2026 has signalled a change of narrative for global equity markets. After several years when stock market performance has been driven by a handful of mega cap tech stocks, pushing valuations and index concentration to unprecedented levels, recent returns have been shared among a greater number of companies – a sign that the investment landscape may finally be returning to a more normalised phase.
Global equities are positive and the US market broadly flat year-to-date, despite the Mag 7 dropping around 8% since the start of January[1]. Led lower by Microsoft and Amazon, investors have started to worry about huge capex spending on AI development which now gobbles up around 90% of cash flows. A related development is the emergence of AI tools that threaten to disrupt ‘capital light’ businesses investors previously believed to have ‘moats’ in data services and software. US software companies have lost nearly a quarter of their value this year[2] with the sell-off spreading to areas like real estate services, wealth management, insurance and logistics, which are also seen as vulnerable to AI disruption.
European attraction
Among the beneficiaries of this drawdown have been discounted small and mid-cap stocks, particularly those with ‘capital heavy’ business models outside of the US. The momentum is particularly strong in Europe where lower inflation and interest rates, rising fiscal support for infrastructure and defence, trade protection measures in selected industries and the prospect of reconstruction spending have helped to improve the medium-term outlook.
With around 40% of the portfolio invested in European equities (versus ~15% of the global benchmark), our small and mid-cap fund, SKAGEN Focus, has had a very strong start to 2026. It has gained 9% year-to-date in EUR – over 7 percentage points ahead of the index[3] – which follows a strong end to last year which helped the fund outperform over 2025.
The portfolio’s European exposure largely encompasses industrial, materials and construction-related producers of chemicals (Wacker Chemie and Solvay), stainless steel (Aperam and Acerinox), bricks (Wienerberger) and ceramics (Vesuvius). While many of these companies’ earnings remain optically weak ahead of a cyclical upswing, we believe they are strategically better positioned than their valuations suggest and offer attractive risk-reward potential in the more normalised earnings environment we appear to be entering.
Our largest European holding is Aumovio, a German automotive-technology company which was spun out of Continental at the end of 2025. The company fits the SKAGEN Focus profile of below-the-radar, deeply discounted companies which have downside protection from strong balance sheets and cheap valuations that also offer huge re-rating potential as earnings normalise.
Although the investment horizon for such normalisation is two to three years, revaluation can often occur in anticipation of earnings growth. This year we have seen the share prices of Aperam and Acerinox rise 10% and 8%, respectively, ahead of the EU erecting a ‘steel shied’ of import tariffs to protect European metal producers. The trade barrier anticipated in mid-2026 has benefitted another steel holding, UK-based Vesuvius, which is one of the fund’s top five contributors this year with a share price gain of nearly 20%[4].
The EU is similarly considering imposing tariffs on chemicals to protect domestic producers against cheap imports from Asia, the Middle East and US which should benefit companies like Wacker Chemie and Solvay. Both holdings provide inputs for building materials and should also benefit from an expected increase in construction activity, particularly if the rebuilding of Ukraine starts to materialise.
A portfolio theme benefiting from a recovery that is already underway is the re-rating of South Korean equities, driven by an ongoing push to improve corporate governance and capital discipline. Hyundai Mobis is the fund’s top contributor this year as the value of the company’s core operations and strategic stake in Hyundai Motors has caught investors’ attention. Despite Korean equities doubling in value last year[5], valuations remain attractive (forward P/E 8.8x) and it represents the fund’s largest country exposure at 23% of the portfolio.
Back to the future
The valuation gap between small and large caps remains wide by historical standards, with the former trading at discounts of around 40% and 15%, respectively, on multiples of book value and earnings. Further reversion towards the mean – small caps have often and for long periods traded at a premium – suggests that the rally has further to run and could gather momentum if investors continue to rotate from capital light businesses into capital heavy alternatives where valuations are more compelling.
The rise of AI has been mirrored by the risk premium for intangible assets to the point where ‘old economy’ stocks with tangible assets are now attracting investors after many years out of favour. With a portfolio of carefully selected companies averaging $5bn market cap and weighted upside of 70% to our price targets, SKAGEN Focus is well positioned to capitalise on these powerful themes and continuing to deliver superior returns for our unitholders.
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[1] Source: MSCI ACWI, S&P 500 and Bloomberg Magnificent 7 Total Return Index in USD as at 17/02/2026.
[2] Source: Bloomberg. iShares Expanded Tech-Software Sector ETF as at 17/02/2026.
[3] SKAGEN Focus A, net of fees as at 16/02/2026.
[4] Share price performance as at 17/02/2026.
[5] Source: MSCI. MSCI Korea Index in USD.