Portfolio Manager
Market concentration has reached record highs, valuations are extended across large parts of the world and artificial intelligence (AI)-related headlines are driving large market moves. Against this uncertain backdrop, I believe our market-neutral long-short strategy, which seeks to generate returns through stock-specific insights rather than relying on rising markets, remains well positioned.
For much of the past two years, equity markets have been driven by a narrow group of companies tied to AI, data centres and digital infrastructure, yet beneath the surface a much broader opportunity set is emerging across regions, sectors and market capitalisations.
At the same time, elevated valuations and ambitious expectations in parts of the market are creating opportunities on both the long and short sides. Periods of significant technological change rarely progress in a straight line. As history has shown, major innovation cycles create both winners and losers, often alongside sharp shifts in market leadership.
Finding opportunities among the winners and losers of technological change
One of the defining characteristics of today's market is the degree to which investor attention remains concentrated in a relatively small number of mega-cap companies. Beneath the surface, the dispersion across stocks, sectors and themes means that the opportunity set for active investors is very broad. Our market-neutral, long-short approach is not constrained by benchmark weights, allowing us to pursue opportunities wherever we see attractive risk-adjusted return potential.
Across North America, Europe, Asia Pacific and Japan we continue to identify businesses benefiting from improving earnings trends, supportive valuations and company-specific catalysts. At the same time, elevated expectations and deteriorating fundamentals in parts of the market are creating attractive short opportunities.
This flexibility is particularly valuable within the technology sector, where we are looking to identify where market expectations have become either too optimistic or too pessimistic.
Recent volatility in AI-related stocks, following renewed debate over the pace and risks of AI development, illustrates how quickly assumptions about perceived market leaders can be challenged. This reinforces the importance of assessing the likely winners and losers at an individual stock level, rather than treating AI as a single, directional investment theme.
Today, we see attractive opportunities in selected US software and services businesses where valuations have become more compelling despite resilient business fundamentals, strong cash generation and durable earnings growth. In many cases, we believe investors have become overly focused on disruption risks while underappreciating the ability of these companies to act as enablers of AI adoption. Our exposure is diversified across a range of businesses rather than concentrated in a small number of positions.
Beyond today’s narrow group of market leaders, we see some of the most attractive opportunities to add value through both long and short positions.
Even within the challenged consumer sector, we can identify individual companies we favour while remaining short the sector overall. In the US, Ralph Lauren is one example. We like the stock for its earnings visibility so therefore hold a long position. It recently delivered double-digit sales growth, achieved its 36th consecutive quarter of retail growth and generated substantial free cash flow while continuing to return capital to shareholders.
Financials also offer opportunities on both sides. We are currently net long the sector and particularly like European banks, where valuations remain attractive, capital returns are strong and earnings are resilient. Parts of the US financial sector are also benefiting from what is increasingly a "K-shaped" economy. Companies such as Goldman Sachs and Morgan Stanley are seeing stronger activity in capital markets, wealth management and private assets, while lenders such as FirstCash continue to benefit from sustained demand for consumer credit.
At the same time, we are short businesses where expectations remain too optimistic, including some regional banks facing structural competitive pressures and exposure to weaker loan markets, as well as financial technology and private equity companies where we believe valuations fail to adequately reflect the risks.
Turning to industrials, we see attractive long opportunities in several European construction and infrastructure businesses. This part of the market has undergone significant transformation over the past decade. A more rational competitive environment, greater pricing discipline and a tailwind from German fiscal stimulus have enabled these companies to generate stronger returns. We also favour selected Asian shipping companies, whose earnings outlook continues to be supported by tight vessel supply and increasing friction in global trade.
Taken together, these positions illustrate the importance of distinguishing between market expectations and company fundamentals. We seek to identify businesses where improving fundamentals are not fully reflected in valuations, while shorting those where expectations have become detached from underlying fundamentals.
Ultimately, the key question is not whether markets rise or fall, but which companies can meet the expectations embedded in their valuations. In my view, greater dispersion makes that distinction increasingly important and provides opportunities to express differentiated views on both the long and short sides.