Megatrend newsletter – What we wrote to our investors in July
July was perhaps the greatest test yet for AI investments. The data centre infrastructure and chip sectors, which had performed outstandingly since the start of the year, went through a substantial correction: semiconductors fell 25% from their June peak, and the broader technology sector also delivered deeply negative returns. Value stocks outperformed growth stocks by a record margin, just as equal-weighted indices outperformed their market-capitalisation-weighted equivalents.
The Korean index, which holds an extremely high concentration of memory chip manufacturers, fell almost 40% from its June peak, and more than 1.2 million investor accounts hit the margin call threshold. After the historic bull market, Korean retail investors had hastily taken on large risks through leveraged ETFs created on single stocks, so in the days following the crash brokerages force-liquidated several hundred thousand accounts. On the American market, meanwhile, segments previously considered AI losers, such as the software sector, significantly outperformed during the sharp correction.
The Chinese technology sector struck on three fronts against Western companies that are finding it ever harder to defend their lead. On 27 July Reuters reported that a Chinese state-owned company had begun manufacturing immersion DUV lithography equipment. Previously only the Dutch company ASML was capable of this, and it had counted as the strongest monopoly in chip manufacturing. On the same day the Chinese DRAM manufacturer CXMT was listed on the Shanghai stock exchange and briefly became China’s most valuable company after the listing. This is a good indication of how significant the appearance of a new entrant is in the memory chip market, which until now has functioned as a narrow oligopoly. Finally, also in July, Moonshot AI, one of China’s leading AI labs, published the full parameter weights of its new frontier model. This undermines the market position of the Western AI labs and suggests that the gap between open-weight models and closed developments is by now negligible.
The negative sentiment and the external competitive threat were partly offset by a series of excellent quarterly reports. Of the companies reporting by the end of July, 86% beat profit expectations, and their results exceeded consensus by an average of 31.4%, compared with the usual figure of around 7%. The Magnificent 7 reports, however, did not trigger a uniform reaction: Microsoft and Amazon shares were lifted by strong cloud segment growth, while Meta and Alphabet suffered from raised investment forecasts.
In the oil market, Brent, the European benchmark, rose 24% and American WTI 21% during the month, with Brent closing at $90.12 on 31 July. The status of the war with Iran is changing ever more rapidly. Brent had fallen back to around $73 by the end of June, then on 8 July, after Trump declared the ceasefire over at the NATO summit, it jumped 5.2% to $78.02, and by the end of the month it had risen above $90. Official American communication on the war often changes several times within a week, and sometimes within a single day, but there is still no sign of a meaningful solution for reopening the Strait of Hormuz.
The financial sector was one of the best performing segments of the month. The rise in long-term yields supported interest margins, and the large banks reporting in mid-July described strong capital markets activity. The quarterly reports showed that advisory and issuance fee income at the leading investment banks grew rapidly. The return of stock market listings feeds directly into the sector’s results.
In the Fund, at the beginning of the month we reduced the weight of the semiconductor sector, largely ahead of its decline, and increased the global allocation to the defensive healthcare and financial sectors. The momentum of renewable energy and solar stocks broke in June, so we took profits in that area. During the month we also increased the weight of Nvidia, which has underperformed its sector this year but may remain a key player in the long-term AI trend.
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