Market review
Stock markets reached new highs as investors looked past tariff uncertainties and focused on potential Federal Reserve (Fed) rate cuts given the more muted labour market. The Fed cut interest rates by 25bps in September, with Fed Chair Jerome Powell at the same time signalling he would remain prudent with further rate cuts given the challenge to balance weaker job market data with persistently higher inflation. The US 10-year Treasury yield settled at 4.15%, slightly below the previous quarter.
Strategy performance
The Strategy gained 20.8% during Q3, outperforming the broader market, as represented by the MSCI All Country World Net Total Return Index, which returned 7.6% (both figures in dollar terms).
The optical connectivity solution provider Lumentum Holdings reached new highs as the company revised guidance upwards, driven by strong demand for optical connectivity products supporting AI data centres.
Similarly, the Taiwanese data centre power equipment management supplier Delta Electronics continued its strong upward trend as analysts revised their earnings expectations upward for this quarter and next.
MP Materials and Lynas, both Western rare earths mining and processing companies, profited strongly from the strategic appeal to Western governments to secure through them access to rare earths minerals and therefore permanent magnets.
Other positive contributors included GE Vernova and UBTech Robotics.
The Taiwanese analogue and power management semiconductor company Silergy trended lower on continued disappointing monthly sales. Similarly, the power and mixed signal semiconductor companies Infineon Technologies and STMicroelectronics were weaker on expectations that the fundamentals would only gradually improve.
Hitachi corrected as the diversified Japanese infrastructure company reported lower-than expected profitability in its digital systems and services division.
Other negative contributors included Owens Corning and Carrier Global.
Strategy activity
The largest exposure remained to the ‘Energy efficiency’ cluster.
We slightly increased the Strategy’s weighting to the ‘Energy efficiency of Big Data’ subcluster. We also initiated a new position in the quantum computing company IonQ, which is using an energy-efficient trapped-ion approach, and increased the position in Lumentum Holdings.
The Strategy reduced its holdings in Alchip Technologies and Broadcom.
We also slightly increased the weighting to the ‘Industrial efficiencies’ subcluster, with new positions in UBTech Robotics, Zhejiang Sanhua Intelligent Controls and Harmonic Drive Systems, all companies expanding into the emerging humanoid robots sector. We increased positions in Lynas, ABB and SAP, sold nVent Electric and trimmed our positions in MP Materials and Hitachi.
In the 'Energy efficiency of buildings' subcluster we initiated new positions with Owens Corning and Procore Technologies. We reduced Autodesk and Installed Building Products and sold Carrier Global.
In the 'Transportation' subcluster, a new position was initiated with Johnson Electric Holdings, a Chinese micromotors company which is about to leverage its expertise in automotive components and home appliances into humanoid robots. We reduced Tesla, NXP Semiconductor and BYD.
We maintained our exposure to the ‘Energy transmission and distribution’ cluster. We initiated new positions in two South Korean companies, HD Hyundai Electric, a leading high-voltage electric equipment manufacturer, and Doosan Enerbility, a power plant equipment supplier.
We also initiated a position in Hammond Power Solutions, a Canadian dry-type electric transformer company, reduced positions in GE Vernova as well as the grid operators Terna Rete Elettrica Nazionale, Red Electrica and Elia Group, and sold Air Products & Chemicals.
Exposure to the ‘Energy storage’ subcluster stayed limited, with the only holding remaining the Chinese battery manufacturer Contemporary Amperex Technology (CATL).
Inside the ‘Power conversion’ subcluster, we increased the positions in Monolithic Power Systems, SG Micro and Silergy, and reduced those in ON Semiconductor and Infineon Technologies.
The very low weight allocated to the ‘Clean power generation’ cluster was maintained, with the Canadian wind farm operator Boralex the one stock held.
Market outlook
Concerns about the implementation of tariff deals and their impact on global economic growth and US inflation persist. The pace of further Fed rate cuts will depend strongly on any further softness of the US job market, with US inflation likely to remain sticky as the impact of the import tariffs have not been fully absorbed yet.
We remain very constructive on the underlying themes reflected in the Strategy’s investment strategy. The Strategy continues to seek to invest in diversifying investments across the clean energy value chain, focusing on segments with strong structural growth drivers in electrification such as clean power production, smart grids and storage, power electronics, electric vehicles including charging stations, humanoid robots, electric heat pumps and the energy efficiency of Big Data.
Through our portfolio holdings, we maintain considerable exposure to the AI theme, mostly through technology enablers improving overall data-processing efficiencies and electrical infrastructure suppliers. We believe the coming years will be decisive for who is going to win the AI race and we expect the significant capex allocations to persist. At the same time, we have initiated positions in the supply chain of humanoid robots, a new segment expected to show strong structural long-term growth, offering investment opportunities into companies optimising overall electricity consumption.
