July 2026 Update

July, 2026

BMW = Be More Worried? Recent results a warning for European investors.

We had a good June and a good 2nd quarter. It's a good job our philosophy is to remain fully invested and not to time cash or Beta exposures too much. In May we declared we had expected a bit of profit taking given the numerous uncertainties and massive profits available to be taken and thus were contemplating further reductions in the higher Beta tech stocks. We had a new Fed Chair upon whose approach to interest rates to ruminate, interest rates backing up, Hormuz, and the continued gating of Private Credit funds but we got a rampant bull market!

All portfolios outperformed and gross of management fees (we offer different ways to access our portfolios and thus different fee structures) but net of transaction, custody and administration fees the following table illustrates that the quantamental process we use is working.

Now for the point of the title - The parlous state of the European economy, or at least its industrial base, was epitomised by BMW's results - regulation, Net Zero, energy costs at 2-2.5x that of the USA, and unceasing competition from China drove EBIT margins to below 3% and the share price fell by over 20% to a multi year low. Oliver Zipse the CEO has long been a critic of emission regulation targets in Europe as have many other CEOs. Some have threatened to invest in the future in the USA rather than Europe. In the last 20 years over 2 million manufacturing jobs have been lost in Europe. The only people who don't seem to care what is happening to the industrial base in the private sector are the public sector employees aka the politicians.

The "Made in Europe" proposal (also known as protectionism for which Pres Trump got lambasted by MSM) won't help since the supply chains for the likes of BMW are global and will merely raise prices for the assemblers/manufacturers. As we say in the heading, if you are investing heavily in European economies and markets at the moment, "Be More Worried". Our ranked preference by country or region remains, Japan, USA, Asia especially Singapore and Hong Kong and only then Europe.

The Global 30 returns are of course pleasing but now further risk reduction is needed, which we will do. Every time we have trimmed KLA and Applied Materials the stocks have raced ahead even further. They now still represent too much of the risk budget despite trimming in recent months. In June these stocks were up 22% and 54% (yes) in US$ terms respectively.

Equity market volatility is elevated and the switching in favour between chip makers and A.I. plays versus the neglected Value stocks such as healthcare and retail is wide and wild. Our presumption is that the latter will outperform from here for a while We see reductions in planned data centre spending, reductions in the spending on A.I. tokens and an increasing realisation that the return on capital investment may well be zero, at least for some companies.

We purchased Encompass Health in June which appears strangely neglected since it is a sound business on a cheap multiple in a structurally growing segment. Space X we did not play.

We like the new Fed Chair's signals that he won't mollycoddle the market with dot plots and nudge nudge wink wink statements. It's about time moral hazard was reduced or even removed and this change will help. Our next hurdle will be whether the US government accedes to the request for government bailouts by A.I. companies pleading that it is a "national security issue". It may be that the US government may take a stake in these companies in such an event which would at least allow the public to participate. Intel has proven to be a profitable albeit unusual adventure by the US government so there is precedent. We see signs already that some companies are warming up the Administration.

Our portfolio characteristics as at the end of the 2nd quarter are tabulated below.

Delft Partners July 2026