Dislocation is the opportunity says Allan Gray and Orbis, and CSL shows promise

You don't need to have more than a passing interest in equities markets to understand that one of the defining themes in recent years has been the huge valuation disconnect between relative mega-caps and the rest of the market. 

And it was a theme that dominated the discussion at the Allan Gray and Orbis Investment Forum, where Allan Gray Australia Portfolio Manager Dr Suhas Nayak  and Orbis Portfolio Manager Stanley Lu talked through what they're seeing on the ASX and global markets.

The good news is this ongoing market dislocation has created great value opportunities, and investors don't even necessarily look particularly hard to find them. 

"The market has forgotten that price matters"

Allan Gray portfolio manager Dr Suhas Nayak says Australian investors are happy to pay almost any price for perceived quality, and ignoring those that could actually be offering better long-term growth. 

That's evident in an index where the top 10 stocks account for 50% of the total value, and 58% of the ASX 300 sits in two sectors: Financials and Materials. 

He makes the point that the five largest stocks on the ASX returned 5.1% over the January-March quarter. The other 295 stocks in the ASX 300 collectively returned -5.4%. 

It's a dislocation that was extended in April. 

The majority of ASX sectors are also trading at a premium relative to history, which makes the sectors that aren't of particular interest to Nayak, and part of why he and Allan Gray are looking at the market through a different lens. 

The Allan Gray Australia Equity Fund - Class A is targeting companies with both lower P/E ratios and depressed earnings.

"You can get the re-rating as PE's come back to something more normal, and you can get a benefit from those earnings coming back to something more normal as well," he says.

"That way you can potentially win on two fronts." 

It's also why the fund is overweight Healthcare by 10.5%, relative to its benchmark, and underweight Financials by 24.7%. 

The CSL comeback

It's the stock that has become the ASX's fallen angel, but Nayak believes CSL Ltd (ASX: CSL) is symbolic of a market where perception of value has become distorted. 

After its well-publicised fall, and despite acknowledged headwinds, Nayak says CSL is now at a point where it presents "a really good opportunity, particularly in a market that is so concentrated and where evaluations are so extreme."

It’s worth noting that Nayak was speaking on CSL before the company again downgraded its FY26 guidance this week, leading to the stock selling off on Monday open.

Whether this latest downgrade becomes the straw that breaks the camel’s back for investors remains to be seen.

"The question is not whether a company has risks," says Nayak. "The question is whether you are being paid to take those risks."

"At current prices, we believe CSL offers a much more attractive proposition than the market is giving it credit for.”

He makes the direct comparison to Commonwealth Bank (ASX: CBA) to demonstrate the huge value disconnect.

Global growth 

The bias for perceived quality is also evident in global equities markets, say Orbis Portfolio Manager Stanley Lu, and it's meaning great value opportunities are being overlooked.

Many investors remain drawn to equities in the US or Europe, and have what Lu says is an antiquated view of where today's great global companies are being created.

"The idea that and the perception that emerging markets is a peripheral part of the world is really outdated."

Emerging markets has been one of the key drivers of returns for the Orbis Global Equity Fund, but Lu stresses that careful stock and region selection are crucial when it comes to driving better returns. 

It is overweight Korea, China and Hong Kong, Europe and the Middle East, while underweight India and Taiwan, where it's looking for durable businesses with trustworthy management but still represent value.

It's also why the Orbis Emerging Markets portfolio is built on two ideas: long-term high conviction plays and meaningful ownership stakes.

60% of the portfolio's stocks have been held for more than five years and 45% are companies where Orbis have at least a 3% overall stake.

An EM tech gem

An example of an undervalued global stock is NetEase Inc (NTES), China's second largest online gaming company. 

It's an example of the type of high-conviction, long-term investment Orbis looks to make, having been held in the portfolio for 17 years, and offering greater than 20% EPS growth over 22 years. 

When compared to its tech and gaming peers on the S&P 500 (names like EA Sports, Broadcom and Take-Two Interactive), NetEase looks a notable value stock, at a modest 12x P/E.

For both Australian and global investors the takeaway is clear: value and growth are still on offer if you have the conviction to seek it out.