybe it's targeting two and a half, but won't say it, uh you can still do okay with with uh Treasury bonds. >> Okay. Let me ask you this. So uh [sighs] you mentioned slowing economy um and there has been data throughout 2025 to suggest that the economy is continuing to slow. Now granted we've been flying a little bit blind in uh you know recent weeks because of the government shutdown. Um you also mentioned that that your word for the economy was uncertainty, right? Or uncertain, right? Um and I agree with that though I think we now have more um clarity on exactly what policies the administration certainly more clarity than when you and I talked last back in, you know, March. Um a lot more clarity on exactly which policies the administration are going to be a put forth and b like approved and and get underway. And a number of them are now, right? So, we've had the tariffs. Um, you know, still TBD exactly what their long-term impact's going to be, but we know that it hasn't brought inflation back to five plus like a lot of people were fearing. Um, we know what a number of the trade deals look like now. And, uh, and hopefully some of the other really big ones, you know, might get struck fairly soon, right? Or finalized fairly soon. We know that what's in the one big beautiful bill um terms of deregulation and and tax ext tax tax cut extension and some additional tax relief. So, you know, we we do have some more clarity and if if if if I'm sure if we had Treasury Secretary descent in this conversation, he would say, "Get ready, guys. You know, all that stuff's going to start producing tailwinds for the economy, you know, in the next year." What do you think is more likely to win out? the slowing of the economy or you know a recovery or or or tailwinds from from these policies. >> It's very hard to say, right? We've in addition to what you cited, we've got a significant reduction in the labor force, >> right, through immigration policy and we've got a ton of capex that's going on related to data center buildout. Mhm. >> Um to the point where I think that data center buildout is driving a significant fraction of GDP growth. >> GDP growth. That might be the thing that trumps everything. Is that what you're saying? like >> if that were to slow and right, you know, we're building out these data centers on promises from AI to spend money that it doesn't yet make to buy chips that Nvidia doesn't yet make, to put into data centers that aren't yet built, powered by energy that we haven't yet produced. If any of this slows down, what does that do to the macro numbers? I think that we have to have a lot of uncertainty about that. >> Okay. And that makes that makes sense to me. So I guess let me ask you this then. So a year year plus ago um I remember listening to warnings that your co-founder Jeremy Grantham was putting out there about you know an asset bubble in in the equity markets. Um, I I think it's, you know, fair to say those concerns are still as true to the points he was making then are still as true today, maybe even more so given given how things have grown since then. How concerned is GMO about, you know, not not just sort of a leveling off of of of AI, but but of a real correction? You know, we [clears throat] talked earlier about the potential implications if there was a correction, but I mean, how how concerned are you that this sort of ends in tears um at least in the near term for the markets? Um if if the AI bubble, if there is a demi bubble in this market, concentrated AI does pop. >> I mean, there's there's various views throughout the firm. >> I bet there are. So that caveat aside, I think that if you got a big deflation of that bubble, you would see a lot of pain in the US market. To your point earlier, you would probably see some pain outside of the US. Uh that XUS would be a great investment opportunity. Um but you know, I guess one way to think about it is all right, GMO, what are you guys actually doing with your money? >> Right? uh so I can tell you in our unconstrained benchmark free strategy um which you know doesn't pay attention to any benchmark as we build the portfolio but over time we think it ought to be beat a 6040 portfolio so a traditional balanced portfolio that's 60% equities 40% bonds in that portfolio we've got a little under half of the portfolio invested in stocks almost all of those are non- US value stocks we have a small allocation to the USD value names that we really like. >> Okay, >> so we're about 50% in stocks in at the end of 2021, we were less than 30%. So, you know, in terms of how much risk are we taking? We're not taking a normal amount of equity risk. We don't have 60% or more, but we do have almost half of the portfolio in equities. We've got a lot of the portfolio in liquid alternatives, so in relative value trades, and then we've got some treasury exposure. We have barely any credit risk in the portfolio at all. So, we own a portfolio that we think is capable of earning returns. Now, it's up something like 18% this year. So, it's actually outperforming the S&P, which isn't a good benchmark for the strategy, but I throw out there just because. Um, but you know, it's a portfolio that we think is avoiding the most risky parts of the market. >> Okay, great. All right. So, you guys you guys aren't hiding. You're not you're not down in the bunker. You're not guns ablazing either, but you're basically saying, "Hey, you know, we think there's acceptable risk to be to take in this market. It's in these areas." And you've already mentioned a number of them. You did mention we got barely any credit risk. So, let's talk about that for a moment. So what is correct me if this is the wrong word but what is spooking you guys about credit markets right now >> it's really that you're just not getting paid for taking risk right if you look at spread so the incremental yield that you're getting for owning a credit instrument above a treasury uh bond with the same duration in investment grade I think it's around 80 basis points which is about as tight as it's ever been so about the smallest amount of incremental return you've ever been paid for taking investment grade risk >> and high yield is probably in the cheapest 10% of the time maybe 20%. It's about 300 basis points of incremental spread. So why take risk where you have very little upside significant downside where instead we can go over to those markets outside of the US where we were just talking about maybe put fewer dollars to work to have the same amount of risk exposed but you've got much more upside and we think long-term less downside. >> So yeah, credit markets are a place where you really should vary your exposure based on how much you're getting paid. Um, and today you're not getting paid very much. >> All right. And so, yes, credit spreads, especially for, you know, prior to two months from now, I mean, you you could almost not see any daylight between, you know, the treasuries and and corporate credit. >> Um, but so let me ask you this. Is it which is it more of? Um I'm just not getting paid for the risk or is it I'm not getting paid well and I think the risk is actually pretty substantial. Uh I asked that because we have seen of late um some signs of concern beginning to appear in the credit markets, right? Um you know we've seen >> we've seen cockroaches. We've seen repo uh lending blowout. So, um, you know, nothing right now that's that suggests, you know, credit crisis, but it does suggest that that all isn't perfect in the credit world. >> Yeah. And I'd say, you know, as we look at things, we agree that you tend to uh risk builds up when everything is looking good, >> right? The risks in credit markets don't start when the market blows out. They were made when the loans were made against bad collateral at a bad price. So I believe that there is risk in the credit markets today. I don't know when it will uh reveal itself, but I do know that you've been able to pass off that paper to somebody else at a much lower spread than where we had bought it previously. Uh so I'll let them realize the risk and then when they no longer want it, I'll buy it back. Yeah. >> All right. Makes total sense. All right. Well, look, let's get to the fun part. So, um, imagine given not just your outlook, but the outlook at the firm as you've described it, this is going to be kind of a fun time for you. Given the ETFs that you manage, correct? >> Yeah, absolutely. >> This is kind of where the firm's, you know, excitement is for the next seven years. >> Yeah. Uh, we're excited about the ETFs and in particular, I'm excited about the ETF that we just launched last month. which is called the GMO dynamic allocation fund. So it's it launched on the New York Stock Exchange ticker GMOD. Uh and that strategy we set up as a multi-asset ETF of ETFs. Um you know what what struck me as we were thinking about this idea was people came to us and said hey GMO have you thought about putting out model portfolio allocations? Right? go out and say, "Hey people, I think you should have this much in fund A and that much in ETF B, etc." And I don't know if this is right, but I think there were something like 6,000 of those different opportunities out there. And I'm like, uh, we could be the 6,000th and first, but um, but you know, as we've built our active equity ETF business, and I've learned more about it, I was thinking, why is it that these active ETF equity managers can reallocate their portfolios? So, they want to sell out of Microsoft and buy Apple. They can do that without incurring any taxes. Why can't I do what I do, active asset allocation using the same tools and suddenly be able to do dynamic asset allocation? So, shift from the US to Japan or Japan to Europe or value to growth, whatever, taking advantage of the ETF structure without necessarily having to realize taxes along the way. Why wouldn't we launch a multiasset ETF? Uh, so that's what we did. Um, it's benchmarked against a 60/40 strategy. Probably wouldn't surprise you given everything I was just talking about. Today, it's taking a pretty normal amount of equity risk, but most of it is outside of the US. Mhm. >> Uh it has exposure to GMO's value fund in the US and outside, GMO's quality fund in the US and outside, uh as well as another ETF we launched recently called the domestic resilience fund, which aims at investing in companies here in the US that stand to benefit from some of that uh supply chain shift away from from China. >> What's that ticker, by the way? >> That one is DRE. >> All right. U so we've got those exposures. We've got them complemented with some uh ETFs from outside of the firm. I just want to be clear when we charge our management fee, we credit off any management fee paid to others. So there's no stacking of fees in the product. >> So we use our ETFs and others ETFs to build the portfolio. And we think it can be dynamic and diversifying and also quite tax efficient. >> All right. Makes ton of sense. So, um, can you give the, uh, ETF for your international value ETF as well? >> Yeah. So, so the international value ETF is GMO and the US value ETF is GOV. We're not super creative with the tickers. >> You know, I like it. I I keep it simple and easy. Um, all right. Uh, well, fantastic. So, um, uh, [sighs] we're going to start wrapping up here in just a moment, but, um, is there anything that is burning brightly on your radar that I haven't thought to ask you about yet, John? >> I mean, one thing people often ask us about is, okay, you know, you see a bubble or you see a highly priced market. What's the catalyst? And you've been kind enough not to ask what the catalyst is because it's always a difficult question for us as value investors >> because it's usually the bullet you don't see coming. But yeah, go ahead. >> Yeah, exactly. And that's exactly right. But you're starting to see signs, right? I think it was Matt Lavine in Bloomberg who was noting that the open AI business strategy is to create machine God and then ask it how to make money, right? You don't hear stuff like that at the bottom of a market, [laughter] right? You've got the potential for open AI going public at a trillion dollar valuation. Now, surely all of that won't free float, but if a significant amount of it free floats and index funds have to buy it, then they got to sell the rest of their stuff. >> Who are they going to sell it to? When the institutions who have these concentrated portfolios that they've been dying to get distributions from their private portfolios, once they get those distributions and lockups come off and they can sell those stocks, who are they going to sell it to? Well, I'm sure they're public market investors who are excited to have Open AI in their portfolio, but they're not sitting there holding cash waiting to buy it. Maybe they're holding Nvidia. Maybe they're holding Microsoft. Well, if you want to get a value investor like me to buy Nvidia off your hands, it's going to take a lot lower price than where it's trading today. And given how much passive money there is in portfolios, the number of active managers who are really willing to step in and change their portfolio to buy some of these stocks that folks might need to uh offload in order to buy the new IPOs. That could be certainly a source of pressure on markets. So, we're starting to see signs. Adam, I I don't know when any of this is going to end, but you know, maybe machine God will tell us. >> That's a really interesting way to put what they're doing. Um, and of course, um, there's no guarantee whatever question we ask machine God that we're going to like the answer we get either. >> That's right. >> All right. Um, well, look, um, I asked you this at the, uh, at the conference, um, but since it was a smaller audience that is watching now, I'm just going to ask it again. Um, what's it like working with access to Jeremy Grantham? Um, I don't know if he still comes in the office every day. I mean, I guess he doesn't. Um, but what's it like to to be able to have access to that mind and all that experience? Well, Jeremy's not in the office every day, but we did just have our client conference last week, and he was up on stage telling some stories. And I'll tell you, one of the things that always really struck me about Jeremy is just how driven he is, just how competitive he is. He was still naming names of people who called him, you know, wrong but dangerously persuasive back before he was, of course, just about to be right. was showing us handdrawn charts of valuation spreads from way back in the day. Uh just really independentminded, really driven, um funny, and you know, I'll put in a shameless plug for his book. Jeremy and and Ed Chancellor have are just about to publish. I think you can get a pre pre-order your book if you want to. I think it's called The Making of a Perma Bear, but it's Jeremy Grantham and Ed Chancellor. They've got a book coming out telling stories of his career. I'm sure it will be an interesting read. I'm hoping there's a copy that shows up on my desk this week. >> Awesome. Um, if it's available for pre-order, uh, and there's already a jacket cover of it, um, I'll put that jacket cover up on the screen when I edit this when you mention it there. Um, also, just so you know, I I I will when I edit put up the tickers that you mentioned on the screen, too, so folks know where to go, folks. I'll have those tickers in the description below this video as well. Um, all right. Well, look, um, last question before I do a little housekeeping and then I'll give you the last word, John. Um, beyond the tickers that you just mentioned, um, and perhaps going and reading Jeremy's book as soon as it's available, um, where can folks go to learn more about you and your work and the work of GMO in general after this discussion? >> Sure. So, we publish our work on GMO.com. Uh some of it is behind a login, but you just need to register. It's free and you can get access. >> All right. Awesome. Um all right. Well, look, um very quickly folks, um please join me in thanking John for coming on and giving us uh such great insight um and particularly giving us a view as to sort of how things work there in GMO, but very specifically how to take advantage of the opportunities that they see through their ETFs. Um, please join me in thanking him for that by hitting the like button and then clicking on the subscribe button below as well as that little bell icon right next to it. Um, look, if you're a DIY investor and these things excite you, you know, definitely go and research these ETFs and opportunities that John have mentioned, see if they might make sense in your portfolio. Uh, if you are somebody who prefers to have a financial quarterback help you make those decisions, um, then obviously ask your financial adviser their thoughts. Are they appropriate? If so, what percentage of their portfolio should they be? If you don't have a good financial adviser to bounce those questions off of, feel free to talk to one of the ones that ThoughtfulMoney endorses. These are the firms you see with me on this channel week in and week out. To do that, just fill out the very short form at thoughtfulmoney.com. Only takes you a couple seconds to fill out the the form. These discussions with these firms are absolutely free. There's no commitments involved. Uh it's just a service they offer to help as many people as possible. Um all right. Uh John, again, can't thank you enough. really look forward to if you're willing to have you back on in 2026 to give us sort of an audible update as to how things progress uh on your current outlook here. Last question for you is um you know we do have professional investors that watch this channel but most are just you know regular people many of whom who have worked hard or working hard to build wealth to provide for their family's future. They want to uh grow their wealth prudently which is why I think they really appreciate some of the opportunities you just gave them to consider. But, you know, most importantly, they they don't want to become collateral damage to some sort of market draw down um and lose a lot of valuable time. Um you you you've mentioned a little bit about your thoughts, but any parting bits of advice for for those people? >> Probably the one that I'd repeat is just this notion that the higher the price of an asset, the lower the expected returns and the higher the risk. So, be careful getting swept up in a lot of enthusiasm. uh you know, if you aren't really studying markets and studying companies, owning a diversified portfolio that's well balanced, it's going to serve you well in the long run. >> All right, very well said. And again, I can't thank you enough for coming on and sharing so much, John. It's been great. >> Thank you, Adam. It was fun. >> All right, it was fun. And everybody else, thanks so much for watching.
US Growth Stocks To Lose Their Crown To International Value In Coming Years | John Thorndike, GMO
Summary
Transcript
So if you look at this chart, it's important to recognize that a normal real return to stocks is somewhere around four and a half, five, maybe five and a half percent. So you're getting paid better than that for owning uh value stocks outside of the US for sure. The other thing to note about this chart as it says in the on the left hand side is these are real return forecasts uh and they're also in local currency. Now since the US dollar looks quite expensive that tends to be a tailwind for US investors who are uh owners of non- US assets. So we think the expected returns from uh from these blue bars should be augmented by an expected currency return that pushes some of these six or seven and a half% returns up closer into the high single digits low double digits. [music] Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagert. I always say the most valuable people to interview are capital allocators because they've got to answer to their clients for their market calls. They're judged not by their opinions, but by their results. So today we're fortunate to hear from one of the most respected capital management firms in the world, Grantham Mayo Ven Otterloo, otherwise known as GMO, which was co-founded by the great investor Jeremy Grantham and currently manages over $65 billion worth of client assets. Specifically, we're sitting down with John Thorndike, co-head of asset allocation, who co-manages GMO's dynamic allocation and international value ETFs. We'll discuss GMO's outlook for 2026 and where the firm sees the biggest risks and opportunities for investors. John, thanks so much for joining us today. >> Thanks for having me, Adam. >> Well, it's a real pleasure, John. And um you you may look familiar to some of the viewers here because you spoke at Thoughtful Money's spring online conference this year. Um this is your first appearance on the public channel. Um so very excited for that. We have a lot of people who are huge fans of your co-founder there, Jeremy Grantham. And uh very interested to hear what his firm is thinking these days and we got a lot of great feedback when you appeared on the the conference early in the year. So I know folks are going to be excited to have you have you back, at least those who've seen you before. Um really quick before we dive into the discussion, um I just want to give a little caveat. Um as a lot of my audience who follows me on the social media knows, um I'm on day five of a fiveday fast right now. and I actually feel fine, but you know, if I start slurring or pass out or anything like that, don't take it personally. John, >> sounds good. That's quite a feat. >> Okay. You know, it's it's it's a quick way to get a lot of uh undue respect from a lot of people is to tell them that you're doing a fast. Um it it really isn't as as crazy as it sounds, but to a lot of people, they're just like, I cannot believe you're doing that. And trust me, the I I enjoy all the kind words and praise, but I I feel like I deserve almost none of it. Um but but enough of that. So look, um a lot to talk about with you, John. Um as I mentioned, you know, several times already, your firm is just highly respected. So why don't we just start with this? um what is your and and taking into your answer kind of what you know of GMO's uh perspective as well what is your current assessment of a global economy and financial markets I'd say on the economy in a word uncertain I mean we have been living in highly uncertain times that continues today we don't know where policy is headed uh we don't know how many parts of the economy are reacting to changes in the labor force course changes in tariff policy, um changes in immigration enforcement, what may be coming from the Supreme Court on tariffs, so many uncertainties, um that as financial market investors, we continue to do what we've always done within the GMO asset allocation team, which is let valuations be the guide to us of where the best opportunities are and where the most worrisome risks are in markets. And there I'd say in terms of financial markets probably the word would be dispersion. There are some parts of the markets that to us look quite risky and worth staying away from and there's certain parts that are worth leaning into. So you know we can go back and talk about how today's environment compares to other periods in time that have been interesting inflection points in markets and maybe compare and contrast some of those. Uh but today very much feels like an environment where there's a lot worth doing and some parts of the markets that are definitely worth avoiding. >> Okay. Um well, why don't we just go right there? So um if history rhymes, what is this current cycle making you think of in terms of past periods? >> Well, I know it's it's quite an analogy to draw, but probably the closest time period that this feels like to us is the tech bubble around 2000. Uh if you think about that market environment, obviously there were some very frothy parts, you know, the TMT sector at at the time. Um but the thing about 2000, there were a lot of great investment opportunities. You could buy REITs at high yields. You could buy old industrial companies at attractive valuations. You could buy small caps. You could buy non- US stocks. You just had to avoid the, you know, internet darlings. And today feels a lot like that as well. Uh we think you get paid well for owning stocks outside the US. We think there's some value stocks within the US that can pay you all right. Uh the fixed income market in terms of interest rate duration certainly has some risks associated with it, but you're getting paid okay. Credit might be another place that we would stay away from. We can talk more about that. But if you contrast that to the other more bubbly times that we've lived through over the past 20 25 years, you know, 2008 was an entirely different bubble-like environment. That was an environment where uh one thing that we look at is what we call the risk curve. So we look at different asset classes and and assess our forecasts against the risk or the volatility of that asset class. And in 2008, the slope of the line of best fit of those forecasts was negative. If you took more risk, you expected to earn less return. >> So the right thing to do in 2008 clearly was just go and hide. Like we went and hid in quality stocks in in safe fixed income, cash, treasuries, those sorts of things. That's not the environment today. The environment today, you still get paid for taking risk. You just need to avoid US large cap growth. So today doesn't look like 2008. It also doesn't look like 2021. 2021 was an environment where expected returns everywhere were very low. Right? You were getting paid next to nothing. Negative real yields for owning treasuries. You were getting paid very little for owning risk assets, especially outside of emerging markets. So in 2021, basically anything with duration looked expensive. And the thing to do back then was hide and we thought liquid alternatives. We had 60% of our portfolio in liquid alternatives back then. So you know there the market does get overenthusiastic about different themes from time to time but u but history isn't always analogous to the last time we had a bubble. We think this one looks a lot more like what we faced in 2000 than it does in 2008 or 2021. >> All right. So, so would it be fair to say that unlike 2008 which was a bubble which was just go and hide. Uh unlike 2021 which you could say was sort of a valuation extreme as well where there just really weren't any really good opportunities. So you you hung out in tea bills or liquid alternatives. Um, would you want to call this one like a like a demi-bubble or a halfbubble where it's like some parts to our value you don't want to go touch but good opportunities in some other areas? >> Yeah, I'd say maybe it's a concentrated bubble or a focused bubble, right? It is really anything associated with AI today looks like it has a lot of enthusiasm priced in. Let's put it that way. But the further that you venture away from that theme, you know, we think that you can earn attractive, even high double-digit returns from some non- US value stocks. Um, and you know, that's just marketkedly different than the environment looked like in 2021. you know. >> Okay, John, as you're talking here, I'm just going to pull up a chart from one of GMO's recent reports here, which is showing the 7-year asset class return forecasts. >> Yes. >> Um, so this does sort of track well what you just said, right, which you said, um, you know, you're seeing some parts of the market that you should lean into and here, uh, it looks like, uh, you know, deep value, uh, international deep value for sure. um but US uh deep value as well. Uh they all seem to have pretty good seven-year um average real return forecasts. Um while the US large caps in particular have pretty pronounced negative ones and and I'm guessing because the MAG 7, you know, make up so much of the performance of the US indices that as you know they're basically dragging the US large caps down. It's some the mag seven uh but it's also just a much broader set of US stocks. In fact, my colleagues looked the other day uh at developed market equities. So, US and developed non- US stocks. And what they did was they went and they broke the whole global market up into decileis based on what do analysts expect the next two years of earnings growth to be for any given company. >> Right? So they took the market, they broke it up into 10 different deciles on analyst expected earnings growth. So not GMO's view, just what does the street expect? Each bucket has US stocks and it has non- US stocks. So fastest growers might have a Door Dash in the US, but would also have say a Spotify outside of the US. And we looked at the valuation discount of non- US stocks relative to US stocks in each of those deciles. So basically comparing like tol like expected growth and you would generally find non- US stocks at 40 50% discounts to the US counterparts even ones that had same expected growth. So this isn't just about seven stocks. >> Uh some of those seven stocks look cheap to us some of them look quite expensive but it's really about this priced in assumption about US exceptionalism that drives those forecasts for the US markets down. uh and it's completely lacking from non- US markets. So if you look at this chart, it's important to recognize that a normal real return to stocks is somewhere around four and a half, five, maybe five and a half percent. So you're getting paid better than that for owning uh value stocks outside of the US for sure. The other thing to note about this chart as it says in the on the left hand side is these are real return forecasts uh and they're also in local currency. Now since the US dollar looks quite expensive that tends to be a tailwind for US investors who are uh owners of non- US assets. So, we think the expected returns from uh from these blue bars should be augmented by an expected currency return that pushes some of these six or seven and a half% returns up closer into the high single digits, low double digits. >> All right. Um so, okay, super interesting. Um looking forward to getting this more deeply with you. Let let me just ask you this real quick. Um, you know, so much of the S&P and and a great deal more of the NASDAQ is made up of of companies that have a ton of their valuation in AI, right? Um, can So, I guess first off, is your base case that the AI sector just kind of cools and these stocks just kind of flatline or or or maybe go down a little bit, right? Or is it do we get those negative -6% returns real returns over the next seven years because there's some massive uh repricing downwards like we had in the dotcom bubble when you know the the world just said you know what we we we've overbuilt we overestimated. Yes, this thing probably will deliver a lot of the benefits we think it will. They're just going to take a lot longer to manifest. Um, and if it's the latter where you think it's more likely to be kind of a big correction because these stocks make up such big percentages of the market, can they correct without kind of taking everything down with them, at least in the near term? >> So, you know, the market doesn't tend to just move in a straight line as it figures these things out, >> right? So while it may be the case, indeed it probably will be the case that AI is a gamechanging technology, right? The internet in 2000 was a game-changing technology. We all do things now that we couldn't do 25 years ago, >> undoubtedly, >> right? So the thesis was ultimately right, just the pricing was insane. Um, I think that today the thesis is probably right that we will all be using AI even more than we already are. Um, but the expectations have probably run way ahead. And when those rerate, I suspect you'll see, you know, a more violent price reaction than even the fundamentals would necessarily warrant. And so you won't just see people >> rerate these stocks down a little bit at a time. You know, if you if you look at what happens to the market based on its starting valuation, its starting valuation doesn't really tell you a lot about what's going to happen next month or next quarter, but it does tell you that when you start at a high valuation and stocks go up, they don't tend to go up by as much as they usually do. >> And when you start at a high valuation and stocks go down, they tend to go down by more than they usually do. So high valuations, low expected returns, high expected risk. There's just a lot is already priced in. >> All right. So, so we're going to talk in depth about why you like value and and international stocks um in just a moment. The this the reason why I asked that question was let's say you convince viewers here during this this discussion. Okay, GMO is really on to something here. I want to start considering value stocks and and international stocks. Um, is it the kind of thing where they should be, you know, building positions now or is it the kind of thing where they should say, well, let me wait for kind of this mania that's over uh to get played out in the AI space and let the market do whatever it's going to do. You know, maybe sit in safety until then. Um, and then once you know the ripple effects of that begin to to die out, then I'll go in and buy this stuff. In other words, is there I I know these things are trading at much greater discounts relative to the the AI stocks, but might it make sense or or is is there a risk of buying into them now and then have them correct, you know, maybe not 30 40% like the AI stocks might, but 15 20% and maybe if I just waited, I could wait for all that carnage to end and then start buying in. Do you have a strong opinion on way or that? And I know I'm asking you to kind of guesstimate a lot here. >> Yeah, my opinion is that's really hard to do, right? That owning cheap stocks that end up trading cheaper hurts, right? Nobody likes looking at their account and seeing that you've taken a loss on a position, but you've bought it at a reasonable price. Earning a reasonable earnings yield or dividend yield or buyback yield, whatever it is. Um, and you know, you continue to have the right to that cash flow stream even if it's gotten priced down to a lower level. What's hard is if you think back to when the tech bubble broke in the US, uh, you know, over periods where the US was coming down, emerging markets, which tended to be high beta stocks, actually made money over some of those periods of time, right? So the market has the ability to differentiate and say this is a problem over here and it's not a problem over here. >> And so well some of the viewers might see that and think I'm going to wait for the correction and then I'm going to be the first one in. >> Well, there's a lot of smart people who will out there be trying to do the same thing at probably the same time. And maybe you'll beat them, maybe you're not. If you buy stocks today at reasonable valuations, when you come back and you look at your account 10 years from now, you're going to have made a decent return. >> Okay. So, when you talk about reasonable valuations, are the value stocks and international stocks right now, are they reasonably valued on an absolute basis or just reasonably valued relative to the overpriced, you know, stocks that we've been talking about? So value stocks outside of the US we think are definitely priced at reasonable valuations in absolute terms. Right? You saw those forecasts of six to seven% real, add a couple points on for inflation, add a couple points on for the currency and you're talking about earning low double digit returns on equities. >> Um you know that's completely consistent with what equities have delivered historically. value stocks in the US is a bit of a tougher absolute return argument. We think that there are some of them that are priced to to deliver you in a reasonable absolute return. They're a much better relative value trade though than they are an absolute value trade. >> Okay. Okay. Um so fair to say that that even though you like US value right now, you like internet value more? Yeah. So if you look at our multi-asset portfolios, we have significantly more money invested in non- US stocks than we do in US value stocks. >> Okay? And you got to forgive me, I have not um looked at uh the performance history of international uh value stocks prior to this this interview. How have they done in recent years? So, our international value strategies up about 35% year to date. Um, so it's kind of startling. Yeah, it's kind of startling to see something that's up that much still look really cheap. Uh, it's one of the cool things about value is value doesn't need its discount to the market to shrink in order for it to perform well because what can happen is value recycles. I think we talked about this for your conference last time we spoke is that, you know, if I'm a value investor, some of my stocks end up doing better than expected. I sell them to you at a premium. I buy your disappointment uh stocks at a lower price and I just keep churning things along. So, we've had a bit of that in our performance where we still have a portfolio that's trading at a deep discount relative to the broad market, yet we've managed to deliver pretty good returns. >> Okay. Wow, that's super exciting. Well, so uh looking internationally right now, um which countries slash regions, uh interest you the most right now? >> Uh so, you know, we've done really well by the European banks. I think our portfolio of European financials this year is up something like 85%. Uh that's a place where we've made some of the easy money, we think, and we're trimming back. Uh but we like some of the Japanese industrial companies. We like some of the global pharmaceutical companies that are traded outside of the US. We like some of the ones that are inside the US as well. I think pharma is a good example though of what we mean when we talk about value doesn't just mean a junky company that's trading at a very low price to book. >> Right? For us, value is you're trading at a steep discount to, you know, an intrinsic value of what your company is actually worth. And we think some of the pharma companies look, lots of near-term risk around uh drug pricing, around insurance pricing, certainly here in the US. Uh so there's always plenty of hair around value names. Um but they're not your traditional deep discount on price to book opportunity. >> Okay. [snorts] And okay, so European banks, Japanese industrials, global pharma. I I know there's more than this in the portfolio, but you're being kind and giving us kind of your big themes here. Can you just give us if you can just a quick like rationale for each one of those things? So what is what has made European banks perform so well this year? >> Oh, part of that was just very low expectations going into the year, right? >> Okay. They were just so beaten down. >> Everybody thought European the European economy was a mess. Europe generally a mess. Uh price to book were significantly below one for many of these companies. And what's changed I think is a thesis around okay if Europe is going to re-industrialize if Europe is going to build out a defense sector somebody's going to have to finance it. uh if Europe is going to be doing a little bit more fiscal, you know, that's going to lead to more growth and even these small changes on the margin when you've got banks trading at significant discounts to tangible book, um that can lead to pretty violent price moves upwards. >> Got it. Okay. How about with the Japanese industrials? The Japanese industrials I think have also benefited from some of thesis around um supply chains moving away from a concentration in China >> have moved a bit from the defense theme as well and then Japan has just generally caught a bit. We think it's a country that deserves to outperform from here as well. uh a lot going on on the ground in terms of corporate reform uh pressure from the stock exchange as well as the government in terms of uh getting rid of cross shareholdings of better use of balance sheet. Uh so there's some themes in Japan generally that I think have benefited some of those companies as well. >> All right. So sort of Japan cleaning up its act and benefiting from the move away from China. Is it the same with global pharma? You know pharmaceuticals have been at the one of the issues near the heart of the US China trade issues. Is this just other China's business for pharma maybe going to some other countries? >> I think it more they're uh the theme is really about these are highquality businesses that have short-term questions around them where their history is generating a very good return on capital and so we think that they are are high quality companies that are trading at around a market multiple and deserve to be trading a little bit higher than that. So they haven't they've performed okay. They haven't performed as well as the European banks or the Japanese industrials have for example. So we think that's still an opportunity of value there. >> Okay. Um one more region and then I'll I'll get to a more thematic question. I didn't hear India uh from you yet. That was a a country that had done kind of great over 2024 through a lot of 2025. Is that a place you're still interested in or did that just get too overpriced? India has generally been one of the emerging markets that we've found expensive. Uh so as we have found value to be particularly cheap, it's been one of the countries that we've been more underweight relative to overweight. >> Okay. And in your back to the chart that that we showed a few minutes ago, um you mentioned that uh a continuing to weaken dollar would be a tailwind to the returns for those countries, right? Um, first off, do those real returns you had on there over the next seven years, do they make an assumption about the direction of the dollar or do they just say, "Hey, if the dollar sort of stays where it is, this is what we'll get and then it could be better or worse based upon how the dollar performs." >> It's more the latter. So, those are local forecasts. So, they don't make an assumption about where the currency is going to go. What you've tend to find historically is that stocks that trade in countries with cheap currencies tend to get a tailwind for one of two reasons. Either the currency appreciates you moves sort of back towards fair value and you get a benefit from that >> or [clears throat] the companies benefit from having a cost advantage. >> Right? >> So you either will tend to see faster earnings growth or a currency rerating. Uh, and so when we do our forecasting in US dollar common currency space, we'll add a little bit above all of those blue bars that you showed on the chart for the dollar's current expensiveness or the cheapness of of the other currencies. >> Okay. So, what is GMO's expectation for the dollar from here? Does it expect it uh and you can tell me whether it's easier to predict over the next seven years or whether it's able easier to predict over the next seven months. um te to tell me which you guys are thinking. >> Yeah, we generally think it's a lot easier to predict over seven years than seven months. >> Uh and we think that the dollar continues to trade expensive relative to a basket of other currencies. So it's definitely come down obviously this year relative to where it was starting the year, >> but it remains expensive. Uh and when you add on to that, you know, pressures around, we continue to see inflation running at a a relatively high rate here. Um and have increased questions about what is the Federal Reserve willing or able to do uh in the context of that sustained inflation but also a slowing economy. Um you know, those can put pressure on the dollar as well. Okay. So, sorry, but is is that just saying over the next seven years, you sort of expect a progressive weakening of the dollar versus other currencies? >> Yeah. >> Okay. >> Um and and since you mentioned it, um what what what is your take um on the Fed ending QT um having restarted a a rate cutting cycle um without inflation being down at their 2% target? Do you expect inflation to to to be sustained going forward then? >> I think it's u I think it's hard to believe that they are really insistent on getting to 2% inflation if you look at their current actions. Now, is 2% a magic number that you have to get to? >> I'm [clears throat] not convinced that it is. Uh what we tend to look at is okay let's let's just imagine that we're not in a world of 2% inflation but we're in a world of 3% inflation. Well if you've got treasuries trading at 4% at the 10-year roughly four to four and a quarter you're still getting 100 basis points over inflation maybe a little bit more. That's okay. Uh that's a reasonable return from say fixed income. If you get a recession, obviously inflation will come down and there's room then for your bond yields to come down. So we think that treasuries, even if the Fed isn't targeting two, maybe it's targeting two and a half, but won't say it, uh you can still do okay with with uh Treasury bonds. >> Okay. Let me ask you this. So uh [sighs] you mentioned slowing economy um and there has been data throughout 2025 to suggest that the economy is continuing to slow. Now granted we've been flying a little bit blind in uh you know recent weeks because of the government shutdown. Um you also mentioned that that your word for the economy was uncertainty, right? Or uncertain, right? Um and I agree with that though I think we now have more um clarity on exactly what policies the administration certainly more clarity than when you and I talked last back in, you know, March. Um a lot more clarity on exactly which policies the administration are going to be a put forth and b like approved and and get underway. And a number of them are now, right? So, we've had the tariffs. Um, you know, still TBD exactly what their long-term impact's going to be, but we know that it hasn't brought inflation back to five plus like a lot of people were fearing. Um, we know what a number of the trade deals look like now. And, uh, and hopefully some of the other really big ones, you know, might get struck fairly soon, right? Or finalized fairly soon. We know that what's in the one big beautiful bill um terms of deregulation and and tax ext tax tax cut extension and some additional tax relief. So, you know, we we do have some more clarity and if if if if I'm sure if we had Treasury Secretary descent in this conversation, he would say, "Get ready, guys. You know, all that stuff's going to start producing tailwinds for the economy, you know, in the next year." What do you think is more likely to win out? the slowing of the economy or you know a recovery or or or tailwinds from from these policies. >> It's very hard to say, right? We've in addition to what you cited, we've got a significant reduction in the labor force, >> right, through immigration policy and we've got a ton of capex that's going on related to data center buildout. Mhm. >> Um to the point where I think that data center buildout is driving a significant fraction of GDP growth. >> GDP growth. That might be the thing that trumps everything. Is that what you're saying? like >> if that were to slow and right, you know, we're building out these data centers on promises from AI to spend money that it doesn't yet make to buy chips that Nvidia doesn't yet make, to put into data centers that aren't yet built, powered by energy that we haven't yet produced. If any of this slows down, what does that do to the macro numbers? I think that we have to have a lot of uncertainty about that. >> Okay. And that makes that makes sense to me. So I guess let me ask you this then. So a year year plus ago um I remember listening to warnings that your co-founder Jeremy Grantham was putting out there about you know an asset bubble in in the equity markets. Um, I I think it's, you know, fair to say those concerns are still as true to the points he was making then are still as true today, maybe even more so given given how things have grown since then. How concerned is GMO about, you know, not not just sort of a leveling off of of of AI, but but of a real correction? You know, we [clears throat] talked earlier about the potential implications if there was a correction, but I mean, how how concerned are you that this sort of ends in tears um at least in the near term for the markets? Um if if the AI bubble, if there is a demi bubble in this market, concentrated AI does pop. >> I mean, there's there's various views throughout the firm. >> I bet there are. So that caveat aside, I think that if you got a big deflation of that bubble, you would see a lot of pain in the US market. To your point earlier, you would probably see some pain outside of the US. Uh that XUS would be a great investment opportunity. Um but you know, I guess one way to think about it is all right, GMO, what are you guys actually doing with your money? >> Right? uh so I can tell you in our unconstrained benchmark free strategy um which you know doesn't pay attention to any benchmark as we build the portfolio but over time we think it ought to be beat a 6040 portfolio so a traditional balanced portfolio that's 60% equities 40% bonds in that portfolio we've got a little under half of the portfolio invested in stocks almost all of those are non- US value stocks we have a small allocation to the USD value names that we really like. >> Okay, >> so we're about 50% in stocks in at the end of 2021, we were less than 30%. So, you know, in terms of how much risk are we taking? We're not taking a normal amount of equity risk. We don't have 60% or more, but we do have almost half of the portfolio in equities. We've got a lot of the portfolio in liquid alternatives, so in relative value trades, and then we've got some treasury exposure. We have barely any credit risk in the portfolio at all. So, we own a portfolio that we think is capable of earning returns. Now, it's up something like 18% this year. So, it's actually outperforming the S&P, which isn't a good benchmark for the strategy, but I throw out there just because. Um, but you know, it's a portfolio that we think is avoiding the most risky parts of the market. >> Okay, great. All right. So, you guys you guys aren't hiding. You're not you're not down in the bunker. You're not guns ablazing either, but you're basically saying, "Hey, you know, we think there's acceptable risk to be to take in this market. It's in these areas." And you've already mentioned a number of them. You did mention we got barely any credit risk. So, let's talk about that for a moment. So what is correct me if this is the wrong word but what is spooking you guys about credit markets right now >> it's really that you're just not getting paid for taking risk right if you look at spread so the incremental yield that you're getting for owning a credit instrument above a treasury uh bond with the same duration in investment grade I think it's around 80 basis points which is about as tight as it's ever been so about the smallest amount of incremental return you've ever been paid for taking investment grade risk >> and high yield is probably in the cheapest 10% of the time maybe 20%. It's about 300 basis points of incremental spread. So why take risk where you have very little upside significant downside where instead we can go over to those markets outside of the US where we were just talking about maybe put fewer dollars to work to have the same amount of risk exposed but you've got much more upside and we think long-term less downside. >> So yeah, credit markets are a place where you really should vary your exposure based on how much you're getting paid. Um, and today you're not getting paid very much. >> All right. And so, yes, credit spreads, especially for, you know, prior to two months from now, I mean, you you could almost not see any daylight between, you know, the treasuries and and corporate credit. >> Um, but so let me ask you this. Is it which is it more of? Um I'm just not getting paid for the risk or is it I'm not getting paid well and I think the risk is actually pretty substantial. Uh I asked that because we have seen of late um some signs of concern beginning to appear in the credit markets, right? Um you know we've seen >> we've seen cockroaches. We've seen repo uh lending blowout. So, um, you know, nothing right now that's that suggests, you know, credit crisis, but it does suggest that that all isn't perfect in the credit world. >> Yeah. And I'd say, you know, as we look at things, we agree that you tend to uh risk builds up when everything is looking good, >> right? The risks in credit markets don't start when the market blows out. They were made when the loans were made against bad collateral at a bad price. So I believe that there is risk in the credit markets today. I don't know when it will uh reveal itself, but I do know that you've been able to pass off that paper to somebody else at a much lower spread than where we had bought it previously. Uh so I'll let them realize the risk and then when they no longer want it, I'll buy it back. Yeah. >> All right. Makes total sense. All right. Well, look, let's get to the fun part. So, um, imagine given not just your outlook, but the outlook at the firm as you've described it, this is going to be kind of a fun time for you. Given the ETFs that you manage, correct? >> Yeah, absolutely. >> This is kind of where the firm's, you know, excitement is for the next seven years. >> Yeah. Uh, we're excited about the ETFs and in particular, I'm excited about the ETF that we just launched last month. which is called the GMO dynamic allocation fund. So it's it launched on the New York Stock Exchange ticker GMOD. Uh and that strategy we set up as a multi-asset ETF of ETFs. Um you know what what struck me as we were thinking about this idea was people came to us and said hey GMO have you thought about putting out model portfolio allocations? Right? go out and say, "Hey people, I think you should have this much in fund A and that much in ETF B, etc." And I don't know if this is right, but I think there were something like 6,000 of those different opportunities out there. And I'm like, uh, we could be the 6,000th and first, but um, but you know, as we've built our active equity ETF business, and I've learned more about it, I was thinking, why is it that these active ETF equity managers can reallocate their portfolios? So, they want to sell out of Microsoft and buy Apple. They can do that without incurring any taxes. Why can't I do what I do, active asset allocation using the same tools and suddenly be able to do dynamic asset allocation? So, shift from the US to Japan or Japan to Europe or value to growth, whatever, taking advantage of the ETF structure without necessarily having to realize taxes along the way. Why wouldn't we launch a multiasset ETF? Uh, so that's what we did. Um, it's benchmarked against a 60/40 strategy. Probably wouldn't surprise you given everything I was just talking about. Today, it's taking a pretty normal amount of equity risk, but most of it is outside of the US. Mhm. >> Uh it has exposure to GMO's value fund in the US and outside, GMO's quality fund in the US and outside, uh as well as another ETF we launched recently called the domestic resilience fund, which aims at investing in companies here in the US that stand to benefit from some of that uh supply chain shift away from from China. >> What's that ticker, by the way? >> That one is DRE. >> All right. U so we've got those exposures. We've got them complemented with some uh ETFs from outside of the firm. I just want to be clear when we charge our management fee, we credit off any management fee paid to others. So there's no stacking of fees in the product. >> So we use our ETFs and others ETFs to build the portfolio. And we think it can be dynamic and diversifying and also quite tax efficient. >> All right. Makes ton of sense. So, um, can you give the, uh, ETF for your international value ETF as well? >> Yeah. So, so the international value ETF is GMO and the US value ETF is GOV. We're not super creative with the tickers. >> You know, I like it. I I keep it simple and easy. Um, all right. Uh, well, fantastic. So, um, uh, [sighs] we're going to start wrapping up here in just a moment, but, um, is there anything that is burning brightly on your radar that I haven't thought to ask you about yet, John? >> I mean, one thing people often ask us about is, okay, you know, you see a bubble or you see a highly priced market. What's the catalyst? And you've been kind enough not to ask what the catalyst is because it's always a difficult question for us as value investors >> because it's usually the bullet you don't see coming. But yeah, go ahead. >> Yeah, exactly. And that's exactly right. But you're starting to see signs, right? I think it was Matt Lavine in Bloomberg who was noting that the open AI business strategy is to create machine God and then ask it how to make money, right? You don't hear stuff like that at the bottom of a market, [laughter] right? You've got the potential for open AI going public at a trillion dollar valuation. Now, surely all of that won't free float, but if a significant amount of it free floats and index funds have to buy it, then they got to sell the rest of their stuff. >> Who are they going to sell it to? When the institutions who have these concentrated portfolios that they've been dying to get distributions from their private portfolios, once they get those distributions and lockups come off and they can sell those stocks, who are they going to sell it to? Well, I'm sure they're public market investors who are excited to have Open AI in their portfolio, but they're not sitting there holding cash waiting to buy it. Maybe they're holding Nvidia. Maybe they're holding Microsoft. Well, if you want to get a value investor like me to buy Nvidia off your hands, it's going to take a lot lower price than where it's trading today. And given how much passive money there is in portfolios, the number of active managers who are really willing to step in and change their portfolio to buy some of these stocks that folks might need to uh offload in order to buy the new IPOs. That could be certainly a source of pressure on markets. So, we're starting to see signs. Adam, I I don't know when any of this is going to end, but you know, maybe machine God will tell us. >> That's a really interesting way to put what they're doing. Um, and of course, um, there's no guarantee whatever question we ask machine God that we're going to like the answer we get either. >> That's right. >> All right. Um, well, look, um, I asked you this at the, uh, at the conference, um, but since it was a smaller audience that is watching now, I'm just going to ask it again. Um, what's it like working with access to Jeremy Grantham? Um, I don't know if he still comes in the office every day. I mean, I guess he doesn't. Um, but what's it like to to be able to have access to that mind and all that experience? Well, Jeremy's not in the office every day, but we did just have our client conference last week, and he was up on stage telling some stories. And I'll tell you, one of the things that always really struck me about Jeremy is just how driven he is, just how competitive he is. He was still naming names of people who called him, you know, wrong but dangerously persuasive back before he was, of course, just about to be right. was showing us handdrawn charts of valuation spreads from way back in the day. Uh just really independentminded, really driven, um funny, and you know, I'll put in a shameless plug for his book. Jeremy and and Ed Chancellor have are just about to publish. I think you can get a pre pre-order your book if you want to. I think it's called The Making of a Perma Bear, but it's Jeremy Grantham and Ed Chancellor. They've got a book coming out telling stories of his career. I'm sure it will be an interesting read. I'm hoping there's a copy that shows up on my desk this week. >> Awesome. Um, if it's available for pre-order, uh, and there's already a jacket cover of it, um, I'll put that jacket cover up on the screen when I edit this when you mention it there. Um, also, just so you know, I I I will when I edit put up the tickers that you mentioned on the screen, too, so folks know where to go, folks. I'll have those tickers in the description below this video as well. Um, all right. Well, look, um, last question before I do a little housekeeping and then I'll give you the last word, John. Um, beyond the tickers that you just mentioned, um, and perhaps going and reading Jeremy's book as soon as it's available, um, where can folks go to learn more about you and your work and the work of GMO in general after this discussion? >> Sure. So, we publish our work on GMO.com. Uh some of it is behind a login, but you just need to register. It's free and you can get access. >> All right. Awesome. Um all right. Well, look, um very quickly folks, um please join me in thanking John for coming on and giving us uh such great insight um and particularly giving us a view as to sort of how things work there in GMO, but very specifically how to take advantage of the opportunities that they see through their ETFs. Um, please join me in thanking him for that by hitting the like button and then clicking on the subscribe button below as well as that little bell icon right next to it. Um, look, if you're a DIY investor and these things excite you, you know, definitely go and research these ETFs and opportunities that John have mentioned, see if they might make sense in your portfolio. Uh, if you are somebody who prefers to have a financial quarterback help you make those decisions, um, then obviously ask your financial adviser their thoughts. Are they appropriate? If so, what percentage of their portfolio should they be? If you don't have a good financial adviser to bounce those questions off of, feel free to talk to one of the ones that ThoughtfulMoney endorses. These are the firms you see with me on this channel week in and week out. To do that, just fill out the very short form at thoughtfulmoney.com. Only takes you a couple seconds to fill out the the form. These discussions with these firms are absolutely free. There's no commitments involved. Uh it's just a service they offer to help as many people as possible. Um all right. Uh John, again, can't thank you enough. really look forward to if you're willing to have you back on in 2026 to give us sort of an audible update as to how things progress uh on your current outlook here. Last question for you is um you know we do have professional investors that watch this channel but most are just you know regular people many of whom who have worked hard or working hard to build wealth to provide for their family's future. They want to uh grow their wealth prudently which is why I think they really appreciate some of the opportunities you just gave them to consider. But, you know, most importantly, they they don't want to become collateral damage to some sort of market draw down um and lose a lot of valuable time. Um you you you've mentioned a little bit about your thoughts, but any parting bits of advice for for those people? >> Probably the one that I'd repeat is just this notion that the higher the price of an asset, the lower the expected returns and the higher the risk. So, be careful getting swept up in a lot of enthusiasm. uh you know, if you aren't really studying markets and studying companies, owning a diversified portfolio that's well balanced, it's going to serve you well in the long run. >> All right, very well said. And again, I can't thank you enough for coming on and sharing so much, John. It's been great. >> Thank you, Adam. It was fun. >> All right, it was fun. And everybody else, thanks so much for watching.