Navigating market extremes through disciplined value investing

Asian markets are being driven by narrow leadership and elevated expectations, even as underlying risks such as higher energy costs build. Nitin Bajaj, Portfolio Manager of Fidelity Asian Values outlines how a disciplined value approach can navigate these conditions while avoiding crowded trades and excessive valuations.

Equity markets have remained relatively calm despite a significant rise in geopolitical tensions and a sharp increase in energy costs following the escalation of the conflict in Iran. Given the scale of the shock, the reaction from markets has been surprisingly muted.

The effective cost of energy has already moved higher for many businesses, particularly in import dependent economies across Asia. This is beginning to feed through to margins and, in turn, to consumer demand. If sustained, the impact is likely to be meaningful.

What stands out is that markets have largely carried on regardless. Global equity performance has been driven by a relatively narrow set of stocks, with strength concentrated in areas linked to technology and artificial intelligence. This has created a disconnect between headline index performance and the broader opportunity set.

In this environment, valuation dispersion has widened. Parts of the market are trading on elevated expectations, while others have been left behind despite stable fundamentals. It is this divergence that is creating opportunities for a more disciplined, valuation driven approach.

Avoiding extremes

Artificial intelligence is clearly an important technological development and is likely to become widely embedded across industries over time. However, the market is currently focused on a narrow part of that ecosystem. This is particularly apparent when looking at the semiconductor and memory supply chain in markets such as Korea and Taiwan, where the scale of earnings being generated has moved well beyond historical norms.

In several cases, profitability has moved to levels far above anything seen previously and several businesses are expected to generate more profit in a single year than they did in revenue in prior years. This points to a period of unusually strong demand, rather than a steady state of profitability.

When both earnings and expectations move to extremes, it becomes harder to judge what a normal level of profitability looks like, increasing the risk of mispricing. The focus therefore is not to avoid the theme, but to avoid parts of the market where outcomes and expectations are already stretched based on experience.

Finding value in overlooked markets

We prefer to look for opportunities in segments of the market where expectations are low and investor attention is limited. For example, the current fascination with the AI-trade has created mispricing in areas that are either unrelated to AI or are seen as AI losers.

A consistent investment discipline and focus on margin of safety continues to lead us to companies with strong cash generation and established market positions, trading at valuations that already reflect a cautious outlook.

Indofood Sukses is one example. The business in Indonesia has compounded earnings over a decade and maintains a dominant position across several markets yet is now trading on a modest valuation as sentiment towards the broader economy has weakened.

Similar dynamics can be seen in companies such as Arwana Citramulia, a domestic building materials business, also based in Indonesia, linked to housing demand, where underlying activity remains steady, but valuations have adjusted alongside the wider market.

Across these opportunities, the underlying principle remains consistent. The focus is on identifying businesses that generate cash, are run by capable and trustworthy management teams, and can be purchased at prices that provide a margin of safety. What the market is focused on in the short-term is often less important than these fundamentals.

Discipline matters in today’s market

The current environment is likely to remain uncertain. Geopolitical developments, energy markets and policy responses will continue to influence sentiment and market direction. At the same time, narrow leadership increases the risk of volatility if expectations shift.

Despite this, the long-term opportunity set for value-oriented investors in Asia remains compelling. Many companies are trading at valuations that already reflect a cautious outlook, even where underlying business quality remains intact. Small and medium sized companies are particularly relevant in this context. They are less widely followed and more prone to mispricing, which creates opportunities for investors willing to take a longer-term view.

Against this backdrop, our approach does not rely on predicting how markets will evolve. Instead, maintaining discipline becomes increasingly important, as over time it is this consistency that drives long-term returns.