July Report

Market Review

Global equity markets were broadly flat in July, though beneath the surface there was considerable dispersion as investors continued to reassess expectations for AI-related demand. Volatility persisted through the month, driven by growing debate over whether the pace of investment in AI infrastructure could be sustained.

Information Technology weakened as AI-related shares came under pressure. Semiconductor stocks were particularly soft, with manufacturers of memory chips, the components used to store data in computers and AI systems, selling off sharply after a strong run into mid-June. Investors reassessed elevated expectations for AI-related memory demand and pricing, prompting a reset across the sector. Semiconductor equipment makers also declined as the broader repricing of AI enthusiasm weighed on capital spending expectations.

Energy was the standout performer, rising 12% as geopolitical tensions flared once more. A fresh exchange of attacks between the US and Iran led to another closure of the Strait of Hormuz, pushing Brent crude prices higher and lifting energy shares broadly.

Regional performance diverged. Emerging Markets was the weakest region, weighed down by South Korea, where the concentration of memory chip manufacturers left the market particularly exposed to the reversal in AI-related sentiment. Developed markets held up better, supported by the rotation within technology from semiconductors and hardware toward software and services, where earnings visibility appeared more resilient.

Portfolio Commentary

July was a subdued month for the portfolio in absolute terms, with a small decline reflecting the broader volatility across global equity markets. The portfolio held up modestly better than the benchmark, supported by a notable rotation within Information Technology, away from semiconductors and hardware and toward software and services, which marked a shift from earlier in the year.

Adobe and Accenture, both of which had been weighed down by fears of AI-related disruption earlier this year, were the standout contributors, with each rebounding strongly during the month. Elsewhere in IT, the absence of memory chip manufacturers SK hynix and Micron Technology from the portfolio supported returns and helped offset the impact of the portfolio’s exposure to Samsung Electronics. NVIDIA and Broadcom also contributed positively, holding up better than the wider semiconductor and hardware group.

Within Consumer Discretionary, shares of Sony rallied after the company raised its annual forecasts on the back of earnings growth in its gaming, music and image-sensor businesses. The absence of Tesla from the portfolio also supported returns in the sector. Offsetting some of these gains, the portfolio’s lower exposure to strongly performing areas of the market, notably Financials and Energy, weighed on relative returns.

During the month, the portfolio initiated a new position in Lenovo, the China-based company that is one of the world’s largest producers of personal computers, servers, and storage systems. Over the past several years, Lenovo has used its cost, supply, and technological advantages to grow its share and margins in both the server market and the enterprise solutions and services market, which includes providing ongoing IT, cloud architecture, and AI support. Lenovo’s global management structure, with headquarters in both the US and China, combined with its strong compliance record, helps to reduce political risk. The investment approach sees Lenovo’s future growth being driven by the ongoing retirement of Windows 10 systems and the growing need for on-premise AI and private cloud servers.

Periods of sharp rotation within the market, such as the shift seen this month within Information Technology, can create short-term noise but often serve as a reminder of the value of diversification. The investment approach continues to focus on well-managed businesses with durable competitive advantages and the financial strength to navigate a range of market conditions.