International Value Outlook: A More Balanced Opportunity Set in 2026

• After an unusually broad and sentiment-driven rally in 2025, international markets enter 2026 with a more balanced backdrop where valuation discipline, selectivity and high-conviction positioning are increasingly important drivers of returns.
• International value is re-emerging after a prolonged post-GFC period of underperformance, supported by attractive valuations, improving fundamentals and geographic and style diversification relative to growth-heavy U.S. portfolios.
• With a less synchronized monetary environment and leadership broadening beyond U.S. mega cap growth, we are finding opportunities across financials, Japan’s self-help stories, energy transition beneficiaries and select consumer franchises.

After navigating one of the most unusual market environments in recent memory, we enter 2026 with a more balanced and ultimately more investable global equity backdrop. The resilience of 2025 — despite a turbulent first quarter — is unusual and underscores the importance of building a differentiated high-conviction portfolio, maintaining valuation discipline and reacting opportunistically during large swings in market sentiment.

The year began under a cloud of uncertainty, with markets unsettled by proposed U.S. tariff policies and fears of renewed trade friction. However, sentiment improved as tariff implementation was delayed, trade agreements materialized and U.S.–China tensions eased, alleviating fears of severe supply chain disruption.

U.S. equities strongly rebounded from initial shocks, driven by solid earnings, a Fed rate cut and surging AI-related capital spending — accounting for nearly 50% of U.S. GDP growth. Emerging markets delivered notable strength, with China, Mexico and Brazil leading gains on the back of a weaker dollar and accelerating AI infrastructure investment across Asia. Developed markets joined the rally: Japan benefited from reflation and policy clarity, while Europe saw confidence rise amid large infrastructure and defense spending commitments.

Stock gains were largely multiple driven, underscoring how short-term sentiment can swing markets dramatically. This reinforces the importance of active management: maintaining a long-term, high-conviction approach and valuation discipline, rather than chasing transient factor trends.

The strong and unusually broad performance of markets in 2025 reinforced a shift that has been developing since the Global Financial Crisis (GFC): international value is reasserting itself after more than a decade in the shadows. Over the past five years, value premiums have rebounded, with international value once again outpacing growth — an important signal of changing market leadership. In our view, this reflects more than a short-term rotation; it points to a market environment that is increasingly supportive of valuation discipline at a time of elevated dispersion across regions, sectors and individual companies.

Several factors are converging to create a compelling “why now” case for international value. Historically, developed international markets have traded at roughly a 30% discount to the U.S. on a price-to-book basis. Today, that discount exceeds 50%, with similarly wide gaps evident across other valuation measures. At the same time, value stocks within international markets continue to trade at unusually large discounts relative to growth — levels last observed during periods such as the dot-com era. This creates a “double discount” opportunity: the potential for normalization of value/growth spreads within international markets, alongside a narrowing of the unusually wide valuation gap between international markets and the U.S.

Just as important, the fundamental backdrop has improved. Many of the structural headwinds that weighed on international markets in the post-GFC period — weak balance sheets, unresolved banking issues and constrained fiscal policy — have eased. Banking systems are healthier, corporate balance sheets are stronger, and policymakers have become more willing to deploy fiscal support, as evidenced by large, multiyear investment programs in Europe and Japan. Yet expectations for international value equities remain subdued, even as return prospects appear more balanced than they have in years.

Finally, international value offers distinct and complementary diversification benefits, particularly for portfolios that have become heavily tilted toward U.S. growth. In recent years, international value has exhibited lower correlation with increasingly concentrated U.S. equity markets, providing diversification across both geography and investment style. In a world where economic cycles may become less synchronized and market leadership more fragmented, this combination of regional exposure and factor diversification creates a favorable setting for active, bottom-up value investing — one that complements U.S.-centric allocations rather than competing with them. This combination underpins our conviction that international value deserves renewed attention in 2026.

We enter 2026 with a more stable macro environment than this time last year. Inflation has moderated globally, giving central banks room to ease, while fiscal programs — from U.S. industrial and infrastructure spending to expanded European budgets and targeted Chinese stimulus — continue to support economic activity. With the effective U.S. tariff rate already having peaked, companies that absorbed tariff-related cost pressures in 2025 should lap those headwinds, creating modest tailwinds for growth.

Several themes are likely to shape markets in 2026:

A less synchronized monetary backdrop: The global monetary backdrop is increasingly mixed rather than uniformly accommodative. While selective rate cuts may emerge in regions such as the U.K. and parts of Europe, other central banks—including Japan and Australia—appear more inclined toward tightening or maintaining restrictive settings, and the path for U.S. policy remains uncertain. In this environment, growth outcomes are likely to be shaped less by synchronized easing and more by regional and sector-specific dynamics, with rate-sensitive housing, utilities and infrastructure benefiting where policy flexibility exists and fiscal support and structural investment sustaining activity elsewhere.

Leadership expands beyond mega-cap AI: While AI remains foundational, power, logistics and efficiency improvements are becoming equally important investment themes. Companies that enable the next phase of the AI cycle — rather than those solely capturing its front-end demand — are well positioned. Regionally, China continues to build out its own AI infrastructure. As companies there are more limited in resources, they must look to quickly monetize their investments. Companies like Tencent are finding ways to profit from these investments now but still continue to trade at large discounts to similarly positioned companies in the U.S.

Emerging markets retain meaningful value: Although outside our benchmark, EM remains one of the more attractively valued areas globally, trading at a roughly 40% discount to the U.S. Disinflation offers monetary flexibility, countries like Brazil and Mexico are on firmer fiscal footing and an easing dollar should support flows, bolster returns and create a more fertile ground for potential alpha generation (Exhibit 1).

Exhibit 1: MSCI EM and U.S. Dollar Index Performance

The U.K. looks compelling: Attractive valuations, improving inflation dynamics and falling gilt yields have created a supportive backdrop — particularly for its concentration of service-oriented industries that should benefit from AI, and are spared tariff headwinds and threats of excess capacity of Chinese exports.

M&A could provide an additional tailwind: Deregulation, strategic repositioning and the prospect of lower interest rates may support an uptick in M&A globally. Companies will likely act more decisively in an environment with reduced policy uncertainty.

We approach international value investing with a clear objective: to own companies trading at meaningful discounts to intrinsic value where fundamentals are improving and expectations remain too low. In today’s market, we are finding opportunity not through broad macro positioning, but by leaning into specific sectors and businesses where balance sheets are stronger, earnings power is normalizing and valuation still offers a margin of safety.

A Core Focus on Financials

With financials now constituting nearly 40% of international value benchmarks, the sector remains central to our opportunity set. While valuations are no longer at extreme lows, they remain attractive given a combination of outsize earnings growth and double-digit shareholder yields. Our exposure to financials is regionally diversified but supported by broadly consistent trends. Bank holdings benefit from inflecting loan growth, high fee income, disciplined cost management and a benign credit environment, while insurance holdings are positioned to perform well as pricing normalizes, supported by mid-single-digit dividend yields and attractive earnings growth prospects across Europe and Asia.

We remain mindful that bank investing is inherently sensitive to economic cycles. However, the current backdrop — characterized by meaningful fiscal stimulus and broadly accommodative monetary policy — helps mitigate downside risks. Lloyds Banking Group, for example, exemplifies this opportunity with highly visible earnings growth over the next two to three years and an above-average capital return profile. BNP Paribas, meanwhile, has shifted its focus to improving its capital positioning via portfolio reshaping, a shift both underappreciated and in its infancy.

Japan: Self-Help and Structural Change

Japanese companies continue to make tangible progress in addressing long-standing issues around capital allocation and governance. Confronted with a low-growth domestic economy and a shrinking workforce, management teams are exiting underperforming businesses, consolidating with competitors and improving productivity by doing more with less.

At the same time, shareholder engagement has evolved meaningfully — activist investors, once viewed with skepticism, are now more constructively engaged, and management teams are increasingly receptive to governance reforms and capital return initiatives. This includes long-time holding Hitachi — a Japanese industrial electronics conglomerate. Hitachi has been benefiting from the demand and buildout of data centers and upgrading of global electrical grids, while its decade-long restructuring has turned the company into a model for value creation in Japan; this in turn motivates its management team to find further avenues for growth and returns.

While Japanese equities have responded positively and now trade at levels last seen during the late-1980s bubble era, we continue to find attractive opportunities where structural improvements and self-help initiatives are not yet fully reflected in valuations.

The Energy Transition and Energy Efficiency Remain High-Conviction Themes

Rising electricity demand from AI, electrification and infrastructure investment favors companies involved in grid modernization, storage and efficiency solutions. A more constructive outlook toward renewables is also improving the opportunity set. For example, Siemens Energy offers exposure to global power transmission and grid investment at valuations that continue to discount execution risk more than long-term opportunity.

Select Consumer Businesses Offer Normalization Upside

Within consumer sectors, we focus on companies with durable brands or scale advantages where margins were pressured by inflation but are now stabilizing. Arcos Dorados, the leading McDonald’s franchisee in Latin America, illustrates this dynamic. As cost pressures ease and operational execution improves, the company’s cash-generation profile is strengthening, yet valuations continue to reflect overly cautious assump tions about long-term earnings power. We also see selective opportunities in global brands such as Burberry, where reset expectations and brand repositioning create potential upside as execution improves.

With a more balanced macro backdrop, healthier geographic diversification and an expanding set of fundamental catalysts, 2026 presents a more attractive opportunity than the narrowly led markets of recent years. The companies best positioned from here are those driving meaningful internal financial and operational improvements that can support long-duration value creation.

Risks such as a softer U.S. labor market, uneven AI returns or renewed fiscal concerns remain part of the backdrop but highlight the necessity for geographic diversification and disciplined bottom-up analysis — key components of our portfolio construction process.