Growing gap between corporate performance and investor reactions creates opportunities

Rising geopolitical tensions in the Middle East are once again dominating global headlines, but Datt Capital CIO Emanuel Datt says long term investors should focus on underlying corporate realities rather than reacting to short-term market noise.

Much of the concern centres on Iran’s role in global energy markets and the strategic importance of the Strait of Hormuz, one of the world’s most critical shipping routes for oil exports.

“Iran has been subject to extensive economic sanctions for decades. As a result, its integration into the global economy is relatively limited compared with larger economies,” Mr Datt says.

“At present, the disruption appears to be driven more by insurance considerations than by physical blockages of the shipping channel. Insurers have restricted coverage because the region is classified as a conflict zone. Developments such as the United States offering insurance coverage for vessels could allow shipping flows to resume more quickly.”

Market signals also do not currently point to expectations of a prolonged crisis.

Against this backdrop, Australia’s latest reporting season revealed a growing gap between corporate performance and investor reactions.

“What surprised us most this reporting season was the clear divergence between the underlying earnings delivered by companies and the way markets reacted to those results,” Datt adds.

“Across large parts of the market, companies delivered results broadly in line with or slightly ahead of expectations. Yet many stocks were still sold down.

“Equities that merely met consensus forecasts were frequently sold down,” he says.

“This suggests that markets are currently operating with a more defensive posture, with investors prioritising liquidity and capital preservation rather than rewarding companies for delivering positive results.”

That said, Datt notes that fewer companies exceeded expectations compared with previous reporting periods, contributing to a broader reassessment of risk across markets.

The end result has been a compression in valuation multiples across multiple sectors

“Businesses with structurally strong earnings drivers were not necessarily rewarded in the short term. In our view, that has opened a broader opportunity set for disciplined investors. Over time, markets will once again differentiate between companies with durable competitive advantages and those facing deeper structural challenges,” he said

Datt says that one of the most powerful structural forces reshaping businesses is the rapid advancement of artificial intelligence.

“Some investors fear that AI could reduce barriers to software development and erode existing competitive advantages. That perception has contributed to a broad sell-off across parts of the technology sector,” he says

“However, many technology companies remain strongly positioned as they possess access to proprietary or regulated data sets that cannot easily be replicated. These data sets effectively form a structural moat that is hard to compete against.

“Many of these businesses also operate under multi-year contracts with customers, creating a stable revenue base.

“As AI tools improve productivity, operating margins can actually expand significantly over time,” Datt says

“What makes the opportunity particularly compelling is the sharp decline in valuations. In some cases, technology companies are trading at the lowest multiples seen in five years despite the potential for improved profitability driven by AI adoption.”

Another encouraging signal in the current market environment is the rise in merger and acquisition activity within the small-cap sector

“When strategic buyers and private market participants begin acquiring listed businesses, it often indicates that the public market valuation of those companies is lower than what private investors are prepared to pay,” Datt says

“Private buyers typically focus on long-term earnings potential rather than short-term market sentiment. As a result, they are often willing to pay a premium for businesses that possess strong fundamentals or strategic value,” he says.

Recent deals have seen several small-cap companies acquired at meaningful premiums to prevailing market prices, highlighting a growing valuation gap between public and private markets. “For long-term investors, that can be an important indicator that segments of the small-cap universe may be undervalued.”

“Despite geopolitical uncertainty, we remain constructive on companies positioned within the global logistics ecosystem, including WiseTech Global. WiseTech operates mission-critical software for the global logistics industry,” he notes. The company’s platform supports freight forwarders and logistics operators globally, providing strong long-term demand visibility.

“In some cases, geopolitical disruptions can actually increase logistical complexity,” he says. “When supply chains shift or shipping routes change, businesses often rely more heavily on logistics software to manage freight movements efficiently.”

Periods of geopolitical tension can also lead to increased shipping activity as businesses build inventory buffers and secure supply chains. “For these reasons, while the current environment introduces short-term uncertainty, it may ultimately reinforce the importance of logistics infrastructure platforms such as WiseTech within global trade networks.  From a long-term perspective, we continue to view the company as structurally well positioned within the global logistics ecosystem.”

About Datt Capital

As an independent investment fund manager in Australia, Datt Capital focuses on disciplined research, independent thinking, and strong alignment with investors. Investors who wish to know more about our Fund offerings, please contact our Head of Distribution, Daniel Liptak, at daniel@datt.com.au or 0419 004 524.