Key points
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A bifurcated market with pockets of excess: Entering 2026, markets are extremely bifurcated. Valuations in many cyclical sectors are discounting a tough environment, while other areas appear to be in bubble territory, where valuations have become detached from the underlying fundamentals. The environment echoes that of the late-1990s tech bubble and the speculative surge of 2020–2021.
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Correction risk driven by structural market dynamics: While the timing of catalysts is uncertain, the current imbalance between fundamentals and valuations in certain parts of the market is unsustainable. Given the dominance of passive flows, retail activity and systematic strategies in US equity markets, any rationalisation could be abrupt and severe.
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Contrarian positioning anchored in fundamentals: Despite shifting market dynamics, we remain true to our contrarian value approach. The long book comprises a series individual turnaround and special-situation ideas. In the short book, we are shorting the hype - companies with lofty valuations who often lack credible business models and the ability to generate revenues.
What is your outlook for your asset class in 2026?
Going into 2026, markets are extremely bifurcated. There are areas of the market that are normal and where valuations fairly reflect the underlying fundamentals. For example, in cyclical areas such as autos, chemicals, and non-AI related industrials, valuations already discount a tough environment, even recession. That’s fair, in our view.
Other parts of the market are in bubble territory, similar to the dot.com bubble of 1998-1999, where valuations have become detached from the underlying fundamentals. The AI theme is the obvious headline, but the excess extends to areas such as quantum computing, crypto, and nuclear. Looking to more recent history, it feels reminiscent of 2020–2021, just larger in scale and intensity.
Our approach is premised on the belief that over the long-term valuations converge to the underlying fundamentals. We do not look to time market catalysts. However, we believe that the current dynamics are unsustainable and at some point, the market will rationalise. Owing to the dominance of passive flows, retail investors, and systematic strategies in US equity markets, when this happens, we expect that the correction will be sudden and extreme.
How are you looking to position your portfolio against this backdrop?
We stay true to our philosophy, regardless of what the market is doing. As a contrarian, our positioning is at odds to the market.
Our long book remains stock-specific, a collection of individual turnaround and special-situation ideas. It has done well this year, and we hope that we continue to see more of the corporate turnaround stories play out as we go into the new year.
As we write this in early December, our largest holding is Bunge, a global grain trader that processes raw commodities to earn the spread on the processed product. The management team are starting to build an improved track record of execution, with expected growth tailwinds coming from their recent capital expenditure programme. They have just closed a large acquisition of a business called Viterra and we think commercial synergies will keep surprising for another 2-3 years.
Another key position is Teva, which we have held in the Fund for some time and is now starting to work. It’s evolving from a troubled generics manufacturer into an innovative biopharma company under new management.
Both companies are examples of long-term turnarounds where fundamental change is underway.
In the short book, we are shorting the hype, companies with lofty valuations who often lack credible business models and the ability to generate revenues. These names have rallied as speculative enthusiasm has continued to build.
Any correction we see in the highly speculative, momentum-driven market should be beneficial. In the short book, if names start to work on the way down, we intend to resize the positions to maintain short exposure, by which way you can make many multiples of the original position size, as was the case with some of the retail/’meme’ stock shorts the strategy made significant gains from in 2021-22.
