Ben Inker’s Strategy: Why Deep Value Stocks Could Dominate in 2025
Inker's Focus on Undervalued Assets Amid Market Uncertainty
Ben Inker, co-head of asset allocation at GMO, is charting a course through an increasingly uncertain investment landscape. With uncertainty permeating the markets, Inker’s strategy for 2025 is sharply focused on one area: ‘deep value’ stocks. These stocks represent the cheapest 20% of the market, with Inker betting on significant rewards in a period of global instability. But as he navigates through economic, political, and policy extremes, where exactly does he see the best opportunities, and what risks does he believe are underappreciated by investors?
A New Era of Uncertainty
Inker’s mentor, renowned investor Jeremy Grantham, has long espoused a value-driven approach to investing. As we approach 2025, that approach remains key to understanding Inker’s strategy. In a world where Bitcoin is skyrocketing past $100,000, and mega-cap tech companies continue to fuel the S&P 500, the market may seem like a place of boundless optimism. Yet, Inker views this exuberance with caution, especially in a time where political and economic uncertainties abound.
As investors continue to pour money into large-cap tech stocks and the U.S. stock market shows its dominance, Inker sees it differently. He is particularly cautious about investments that rely on predicting the economic landscape three to five years down the line. Instead, he is focusing on undervalued assets that are outside the mainstream investment conversations.
Inker's Favorite Investments: Cheap U.S. Stocks and Japanese Small-Caps
So, where does Inker see potential? His focus is primarily on “deep value” stocks within the U.S. These are companies that belong to the bottom 20% in terms of valuation. What’s intriguing about this segment is that many of these stocks are trading at discounts not seen in years. While U.S. markets are experiencing high premiums, Inker sees opportunities in undervalued companies that have long-term upside potential. The beauty of this strategy lies in the fact that even in turbulent times, undervalued stocks often bounce back once the uncertainty clears.
But Inker’s optimism is not limited to the U.S. He also sees substantial opportunity in Japanese small-cap stocks. Why? Japan's market has historically been undervalued, and now, with a weak yen and improving corporate governance, Japan is becoming an attractive place to invest. The Japanese government is actively pressuring companies to be better stewards of shareholder value, driving up buybacks, raising dividends, and encouraging mergers and acquisitions.
Japan: A Market with Potential
Inker’s excitement about Japan is tied to three main factors: the undervaluation of Japanese stocks, a cheap currency, and the country’s improving corporate governance. This trifecta offers the potential for double-digit returns in Japanese small-caps over the next five to ten years. Furthermore, as Japan’s economic recovery progresses, more companies are expected to be taken private, boosting shareholder value.
Inker believes that the government’s push to improve corporate behavior, combined with an undervalued stock market, makes Japan a compelling investment proposition. For long-term investors, the opportunities in Japan look robust, particularly as the yen remains weak and makes Japanese exports more competitive globally.
The Uncertain Future of U.S. Tech Stocks
As the U.S. stock market is increasingly driven by the performance of large-cap tech stocks, Inker also shares concerns about overvaluation in this segment. While these companies are currently performing well, their valuations are soaring, leading Inker to question whether they have more room to run. If these companies continue to perform at the level they did in 2024, they might provide decent returns. But as their valuations continue to increase, the risk grows.
Valuations in large-cap tech are especially worrying because they have already priced in a lot of positive performance. If these companies miss expectations, their stock prices could see steep declines. Inker is particularly concerned about this risk as the market continues to place immense confidence in the tech sector.
Hedging U.S. Tech Exposure
For those looking to hedge their exposure to large-cap tech stocks, Inker suggests a relatively simple strategy: the equal-weighted S&P 500 index. This version of the S&P 500 offers exposure to the same stocks but weights them equally rather than according to market capitalization. Interestingly, the equal-weighted version has historically outperformed the cap-weighted version over time.
By opting for the equal-weighted index, investors can avoid getting caught up in the hype surrounding top-performing stocks, ensuring that their portfolio is more balanced and diversified. It offers a disciplined approach to investing, reducing the risk of being overly exposed to a few dominant players in the tech space.
Risks That Investors Are Underestimating
While investors remain confident in the U.S. economy, Inker warns against assuming that things will continue as they have. The U.S. stock market is currently trading at a premium, with the belief that the economy will remain strong and companies will continue to grow. However, Inker sees an increasingly uncertain future. He points to the tight spreads in U.S. corporate high-yield credit as an example of overconfidence in the market.
Inker recalls that in 2005-2006, investors were also highly confident about the strength of the U.S. economy, only to be blindsided by the financial crisis. The situation today is eerily similar, with investors seemingly pricing in a high level of certainty. Inker believes this overconfidence leaves little room for error, and the potential downside could be significant if the economic environment doesn’t unfold as expected.
Global Risks and the U.S. Dilemma
Another major risk that Inker sees is the possibility of inflation, which could have far-reaching consequences for U.S. assets. Inker argues that while other countries may not be as affected by U.S. inflation, U.S. stocks and bonds could take a significant hit. This shift could be exacerbated by a global economic environment where inflationary pressures are localized to the U.S., leading to unique challenges for U.S. investors.
Inker cautions that investors need to be prepared for a world where the U.S. faces difficulties that are not shared by other parts of the world. This could lead to a divergence in asset performance, with U.S. assets suffering while other markets remain relatively insulated.
Conclusion
As the investment landscape for 2025 approaches, Ben Inker’s strategy emphasizes the importance of deep value investing and a cautious approach to highly priced assets. With a focus on undervalued U.S. stocks and small-cap stocks in Japan, Inker is positioning himself for a world where uncertainty reigns. Investors who take heed of Inker’s insights may find themselves well-positioned to navigate the challenges of the coming years, whether it’s hedging exposure to overvalued assets or embracing overlooked opportunities in emerging markets.