Equity and bond market indices recorded lacklustre performance in July, driven by a combination of two factors. Firstly, renewed tensions in the Middle East pushed energy prices higher, reigniting inflation concerns and putting upward pressure on interest rates. Secondly, growing doubts about AI-related demand and the associated capital expenditure intensity sent semiconductors and memory stocks sharply lower, dragging concentrated indices down in both emerging and developed markets.
In equities, indices less exposed to technology and the broader AI theme delivered the strongest performance in July. In a sign of broadening market leadership, equal-weighted small- and large-cap indices outperformed their market-cap-weighted counterparts. The concentration risk we discussed last month began to materialise, as momentum trades started to unwind.
Semiconductors entered bear market territory, declining 20% in July and leaving the global technology sector down 4.3%. Reassuring earnings from hyperscalers helped mitigate the index drawdown, while previously neglected software stocks rebounded meaningfully. Dispersion both within and across sectors was high: global technology, industrials and utilities declined for the month, while global energy stocks and software both gained 12%. Diversification into European equities helped mitigate volatility, an effect amplified for USD-based investors who benefited from a stronger euro and Swiss franc. The same did not hold for emerging market indices, which declined 3.1% in US dollar terms, dragged down by their heavy technology weighting.
In fixed income, the uncertain reaction function of central banks amid renewed inflation fears and oil futures trading back above $90/bbl led to both higher interest rates and wider credit spreads. In a clear uptrend since the beginning of the year, the 10-year US Treasury added 35bps to reach 4.73%. Among the 107 fixed income indices we follow, only 7 recorded a positive return in July. Overweighting money market instruments has added value, as bonds have not compensated for poor equity returns.
In currencies, attention centred on the Japanese yen, which reached its lowest level against the US dollar since 1986 at 164 yen per dollar. This extreme low triggered concerted intervention by the Bank of Japan and the Federal Reserve to support the yen. As a result, the currency closed the month at 159, although whether those gains are sustainable remains an open question. A further appreciation of the yen would also heighten the risk of a carry-trade reversal, reminiscent of the market stress observed in August 2024
All in all, market sentiment and risk indicators remain constructive, but some discomfort is spreading. We maintain our asset allocation with lower fixed income and higher cash exposure, while keeping a neutral equity exposure where we emphasise diversification.
