Has the technology rally gone too far? Answering clients’ key questions on GEM

Alongside researching companies and managing the portfolio, I spend a significant amount of my time speaking with Artemis’ clients. While market conditions change, many of the questions don't. These were the topics we discussed with our clients most frequently over the summer… 

1.“Has the technology rally gone too far?” 

Questions about artificial intelligence (AI) have dominated almost every conversation with our clients. AI remains the overarching theme in markets and in the global economy. We do not question the opportunities here. Indeed, our portfolio retains a meaningful level of exposure to the AI investment boom through companies such as SK Hynix and Samsung Electronics. At the same time, we do question how much of their future success is already captured in share prices. We have no edge in calling exactly when semiconductor margins will peak. So, rather than trying to time the cycle, we balance earnings growth with discipline on valuations, adjusting the size of our positions as share prices and fundamentals evolve.  

Samsung Electronics, for instance, continues to trade on a valuation that is well below many of its global technology peers despite its rapid earnings growth. It remains our largest holding, although we trimmed the position after a period of exceptional performance. That reflects our discipline in portfolio construction rather than a change in our long-term view. 

2. “Have investors ‘missed out’ on the recovery in emerging markets?” 

We don't believe investors have missed the opportunity. 

Equity markets in general have delivered exceptional gains over the past five years. But that does not mean the opportunity has disappeared. The rally in emerging markets has primarily been driven by improving corporate earnings rather than expanding valuations. That gives us great confidence it can continue. 

For us, however, the question is less about the overall direction of markets and more about where expectations remain too low. If recent returns encourage investors to rebuild their allocations to emerging markets, we would expect returns to broaden out beyond today's benchmark heavyweights. In the meantime, we continue to focus on identifying companies whose fundamentals are improving before that has been fully recognised by the market. 

3. “Where are the next opportunities in emerging markets?” 

Amid speculative behaviour, including sharp gains in unprofitable companies and leveraged momentum trading, we continue to allocate our clients’ capital to areas where investor enthusiasm has yet to catch up with improving business fundamentals. 

China stands out in this regard. Beyond the best-known technology names, we continue to find national champions across a number of sectors – financials, industrials, logistics and consumer stocks – that trade on modest valuations despite their improving earnings and strong competitive positions. 

Brazil offers a similar mismatch. Political uncertainty ahead of next year’s election is likely to create ongoing volatility, but valuations remain depressed and monetary conditions are becoming more supportive. Looking over the next 18 to 36 months, we believe the combination of depressed valuations and improving monetary conditions is creating an attractive long-term opportunity. 

One common feature of these questions is that they have been shaped by the market’s recent performance and shifts in sentiment. And while markets will always swing between optimism and pessimism, our investment process is designed to remain disciplined and grounded in fact. So our approach hasn't changed. We continue to use our objective, disciplined approach to look for companies whose earnings are improving, where expectations remain modest and whose valuations provide a margin of safety.