US Exceptionalism and Changes Abroad
Factor exposures vary by region across time
By: Yukoh Shimizu
Valuation isn’t the only metric on which the US and international markets differ. Different regions have vastly different types of stocks—and different exposures to the style factors that quants use to explain equity returns.
In today’s piece, we show how different global equity markets compare to each other and how they’ve evolved over time in terms of their cap-weighted factor exposures. We show these exposures in terms of z-scores, with each “z” representing a standard deviation from the cap-weighted mean.
The most obvious thing that stands out is US exceptionalism. The US equity market stands out as comprised of larger, higher quality, more expensive, and more liquid stocks. The below table shows equity trading activity on the left and quality (as measured by gross profit to assets and free cash flow to assets) on the right.
Figure 1: Comparison of Trading Activity & Quality Factor Exposures (1996-2025)
Source: Verdad factor model
The US line (in red) is significantly higher than the lines for international markets.
The most striking thing to notice about Japan is the significant changes over the past decade. Japanese equities have become more profitable, growth has accelerated, and leverage has decreased while valuations have gotten even cheaper. The left panel in Figure 2 below shows a steady rise in Japan’s value z-score, reflecting a persistent undervaluation that has increased over time. This discount has held despite improving growth (shown in Figure 3 below).
Japan’s historically conservative approach to leverage, shaped by the fallout of the late 1990s bubble, is evident in the right panel of Figure 2. Leverage ratios have steadily declined as companies prioritized cash reserves over debt. While this has contributed to financial stability, it has also weighed on capital efficiency, making the recent TSE-enforced governance reforms to reduce excessive cash reserves a pivotal step, in our opinion, toward enhancing shareholder value.
Figure 2: Comparison of Value & Leverage Factor Exposures (1996-2025)
Source: Verdad factor model
EM equities have also experienced dramatic changes over the past decade. In the early 2000s, EM equities could do no wrong as the prospective global growth engine. Their companies, as a result, invested heavily in future growth. But this growth turned out not to be as profitable as anticipated. EM equities invested heavily and have seen profitability decrease while growth has slowed and valuations have increased. Both investment and growth have slowed, as shown in Figure 3 below.
Figure 3: Comparison of Growth & Investment Factor Exposures (1996-2025)
Source: Verdad factor model
Aside from this classic boom-bust cycle, emerging markets have seen a sustained decline in profitability (Figure 1) and increase in cheapness (Figure 2).
European equities have had a less dramatic journey. The average factor exposures for European equities have been mostly stable. The most notable difference for Europe over the last 25 years has been the sustained level of elevated dividend yields relative to the rest of the world, as we discussed in our previous research piece “Buybacks for US, Dividends for EU.”
Figure 4: Comparison of Dividend Yield Factor Exposures (1996-2025)
Source: Verdad factor model
This has been accompanied, per Figure 1, with a drying up of liquidity.
Reading these Z-Score charts tells us that the US is exceptional in having large, high quality, and very expensive companies—and in attracting seemingly bottomless liquidity. Meanwhile, Japan has become more shareholder friendly, with declining leverage and increasing dividend yields, yet has continued to get cheaper and cheaper. Emerging markets experienced a boom-bust cycle in growth and investment, with the market now both quite cheap and quite low quality. Europe’s factor exposures have been largely unchanged, with very high dividend yields and quality metrics similar to the US—yet attracting little trading activity and interest from investors.
These factor exposures can change dramatically over time. And, as a betting man, I’d put my money on the cheap, high quality markets with low trading activity, rather than piling into the most liquid, most expensive market—even if there’s superior quality.