MARKET REVIEW
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 (One Big Beautiful Bill). These developments have broad implications for the USD, debt sustainability, interest rates, and both consumer and business confidence, as well as creating 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 wait-and-see mode. Meanwhile, in the eurozone, inflation has fallen below target, helped by lower energy prices and a stronger EUR, 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.
PERFORMANCE COMMENT
In the first half, the strategy lagged its reference benchmark. The thematic's defensive positioning assisted performance in the first quarter but resulted in less upside participation as the market rallied in Q2. A brief note on attribution: if we look at our attribution using the standard GICS sectors, our underperformance in H1 mostly comes from stock selection. However, given some of the intricacies in the first half and our thematic focus, it is important to go a level deeper. When attributing with GICS subsectors, the answer is the opposite, i.e., allocation drove the underperformance. Some notable headwinds came from being unable to own certain GICS subsectors such as Aerospace and Defence and Diversified Banks. Stock selection was also mildly negative.
In June, the strategy underperformed its reference benchmark. When attributing with GICS subsectors, similar to the first half, this was due to the allocation effect while stock selection was mildly positive. On the allocation side, our thematic bias hurt performance, with our overweight to packaged food and meats costing around 40% of total attribution and semiconductors costing a further 25%, for instance.
Our top contributors for the month were Apple (-17.9%), VusionGroup (75.1%) and Corteva (31.5%), while our bottom detractors were Sodexo (-25.7%), Smurfit (-19.0%) and Graphic Packaging (-21.9%). Vusion Group benefited from a continued rollout of electronic shelf labels in the US, combined with a resurgence in demand in Europe, while Sodexo was hurt by a weak quarter. The stock remains one of the cheapest in our portfolio and we added to the position.
FUND ACTIVITY
From a sector perspective, there was minimal change in positioning over the month. We reduced our exposure to Consumer Staples by a bit more than 1%, while using the cash to increase our exposure to IT. There was no material change from a regional perspective over the month, while cash increased from 1% to 3%. Our largest individual trades during the month were to exit Yakult (Consumer Staples), while increasing our position in E Ink (IT).
OUTLOOK FOR THE STRATEGY
In 2024, as the inflation battle seemed over, countries began to move towards more accommodative monetary policies, with rate cuts across key economies, except for Japan. The narrative of a soft landing is starting to take shape, potentially favouring a broadening of the equity market performance into 2025, after having been concentrated in a narrow set of stocks since 2023.
Many of our themes were left behind and encountered cyclical headwinds, due in part to inflationary pressure, such as in food-related themes. Despite these cyclical headwinds, we believe the structural trends we focus on are firmly established. Looking ahead into 2025, we identify several attractive opportunities that were unduly overlooked and could regain investors' attention,
Last year saw a tremendous surge of interest in our themes. For instance, food took centre stage at COP28: the number of agribusiness lobbyists more than doubled; there were three times as many delegates from the meat and dairy sectors; 160 delegates signed a declaration to include food and agriculture in their climate plans; and the FAO unveiled its roadmap for aligning the food system with climate goals – a significant step akin to what the IEA outlined for the energy transition several years ago. Our portfolio of companies is well-positioned to benefit from systemic changes across the entire value chain. From the enactment of new regulations to the development of obesity medications that alleviate pressure on the system, our holdings are strategically positioned to capitalise on this unrelenting force which continues to gain momentum.
FUND STRATEGY
Currently, food systems are contributing to the violation of various planetary boundaries, including biodiversity loss, deforestation, agrochemical pollution, excessive water usage and waste generation. In order for food systems to be sustainable in the medium to long term, significant transformations are necessary. These paradigm shifts will disrupt profit pools, altering opportunities in existing markets and creating new ones, while also posing risks and unlocking potential upside for financial market investors.
Our strategy is specifically designed to capture the potential opportunities associated with the transformation of food systems. We aim to invest across the entire food value chain, from sustainable food production (such as ingredients, fertilisers and aquaculture) to food consumption (including manufacturing and canteens) as well as enabling technologies (such as life sciences, packaging and logistics). Our goal is to align with the shift towards a food system model that can nourish the planet while operating within, or contributing to, the restoration of planetary boundaries.
