In July something changed in the equity market. Whilst the headline index of the MSCI World was broadly flat for the month, this masked violent swings under the surface. The index’s IT subsector declined by -4.1% in dollars, with semiconductor companies within it falling well into the double digits. Conversely, IT service and software companies that had been on the wrong side of the ‘AI losers’ trade rose in the double digits. Previously unloved companies in the Consumer Goods and Healthcare sectors found favour. The portfolio having been largely in these less fashionable areas got a sudden bid toward the end of the month. This sort of volatility for a very steady set of businesses is, to put it mildly, very unusual. It speaks to some of the very strong market trends we have seen over the last year, but is a continuation of a theme. For some time now the portfolio has moved in the opposite direction to AI and semiconductor-related companies. These sectors have become so dominant in the market that this means the portfolio is often moving in the opposite direction to the broad index. We have written at length about the valuation opportunity that this has created, and whilst July’s move was quite dramatic, it only represents a small closing of the significant differential to the fair value of these businesses. The gap to the market’s high valuation is even bigger.

The valuations have to be backed by operational performance, and half year results season is showing the steady revenue growth we expect from the portfolio. If anything the growth rate is accelerating slightly. This is encouraging given some of the macroeconomic and geopolitical challenges in the world, and given the lowly valuations for many businesses in the portfolio. For a full rundown of results season so far please see the latest investment view on the Evenlode Investment website.