August 2026 Update

August, 2026

FOMO becomes a FAIL?

"Fear of missing out", aka FOMO aka momentum factor-based risk exposure, came unstuck in July. It seems to have been replaced with FAIL or "Fearing A.I. losses". Quite logical really since valuation or anti momentum typically makes a comeback at some point. Valuations stretched, uncertainty surrounding return on the invested capital in the A.I. ecosystem, significant amounts of leverage in both the real and financial economies, a steepening bear yield curve, and an irresponsibly levered hedge fund liquidation all seemed to be the cause of the selling. The culprit really is the embedded expectation that things will always recover with the implicit put option provided by the Fed. As we surmised in a previous article it may be that this Fed will provide less guidance and maybe not so much support in an effort to remove indifference to leverage and moral hazard? Having said that the latest Fed meeting voted to keep rates stable despite stubbornly high oil prices. A missed opportunity?

Performance in July was mixed with the global diversified strategy performing in line with the global indices, rising over 1.5%, the Infrastructure strategy outperforming nicely, rising over 2% (due to an underweight to rising interest rate risk) and the Global 30 value portfolio underperforming significantly as retribution for last month's massive outperformance.

We had actually feared a blow off and moved to reduce momentum risk and exposure to "FAIL" exposure in all strategies but didn't do enough in the Global 30? We did trade out of Heidelberg Materials and into JP Morgan and also trimmed KLA in the tech sector. Too timid, too reluctant to crystallise taxable gains, or unaware of the extent to which the AI frenzy had infected everything and thus didn't use a short horizon risk model, we could have done better after a stellar few months in the Global 30? However, all sensible time periods to judge skill and process efficacy show consistent outperformance.

From March 2026 commentary - "As we stated late last year, the active risk in the portfolios has risen to uncomfortable levels driven by price momentum, the downside to outperformance. Put another way, high exposure to price momentum is great until it isn't and so we made many more trades than usual in February to reduce this oversized risk."

It remains our base case that power grids even without a data centre boom are capacity constrained and that Japan remains both undervalued and a potentially strategic partner for the West as it can help to reindustrialise the West through direct capital investment, and to counter China in the Pacific. It is also likely that capital expenditure on data centres/power grids continues by those companies that survive on the basis that they will eventually turn profitable. Given the profitability enjoyed by those companies that didn't walk away from the 2001 internet bubble in the following 20 years, psychologically the determination to keep spending will prevail - at least we think so. What we don't yet know is who and when will have to surrender first. What maybe has changed in market sentiment is the willingness to believe all companies can make money at or above their cost of capital. From now attention and analysis will focus on the first to withdraw from the capital investment frenzy. Who blinks first? Europe doesn't have this problem as it doesn't really have the industry. It has other problems! As we publish this the French government has announced its budget deficit will be over 14% higher than forecast and the total deficit including municipalities and regions. Spending is rising faster than revenues and the State is essentially destroying the economy. See last month's Be More Worried? https://www.delftpartners.com/news/views/july-2026-bmw-be-more-worried.html

China appears to have used the State balance sheet in their Tech/A.I. buildout if we are to use the IPO of CXMT on Shanghai's Star 50 market as an example of sovereign strategy?

As ever in equities, the answer probably lies in the credit or CDS markets, and an ability to look at off balance sheet financing and contingent liabilities that are more than contingent. We pointed out the impossible trinity of raising new equity, funding buy backs (which have been running at over US$800bn p.a. for a while) and keeping head count stable or growing. For this capital investment rate to continue, something has to give. We suggested head count would be the first to go and then buy backs for the C suite reluctantly later.

From March https://www.delftpartners.com/news/views/march-2026-market-commentary.html - "A.I. companies continue to insist they will spend the money required and this will have implications for share buyback programmes which have supported share prices. Be wary of high levels of capital investment combined with continued share buybacks because good balance sheets will quickly become levered. Be also wary of the off-balance sheet financing of these committed investment programmes, and believing lazy analysis which will look at cash flow and say "no problem', while failing to account for the real cash cost of share option programmes. Meta anyone?"

When this happens, we move to a market which for the first time in a long time has to be a supplier of equity funds and not a recipient from the corporate sector. Stock selection will matter more.

Meantime we anticipate our holdings in the Global 30 to bounce and are comfortable with positioning in the Global diversified and Infrastructure strategies.

Delft Partners August 2026