During July the Strategy outperformed the index by 1.9% even as investors got jittery about the AI trade.
The greatest positive contribution came from our stock selection in Korea as well as exposures in China and smaller markets such as Argentina, Thailand and Poland. This was offset by stock selection in Taiwan where second-line stocks gave back some outperformance against TSMC and our underweights in India and Brazil which held up relatively well.
We have used volatility to gently nudge our exposures within AI driven markets but broadly maintained a cautious stance. This leaves us modestly underweight the broader AI hardware ecosystem in Asia.
At least since James Carville said he wanted to be reincarnated as the bond market because it “can intimidate everybody”, there has been a grudging acknowledgement of its power. Liz Truss found out the same during her ill-fated stint as UK Prime Minister. In recent months, ominous rumblings have again been coming from global bonds. The US is paying the highest yields in a quarter of a century on its longer dated debt and there have been large localized moves in technology company credit spreads. The two are not unrelated in our view.
US treasuries are typically seen as driven by inflation expectations but with inflation-linked securities are anchored to their average level of recent years at 2.3%. In fact, we are seeing a classic supply and demand situation where a dramatic increase in global debt issuance is leading to a repricing. Even as the US continues to run US$2trn deficits without seriously attempting to address them (DOGE distractions notwithstanding), AI capex spend is sucking in ever larger quantities of money via debt and equity markets and off-balance sheet arrangements. Hyperscalers have taken to issuing debt in exotic markets and currencies to make up for diminishing pools of money at home and ensuring the globalization of the squeeze.
This combination is pressuring other borrowers including EM governments like Brazil that remain highly vulnerable to the level of rates. Alongside political uncertainty it is one reason we have remained largely cautious on the Brazilian market. We note that countries like South Africa and Peru with better fiscal outlooks have maintained or even reduced their yields despite the global pressure. Circling back to the immense demand for capex funding by the global AI buildout and its increasing footprint in financial markets, we are more broadly wary of parallels to 2007 but with government balance sheets in a far weaker state. While it may still turn out that an explosion in productivity growth validates the spend and brings about rapid deleveraging, there are probably more ways for this to go wrong.
Our process always starts with following long term rates to help understand the risks of investing in equities. We will continue monitoring the willingness of bond markets to participate in the great spending experiment and work to incorporate its signals in our positioning.
