August 2025 Update

August, 2025

If everything looks shipshape, then you've overlooked something?

Risk assets especially equities continued their ascent. The global equity strategies rose almost 5% for the value biased and over 5% for the more diversified strategy geared to beating the cap weighted global benchmark such as the MSCI ACWI or the S&P Global BMI. The factor based and market cap weighted indices rose about 2.5% and 3% respectively.

This continued rise in equity prices occurred despite some signs of stress at the long end of the US yield curve as investors finally fear indigestion from continued deficits, and the unknown short-term impact of the tariffs. We expect (hope?) the potential growth rate of the USA to rise as private capital investment replaces government spending. This will ameliorate the debt to GDP metric. It will however take time. This is the problem we face in so far as the short-term price impact of the tariffs may well outweigh the benefits from any increased private sector supply side spending.

We're hardened investors so the crowing about how President Trump has influenced decisions by Apple and Nvidia et al to 'NEWLY' invest hundreds of $ billions, may or may not have been incremental ie will it shift the dial as NEW investment? On the other hand, it's not as if companies are going to disinvest? "Animal Spirits' look to be reviving here and certainly more so than in Europe, which has decided to mobilise more government spending by reclassifying the (re)building bridges and power supply as defence spending. It all helps perhaps but right now the US trajectory is more pleasing to us.

Some companies blamed tariffs for disappointing results (Nike) and some said "wir schaffen das" - Japanese carmakers exporting to the US. Decisions on pricing, resilience to take a margin squeeze to maintain market share, and the attractions of product line-ups are what makes analysis a value-added proposition. We use a quality factor to assess the resilience of companies to adverse events. This has proved useful.

Buy backs which we thought were going to come under pressure, look like rising again, to over $1 trillion. If companies can keep the C suite sweet by maintaining support for share prices, maybe they can afford to also take a bit of a hit on margins for their customers who aren't in the C suite? This is the Main Street vs Wall Street debate in a nutshell and Main Street appears to be the favoured party by this administration. Consequently, we expect the brow beating of executives to continue.

Deals were struck between the US and Japan, good for Japan of course, and we wondered why it took so long given Japan's role as the largest owner of US treasuries and as its most potent friend in the Pacific, but anyway. Europe promised to buy lots of USA LNG and got a deal which was widely believed to be a rollover. India was threatened with tariffs if it continued to buy Russian gas, and Brazil likewise for internal political decisions to prosecute a former leader. It is obvious that the US is going to use its economic power to influence geopolitics. Here, the best option is to keep it simple - friend or foe? Friends are more likely to be treated consistently and thus easier to analyse their companies.

As we write this the likely squeeze on corporate profit margins is apparent based on the different trends in consumer price inflation, and producer price inflation where the latter is rising faster than the former. Such things normally result in increased investment to raise productivity and lower the costs of production and hence rebuild margins, but we've not been in normal times for a while. On balance we expect a mix of increased investment and labor layoffs. On the latter it has been clear for a while that the data on the labor market was pretty useless, and we couldn't fathom why the central banks kept their mantra of being 'data driven'. So, the head of the BLS got removed and replaced by a loyalist. Cue the outrage in the legacy media. It wasn't the bad jobs report that should have triggered this change but the complete uselessness of the outmoded survey-based data gathering. If only that had been the message broadcast!

https://www.delftpartners.com/news/views/may-2024-market-commentary.html

Our biggest concern remains the concentration of the market in just a few stocks. Despite a sell-off in April, the concentration ratio of the 7 stocks (possibly some of them not so magnificent now?) has gone up again and it approaches 25% of the S&P 500. To be fair they also represent a disproportionate percentage of the profits. However, it is not a healthy market and for the run to continue, it has to broaden out. Hence the title of this update. Can the market broaden while these stocks mark time, or will these stocks sell off with less damage done to the prices of the others? Either way the outlook for a cap weighted passive return is less stellar than the general level of expectation.

Our outperformance has come from minimal investment in these companies, and we have made great profits from Japanese technology, power grid and general infrastructure (re)investment, and basic materials companies.

July notable risers were eBay + 23%, Hokkaido Electric Power in Japan, a nuclear power operator which we highlighted late in 2024, +22%, Sumitomo Electric Industries +22%, Corning + 21%, and Teradyne +19%. Detractors were Qualcomm, HCA Healthcare, Reliance, Shin-Etsu Chemical and Quest Diagnostics.

We took profits in Tegna after a takeover approach from Nexstar, and made a new investment in AECOM, a Texas, US based infrastructure project consulting service, as well as in Toll Brothers, a US mid-Atlantic Coast housebuilder. Much of the data centre investment is due to go into this region, which is currently struggling to meet existing power demand, let alone the projected. The US being the country which makes the right decision but only after exhausting all other possibilities, will encourage investment into this region across several industries. The population will grow; the demographic will change; and housebuilders and construction companies should benefit.

Delft Partners August 2025