June 2025 Update

June, 2025

Dazed and Confused?

May was a good month for equity risk assets even as the bond markets began to (finally) worry about debt issuance. It is seldom right to join in a panic sell down as we experienced in April with 'Tariff Turbulence' causing consternation and a "dash for cash".

To make it more challenging for investors we also have the problem of poor data with which to contend. US economic data remains confusing and confused or even contradictory. The ISM Services diffusion index showed a decline whereas the PMI diffusion index rose meaningfully. Pity poor Fed Chair Jay Powell who will no doubt get an earful if he doesn't cut rates. The 'data driven' philosophy of central bankers everywhere is now clearly "somewhat" (ahem) unsound, as we argued previously. Prepare for errors.

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

If the data is awful, it's likely that policy decisions will be awful. We'd go back to looking at monetary aggregates as a useful guide to setting rates, but that's not for this update. Anyway, our central case remains that we have to invest against a political backdrop of a strong bias to inflation as a debt reduction and fiscal drag tool; that national industrial policy is back on the agenda everywhere (never went away in Asia btw) and that individuals will be slugged for tax rises although thankfully some companies are now being forced to 'cough up' to help out with deficits. This increase in tax payments by 'Big Tech' especially will be an interesting headwind for that part of the market. Along with signalled, required and anticipated increases in capital investment for AI etc, this will result in many 'Tech' firms seeing free cash flows no longer so large and free. The current rate of share buybacks in the US is C.$1 trillion of which over $250bn is made by 'Big Tech; or approximately 25% of the total is coming from 4-5 companies; and if this rate of buybacks is reduced, so is a support for that part of the market. Therefore we have higher taxes, lower levels of share support from buy backs and accelerated depreciation from a wave of capital investment, all of which hit the bottom line adversely. It's not to say that the profits won't be substantial, it's that the rate of increase expected may well be too high. Not a lot of people know that.

Tariff turbulence continues but markets rose strongly with the cap weighted global indices rising c5% in A$ terms. The trust rose equally with this benchmark and the Global 30, a Value biased approach, rose almost 3.5%. Growth beat Value in May but over the last year Value has started to claw back years of underperformance. As pressure returns to re-industrialise the West and for more infrastructure and Defence spending, we expect this trend favouring a Value style to continue. We continue to hold a small Value bias in the Global Trust too.

Some managers may have raised a lot of cash in the last few weeks as the tariff threats escalated but timing equity exposures against cash is a very hard thing to get right. We very rarely do it.

Despite DOGE efforts to reduce spending there hasn't been a significant drop in expected US debt servicing outlays. It will be much easier to reduce debt to GDP by pro growth policies and various incentives or even cajoling, to the private sector to invest. The tax cuts, deemed irresponsible by some, were passed in the House. We expect (hope) that growth will surprise on the upside (eventually) but years of bad policy almost everywhere have produced poor economic growth rates and serious imbalances.

Europe has pledged significant increases in defence spending and Materials and Defence stocks there continue to rise in anticipation. We held on to Heidelberg Materials, CRH and Smiths Industries in the UK but very large gains in the last year are making other options look more attractive.

In the diversified global trust we purchased Sterling Infrastructure, and added to Cheniere Energy, Quanta, Corning, in the USA; A2A in Italy; and Sumitomo Electric Industries in Japan.

At the end of May Meta announced a deal with Constellation Energy for the supply of nuclear power from the plant in Illinois which would otherwise have been mothballed in 2027 after the expiry of government supplied $ via the Zero Emission Credits scheme. This type of deal whereby the private sector funds vital infrastructure, is a sensible way to bring the healthy balance sheets of the private sector into direct investment allowing the over stretched government balance sheets to be repaired. Care needs to be taken when investing because some private capital will pillage the asset base to the detriment of the customers, the equity holders, and the annoyance of governments - Thames Water anyone?

We have been managing a global listed equity Infrastructure strategy for several years and anticipate offering this as a unit trust to Australian based investors shortly.

Delft Partners June 2025