What happened to the great rotation?

With peace not breaking out, but with haggling over a deal replacing active hostilities, markets have cooled. Profit taking in the hottest markets, like Korea, has led to profit taking elsewhere, and there is increasing discussion over high valuations in tech.

Where is momentum going?

The story for 2026, leaving out the war, is a move away from the MAG7 as they commit huge amounts to capex and their free cashflow falls. Investors are rotating into their suppliers.

The rotation away from the MAG7 is real, but investment has stayed in tech supply chains, so the “Emerging markets rotation” was really “rotate into chip supply chain” – SK Hynix, Samsung, and Korea: i.e. hardware suppliers.

Korea’s KOSP Index Year to Date:

This is still going on to some extent – mainland Chinese investors are repatriating cash from the software dominated HK market to hardware companies in the PRC, helping to push down the Hang Seng index.

The momentum to end June now seems to be fading and concerns are rising over valuations.

On a technical point, Micron technologies doesn’t look hugely expensive at a $1Tn valuation: the FT article looks back at CAPE ratios. The real news at Micron is not its earnings over the last 10 years, rather that it is entering into multi-year supply contracts and its earnings to the quarter ending Feb 26 were $12.20 per share, compared with $1.56 a year earlier! So run-rate earnings up 10X over 1 year. Valuation up …roughly 10X too.

The best performers over the last 26 weeks

As we can see, Korea and tech supply chain dominated funds in Asia have led over 26 weeks, but now they have corrected a little. Korea, in quite an exciting way!

Oil and gas?

The momentum is negative for oil. Prices are down around $70 (WTI below, Brent at $71 at the time of writing).

The great rotation, is it moving now into US small caps?

Last month we highlighted the fact that the EM rotation was an illusion, it was really into tech. US mid-caps however have been a steady performer (war aside) and increasing momentum now. North America inc. small companies is now in third place in the rankings.

This makes sense: the US dollar index is the highest it has been for fifteen months; the Fed is looking like it is not now raising interest rate after the weak June end jobs report (just 57,000 jobs added). Investors are “betting on a just-right scenario in which inflation cools while the job market holds steady” (Piedmont Capital).

Commodities and metals

Precious metals have had another bad month. Their negative momentum is being maintained. It is difficult to see this changing whilst US yields stay above 4% and the $ index stays strong. Gold is the opposite of a Dollar.

What about SpaceX?

A huge success, with a strong “Pop” up to $200, but that has now subsided and is trading at $160 (well above the £135 issue price). The short interest in SpaceX is now roughly 30% of the publicly floated stock, so the coming months may be exciting. Again, I go back to last month’s caveats about the amount of leverage in the markets. A fragile position. Could SpaceX follow gold and silver’s example (see below) on bad news.

Our Portfolios

So how have the portfolios performed?

The relative performance is deteriorating and the dispersion is significant! As I have said in many of the previous blogs, our performance critically reflects the relative weights of Technology in our portfolios vs SWDA. If we look at the dispersion, the best and worst portfolios in both relative and absolute terms are 20 (worst) and 21 (Best) reflect this. Portfolio 21’s story is easy: it caught the tech supply chain story, beating SWDA every month.

What about portfolio 20? Terrible? Gold and Silver had both built an “Elf tower” at the end of a 2-yr strong progression. What caused it to crash down? “Hawkish” Kevin Warsh was nominated for Fed Governor, triggering the largest one-day drop in the gold price since 1983.

Margin requirements for Gold and silver futures on CME were raised with effect from early Feb.

Neither of these seem dramatic but perhaps tell us about the impact of the high degree of leverage in markets through margin trading, option buying and the growth of “2X-market” style ETFs. Unfortunately for portfolio 20, it “got in at the peak” The 20% loss related to gold-linked positions could not be retrieved. A second leg down then followed in June. Ouch. Perhaps this gives us a feel for what might happen in Tech shares were the shorts to win at SpaceX, or a semiconductor stock miss a forecast.

Is there value in the strategy? The following tables shows 1) cumulative returns of the SWDA Index and 2) the relative Cumulative performance of each fund over the same horizon in each case. As you can see five out of 6 portfolios have outperformed on a cumulative basis.

How have the individual portfolios performed?

Momentum in May and a new portfolio Twenty-Six

If we look at the momentum over the last four weeks, then the ranking would be:

1. Property
2. Pharma – as the best performer out of “Specialist”
3. N Am inc small cos
4. EU inc/exc UK

Over six months, the picture is still dominated by the Tech supply chain:

1. GEM
2. Asia Pac ex Japan
3. Tech and Tech Innov
4. Japan: A very different picture.

1. 

If June represents a significant slowdown or consolidation phase of the AI tech story, then looking to the 4-week picture probably presents the better guide forward. I am inclined to ignore property – it has little momentum, some improvement due to falling interest rates, but little real momentum.

This month’s portfolios