The month of July ended on a generally unchanged note, but the underlying movements were very significant: from a macroeconomic and geopolitical perspective, the situation in Iran deteriorated once again, leading to a new surge in oil prices with inflationary consequences. Both the ECB and the Fed reached the same conclusion, not raising their rates (this time), but the market interpreted the two meetings differently: Kevin Warsh initially managed to convince the markets of his determination to control inflation and raise rates if necessary, contrary to the mandate set by President Trump, but this meeting and internal disagreements created doubts about his real intentions, which caused US rates to rise sharply. Inflation was further exacerbated by the new tariffs imposed by the American president. At the same time, the Japanese currency continued to depreciate significantly, and the end of the month saw the first massive joint intervention by the American and Japanese central banks to support the yen. China, for its part, is still facing a sluggish economy, but is advancing its export strategies, especially towards Europe and emerging markets, and is positioning itself against the United States in AI.
Equity markets are not left behind: for several months, the AI theme, associated with considerable investment spending, has been driving the market as well as all derivatives related to the implementation of data centers and connectivity, from electrification to power generation and specialized real estate. The market exaggerated this trend, leading to the creation of leveraged ETFs on individual stocks in Korea, allowing retail investors to speculate with leverage on price increases that seemed infinite. As trees do not grow to the sky, the essential question of the expected profitability of these investments finally arose. Given their scale, profitability seems distant, while China is beginning to deploy open-source models and circumvent US sanctions on technology exports by working to develop its own capabilities, from chips to lithography machines that were thought to be the preserve of a few Western or Korean companies. The abrupt reversal in sentiment cleared out speculative retail positions and led some specialized funds, such as Situational Awareness, to forced sales and near-bankruptcy before Citadel acquired them.
In this shifting environment, earnings releases are living up to expectations: US stocks are delivering positive surprises, hyperscalers continue to generate impressive cash flows, and overall, for the second quarter, the growth of already announced results in the US will be close to 30% and 14% median, with companies remaining optimistic about their outlook.
In July, the European Commission published an Electrification Action Plan with a proposal for a 100 billion EUR Industrial Decarbonization Bank and a commitment to revise the Union's hydrogen strategy. In China, the hydrogen-compatible gas turbine market is projected to reach nearly USD 3.5 billion in 2032 (>10%/year), signaling increasing maturity of equipment for H2 injection/combustion. Meanwhile, in North America, Air Product officially abandoned its low-carbon hydrogen project in Louisiana.
In July, the fund fell by -3.8% compared to -0.6% for the MSCI ACWI in a context of massive and very rapid consolidation of AI-related stocks. The fund's strong structural exposure to industrial stocks was particularly penalizing. These stocks cost 3 points of underperformance, driven by declines in emblematic names such as Siemens Energy (-11%), GE Vernova (-16%), Bloom Energy (-32%), and Vertiv (-28%). Pure players like Doosan Fuel Cell and Ceres Power even dropped by 53% and 31% respectively. While the decline was anticipated and led us to somewhat reduce exposure, its magnitude frankly surprised us, especially since fundamentally, the outlook was confirmed during Q2 releases, so the fund's exposure remains essentially unchanged. In this context, consolation prizes came from sectors that benefited from market diversification towards stocks uncorrelated with AI, notably in the automotive sector with BYD (+29%) and Toyota Motor (+14%).
While we feared a consolidation, the speed of the movement surprised us, as it was accelerated by the unwinding of leveraged positions. But by the end of the month, second-quarter releases brought the expected clarifications. For example, Microsoft indicated it was facing a capacity deficit and had a very diversified customer base, factors likely to support its investment plans that benefit stocks in our universe. In no way does this consolidation, however strong it may be, call into question the strength of the investment cycle in alternative energy solutions, supported by the need to accompany growth and the necessary changes in global energy systems, under the effects of digitalization, increased sovereignty concerns, and de-globalization / re-industrialization.