July – War and Peace
After an eventful first half of the year, all we wanted was a quiet and peaceful summer to enjoy a worry-free vacation while cheering for our favorite football team. Instead, a ceasefire was broken, blocking once again the strait of Hormuz, missiles and drones flew in all directions, and even the world cup brought its lot of drama and controversies.
Inflation was a big question mark coming into the month and directly linked to this macroeconomic data point was how the Fed would react during their July meeting. The ceasefire brought some respite and helped bring inflation down from 4.2% in May to 3.5% in June. With the resumption of hostilities and the immediate impact on oil prices, June inflation may have been a temporary respite. As a result, the Fed maintained the status quo, even with a healthy labor market that could have easily dealt with a small interest rate hike. With hindsight, this was a good move, as Q2 GDP growth came out much lower than expected at 1.5%.
What investors focused on were the magnificent 7 and the semiconductor sector. Indeed, the crown jewels of the S&P500 fell out of love in late June, with a frightening loss of value (more on that in the chart of the month section). Despite the drop, the S&P500 still managed to end the month flat, indicating that investors still believe in equities and simply shifted their exposure to the rest of the large cap stocks.
Meanwhile, Europe was watching from the sideline as semiconductors were being punished, having only Dutch-listed ASML sort of competing in this space. The old continent remained relatively calm, inflation being stable, GDP low but stable, the central bank leaving rates untouched and a welcome surprise in the form of PMI’s moving back in growth territory.
As could be expected, Asian powerhouses, who are strongly exposed to semiconductors were crippled in July. China down over -7%, Japan over -8% and South Korea over -22%. Do not feel bad for them though, the latter two countries are still showing a very strong positive performance this year.
House View
We took advantage of short-lived volatility events to issue our usual structured products with downside protection, locking in attractive coupons. These are ideal investments when equity markets don’t do much, as was the case this month for developed markets.
We are starting to invest the proceeds of maturing high quality investment grade bonds into both hard currency emerging market bonds and a diversified flexible bond funds, two of the best in their space out there.
Chart of the month
The chart of the month shows the evolution of the Nasdaq Global Semiconductor Index since the beginning of the year. The index includes companies like Micron, SK Hynix, TSMC, Nvidia ASML, etc.…
It clearly shows the volatility of being in this sector, which had an amazing start with a performance of +116% between January 1st and June 22nd. Then fear spread of unsustainable spending by hyperscalers, interest rate concerns and sector rotations resulting in a drop of -30% over the next 35 days. The bleeding then stopped and the index went up +10% in the last 2 trading days of the month.
Back in the November 2025 letter, we warned that we were seeing the first cracks in this seemingly unstoppable sector, not in equity but on the credit side. Credit tends to be a better representation of a company’s health, usually deteriorating before stocks. It took time for investors to remove the blindfold, but they are finally paying attention.
The small scare we experienced could be a warning not to be over-exposed to semiconductors and the wider technology sector and an opportunity to take profit and diversify elsewhere.
Source: Bloomberg
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