AI disruption fears are driving a disconnect in global small and mid-caps

Nicholas Cregan

Global equities manager Fairlight Asset Management believes concerns about the potential impact of artificial intelligence are creating a growing disconnect between market valuations and business fundamentals across quality global small and mid-cap companies.

Speaking at an investor briefing late last week, Fairlight Portfolio Manager and Partner Nick Cregan said investors had become increasingly focused on potential AI-related disruption, despite many businesses in the quality SMID universe continuing to deliver strong earnings growth and resilient operating performance.

“Markets have become highly focused on identifying potential AI winners and losers,” Mr Cregan said.

“In the process, a number of high-quality small and mid-cap companies are being valued as though disruption is inevitable, despite continuing to produce strong operating results and maintain leading competitive positions.”

Fairlight noted that the majority of its portfolio companies either met or exceeded expectations during recent reporting periods, with no portfolio company reporting so far this quarter downgrading full-year guidance.

This strength is yet to be recognised by the market with many businesses across sectors such as property classifieds, consulting and information services trading near the bottom of their historical valuation ranges.

“This valuation compression reflects investor uncertainty rather than deterioration in underlying earnings performance,” said Mr Cregan.

In addition, he said that 63 per cent of Fairlight’s portfolio companies currently have active share buyback programs in place – the highest level of buyback activity observed across the portfolio since inception.

Fairlight is also seeing increased insider buying activity and growing interest from private equity investors in companies trading at discounted valuations.

“We continue to see a significant disconnect between market expectations and business fundamentals,” Mr Cregan said.

“For long-term investors, that is creating attractive opportunities across a range of quality global small and mid-cap businesses.”