MARKET OVERVIEW
H1 2025 was marked by significant shifts. The US is now grappling with several self-inflicted challenges, including its trade policy (“Liberation Day”) and ongoing fiscal expansion (“Big Beautiful Bill”). These developments have broad implications for the USD, debt sustainability, interest rates, and both consumer and business confidence, as well as inflationary pressures.
In contrast, the outlook for the eurozone has improved modestly. Fiscal expansion linked to the EU’s defence initiative and Germany’s easing of fiscal constraints and mobilisation of its fiscal space are expected to gradually support economic activity over the coming quarters. However, even in Europe, the reset of US bilateral trade relations is weighing on business sentiment.
In China, the recent de-escalation of trade tensions with the US has been a welcome development. Authorities are now focusing on stimulating domestic consumption and investment. While the peak uncertainty surrounding US trade policy may be behind us, global economies are converging from different starting points.
In the US, slowing growth, a weakening labour market, and the risk of a rebound in inflation have placed the Federal Reserve in a wait-and-see stance. Meanwhile, in the eurozone, inflation has fallen below target, helped by lower energy prices and a stronger euro, prompting the ECB to further cut its benchmark rate. This could pave the way for a gradual improvement in activity levels.
All major equity indices have rebounded strongly from the early-April sell-off triggered by “Liberation Day.” The corporate earnings season has been robust globally, with earnings surpassing expectations by nearly 8%. Notably, the gap in earnings growth between US and European equities has narrowed somewhat, contributing to the relative outperformance of European equities over the semester.
In a volatile environment, it is particularly noteworthy that small and mid-cap stocks performed on par with their large-cap counterparts, despite the prevailing risk-off sentiment. This resilience, in our view, underscores the elevated level of pessimism already embedded in this segment of the market, where valuations remain at historically attractive levels. Also worth highlighting is the historical outperformance of European cyclicals, led by Financials and Aerospace & Defence, relative to their US counterparts, which have been weighed down by mounting concerns over US growth and inflation. More defensive sectors, such as Staples and Healthcare, were left behind in H1 2025.
INVESTMENT THESIS
So far this year the portfolio has returned 8.5%, against 9.5% for the benchmark. A large number of the companies, including real-estate firm CBRE, e-commerce company Mercado Libre and payments platform Adyen, have made outsized contributions to performance this year.
On a three-year basis the portfolio remains behind market averages, but over a decade it is ahead by two percentage points per year.
Generation feel optimistic about the future. The investment team is currently in ‘execution mode’ with the cogs of their investment process whirring. The investment team are finding great opportunities in the market: so far this year analysts have presented five companies to the Focus List (and they expect five more to come). At a recent roadmap presentation on AI, the energy and enthusiasm were palpable.
Today we operate in an uncertain and confusing world. It is hard to keep up with the news flow, with seismic events happening in Iran, Kashmir, Ukraine and more. The current US administration is chipping away at America’s credibility on the world stage. Its tariffs represent a direct hit to companies’ margins. Yet, so far, the financial and economic fallout has been minimal. Most global share-price indices are at or near all-time highs. Of course, it is always dangerous to comment on overall market pricing. But it is remarkable how resilient markets appear to be.
Generation worry that progress on sustainability may slow. For instance, America’s healthcare infrastructure is under threat. Spending by the National Institutes of Health, the largest public funder of biomedical and health-related research in the world, is already 10% lower in real terms than last year. These cuts make it harder for the world to reach sustainability goals, including those covering human health. Crackdowns on immigration are not just rhetorical: net migration to the US has fallen by 80% from its level in 2023. The US government has withdrawn from the Paris Agreement, which was perhaps the world’s best hope of keeping human life within planetary boundaries. It has also pared back support for clean energy and electric vehicles.
Regrettably, sustainability is now part of the culture wars. But really it should be something that the world can unite behind. The sustainability revolution can be good for business and margins, as well as good for society. Hiring from a diverse group of job applicants can help firms reach better decisions. Cutting out fossil fuels can help cut costs.
Many jurisdictions, including the EU, press ahead with regulations governing sustainability reporting. In addition, private actors mobilised by private capital can help solve many sustainability goals. Take, for example, healthcare. America spends 20% of GDP on health, higher than almost any other country. Yet outcomes are often unimpressive*. Making the healthcare system fit for purpose is a key sustainability objective. It is also an area where there are many great opportunities for thoughtful capital allocation.
Generation see healthcare tools as one of the most attractive niches. For one, tools-production companies are largely disconnected from the underlying pricing of their customers’ drugs – useful at a time when drug pricing, especially in the US, is deeply uncertain. The barriers to entry, meanwhile, are formidable. There is entrenched intellectual property, regulatory moats and customer lock-in. This makes disruption rare. Yet within this market structure, innovation remains vibrant.
A long-term shift from small molecules to biologics (large molecules) is under way. Biologics are more complex to produce and validate, which drives demand for specialised tools. Within the tools sector, it is important to differentiate between research and production. Research budgets are under pressure. But production tools are a necessity for established pharma and biomanufacturing firms.
The investment team therefore prefer those companies focused on production, including Danaher and Agilent. Danaher in particular is a leader in precision manufacturing and life-sciences tools, offering long-term visibility and pricing power. These companies’ innovations in manufacturing have significantly reduced the cost of producing biologics. This enables low-cost ‘generic’ biologics to be launched, which in turn allows for the broader use of life-saving drugs in poorer countries.
Another long-term opportunity, in the investment team’s view, is AI. In the past year many of the AI-adjacent investments have contributed to returns. The use of AI tools could have large system-positive outcomes. It could boost efficiency across all sorts of companies. And if deployed appropriately, AI may also be able to cut carbon emissions in many industries, from transportation to building management, by optimising energy consumption.
Yet crucial questions about AI remain fundamentally unclear. Which businesses will adopt AI tools? How fast will this happen? And when they do, what will be the impact? To explore these questions, Generation recently hosted the first of three in-depth roadmaps on AI. Over the next few months, the investment team will deeply research and discuss what they view as the three key topics on AI: demand, supply and sustainability. The conclusion of their recent discussion on AI demand, broadly, was as follows: Generation are optimistic about the technology’s potential, yet the investment team are alive to the fact that a certain amount of overinvestment could take place in the infrastructure layer.
* Generation internal analysis of US national accounts. See also The Commonwealth Fund article https://www.commonwealthfund.org/publications/issue-briefs/2023/jan/us-health-care-global-perspective-2022
PERFORMANCE REVIEW
Generation's process is underpinned by a bottom-up approach to stock selection, the manager refers to the stock attribution attached for the drivers of performance during the month of June.
As long-term investors that integrate a sustainability lens into their analysis, Generation is focused on their long-term outlook for the companies in the portfolio and whether their thesis remains intact, despite any near-term headwinds and share price movements.
The top performers during the month included TSMC, Microsoft and JLL. The bottom performers included Adyen, Nestle and Vestas. Whilst these companies are experiencing short-term headwinds, the Generation team retains his conviction in the long-term thesis on these names and others in the portfolio.
Generation is focused on strong execution of its process and has made adjustments on areas the manager identified for improvement.