In July, DM equities experienced the same diverging trend than in late Q2, with US and Japanese equities outperforming their European peers. US equities reached new highs late July, while European equities have traded sideways since mid-May. US equities found some support from an improving trade outlook in July, with several trade deal announcements, notably with Japan and the EU. Despite uncertainty easing somewhat, it is becoming clear that the average effective tariff rate will stabilize above 15%—substantially higher than pre-Liberation Day levels. A drag on US economic growth now seems inevitable, though it may be delayed for a few months as front-loading of imports from China continues under the extended 90-day trade truce. Macro risks are increasingly skewed to the downside for both the US and EU, while the US inflation outlook has deteriorated, with the core-core CPI bottoming out for the first time in a year. The Fed struck a more hawkish tone than expected at its July FOMC meeting, surprising markets and triggering a brief USD rebound. They are likely to stay on hold for the foreseeable future unless the labor market deteriorates significantly, and the emerging stagflation outlook is unlikely to justify resuming the rate-cut cycle before 2026. With no monetary easing this year, US equities will have to rely on strong corporate earnings to justify high PE multiples, currently at 23x forward earnings. Secular investment themes like AI or financial deregulation have driven US indices higher, creating a similar concentration risk than in January, with high investor complacency as well. It might trigger the need to diversify again outside the US towards the EU and EM. In any case, only a moderate upside is expected to year-end while volatility will remain elevated.

The Fund was up a +0.8% (A, USD) in July, outperforming and continuing to revert toward its short-term rate + 3% p.a. performance objective. Positive equity market performance meant the portfolio turnover was high in the first half of the month, but the persistently higher-than-usual volatility regime allowed to preserve strong yields on reinvestments. The downside protection of the portfolio improved throughout the month, offering an attractive risk/reward ratio. As of 31/07, the Fund’s running yield was at +9.8% p.a. (USD, gross) with +19.2% downside protection of the income notes allocation and 4.6-month average maturity.