Sumesh Chetty, Portfolio Manager at Ninety One
There comes a point in every market cycle when investors begin to wonder whether the old rules still apply.
It is an understandable question. Over the past few years, market leadership has become increasingly concentrated, a handful of companies have driven an outsized share of global equity returns, and artificial intelligence has emerged as the defining investment theme. At the same time, quality investing has been out of favour, leading many investors to ask whether something more fundamental has changed. The short answer is, it hasn’t.
Every market cycle develops its own narrative. Twenty-five years ago, it was the internet. Today, it is artificial intelligence. The themes evolve, but the underlying pattern is remarkably consistent. Periods of abundant liquidity and rising markets tend to reward optimism, narrow leadership and an increasing willingness to pay for future possibilities. In those environments, disciplined investors who remain focused on business fundamentals will often look out of step with the market.
That is not a flaw in the philosophy. It is precisely how different investment styles behave through cycles.
When markets become captivated by a single theme, the instinct is to identify the companies most likely to win. Experience suggests there is another way of thinking about the opportunity. Rather than asking who will dominate the next phase of AI, for example, it is often more valuable to identify the businesses whose long-term success does not depend on making that prediction correctly.
Companies such as ASML and TSMC illustrate the point. Their competitive advantages lie in enabling the broader semiconductor ecosystem, positioning them to benefit from long-term structural demand regardless of which applications, models or platforms ultimately emerge as the winners. The investment case rests on durable competitive advantages rather than market excitement.
The same principle extends well beyond artificial intelligence. One of the consequences of increasingly concentrated markets is that opportunities begin to emerge in less obvious places. As investors crowd into a relatively small group of market favourites, many exceptional businesses receive far less attention than they deserve. Their competitive positions remain intact. Their long-term growth prospects remain attractive. What changes is the price investors are willing to pay for them.
Ironically, the conditions that have weighed on quality investing are also the ones creating today’s opportunities.
Across consumer businesses, companies such as LVMH continue to possess exceptional brands and pricing power and remain attractive at current valuations. Within enterprise software, concerns that artificial intelligence will disrupt established business models have created opportunities in businesses with deeply embedded customer relationships, proprietary data and resilient recurring revenues. Many of these companies are more likely to benefit from AI than be displaced by it. Intuit is one example.
At the same time, selective opportunities continue to emerge across Asia. Investments in businesses such as AIA, Tencent and CATL are not broad macroeconomic calls on the region. They reflect the conviction that market sentiment has become disconnected from the long-term quality of these businesses and their ability to compound value over time.
Opportunity, however, requires discipline. Quality portfolios are not built to resemble an index, nor are they designed to outperform in every market environment. They are built one company at a time, based on the belief that resilient businesses, durable competitive advantages and sensible valuations remain the most reliable foundations for long-term returns.
The inevitable consequence is that there will be periods when portfolios look very different from the market, and periods when performance tests conviction. Those moments are uncomfortable. They always have been. But they are just moments, and as with any moment in any cycle, they too will eventually pass.
No one can predict precisely when market leadership will broaden or when sentiment will shift. Trying to call those turning points has never been the objective. The objective is to recognise when market prices have become increasingly disconnected from business fundamentals and to act with patience and discipline while others are focused elsewhere.
History has taught us that there will always be stories that captivate markets, and those stories will continue to evolve, but what remains are the principles that underpin successful long-term investing. In our view, when the rules seem to change, experience and discipline are often what matter most.
ENDS
