We share our latest observations on global asset markets in relation to T8 Energy Vision

All movements are expressed in United States (US) dollar terms, unless otherwise stated.

Key points

• T8 Energy Vision generated a positive return during May, in line with global equities. Please refer to the monthly report for detail specific to the performance of the fund.
• Looking beyond the short-term noise around tariffs and trade wars, we have not changed our positive outlook for the electricity sector which is driven by structural, secular and cyclical tailwinds all converging. We believe this will allow the electricity sector to prosper, even if the economy experiences a slowdown.
• Rising electricity demand represents a compelling opportunity for investors. Driven by the boom in data centres (a secular electricity demand growth trend) and the electrification of road transport (a structural electricity demand shift), the winners will include energy generation, grid infrastructure, energy storage and electrification (as well as their direct supply chains, including critical minerals).

Market update

During May, tariff de-escalation (especially between the US and China), solid economic data, neutral monetary policy and robust corporate earnings were a tailwind for risk appetite in equity markets, continuing the extraordinary V-shaped recovery from April’s Liberation Day shock.

We reflect that the increase in risk appetite is ignoring elevated US debt levels; the unsustainably high budget deficit; President Trump’s tax bill (which may exacerbate these issues, at least in the short term); uncertainty in relation to the impacts of tariffs (especially on inflation); and heightened fears of a recession. These uncertainties are unlikely to be resolved in the short term and are therefore likely to motivate equity investors to seek safe haven sectors, such as utilities. We observe that the utilities sector is benefitting from growing electricity demand in developed markets for the first time in a decade (driven by the data centre boom). This is a genuinely attractive attribute beyond its well-known defensive characteristics.

Macroeconomic data

Economic data (especially inflation, unemployment and indicators of economic activity) will be the key catalysts for asset markets over the next 2-3 months (in the absence of left field shocks which seem more likely than usual under President Trump).

The outlook for fewer interest rate cuts this year reflects elevated inflation and low unemployment

Interest rate expectations continue to oscillate. The market is presently pricing in two interest rate cuts during 2025 (relative to the 4 interest rate cuts that were predicted last month), with the first cut not priced-in until October. This reflects the elevated inflation and low unemployment data. We reflect that these factors can change rapidly and therefore so too can interest rate expectations.

The Core Personal Consumption expenditures Price Index (Core PCE) contracted to 2.5% in line with expectations (from 2.7% in the prior month). The assumption that tariffs will be inflationary makes the present reading less relevant. The magnitude to which tariffs increase inflation and therefore prevent interest rate cuts is a critical issue to monitor.

The labour market remains solid with the economy adding 177 thousand jobs during April, considerably more than the 138 thousand expected (you will recall that 100 to 150 thousand is considered to have a more or less neutral impact on unemployment). This is an indication that the US economy remains strong and tariffs did not have an immediately identifiable impact on unemployment during April (it is arguably too soon). The unemployment rate was steady at 4.2%. Once again, the impact tariffs may have on the labour market is a critical issue to monitor.

The key question is how tariffs will impact the US economy

While consumer confidence rebounded spectacularly in May to 98.0 from 86.0 in April (you will recall that consumer spending accounts for nearly 70% of US economic activity and month over month changes of more than 5 points are considered significant), the level in absolute terms remains weak in the context that readings of less than 100 indicate a more pessimistic than normal outlook.

The response of US consumers to the trade war will be a key determining factor for the trajectory of the US economy. In the short term we are cautious on the basis that the key drivers of improving consumer confidence are believed to be a combination of high job security, rising wages, low inflation and falling interest rates – none of which are the base case in the short term.

Market impacts

The whole yield curve shifted upwards during May with the yield on 10-year US Treasuries ending the month 24 basis points higher at 4.40%.

Bonds suffered with the increased risk appetite. Once again, we believe the performance of the Global Aggregate Bond Index (-0.4%) relative to an index of US Treasury notes with similar duration (7-10 year US Treasuries -1.6%) is a warning sign that not all is well in the US Treasury market. This is especially apparent at the long end of the curve (20+ year US Treasuries -3.6%).

The US dollar finished the month flat, failing to rebound following its sudden drop during April (US Dollar Index -0.1% to 99).

The key issues appear to be concerns over US debt levels; the unsustainably high budget deficit; President Trump’s tax bill (which may exacerbate these issues, at least in the short term); uncertainty in relation to the impacts of tariffs (especially on inflation); and heightened fears of a recession. We reflect that these uncertainties are unlikely to be resolved in the short term and are therefore likely to motivate investors to seek safe haven asset classes such as gold and equity market sectors such as utilities.

Commodities were mixed with gold flat, crude oil (+1.2%) rebounding only modestly following its 15.5% drop in April while copper (+4.7%) and silver (+1.1%) partially recovered their draw-downs from the prior month.

Tariff de-escalation and robust corporate earnings in the second half of US reporting season was the backdrop for a broad-based rally in equities as volatility normalised. Global equities (+5.7%) were propelled by the rebound of US equities (S&P 500 +6.2%). While technology stocks led the charge (Nasdaq 100 +9.0%), small caps also participated (Russell 2000 +5.2%).

The ‘Magnificent 7’ mega-cap technology stocks (+13.4%) were core to the rebound, rallying from oversold levels. Notwithstanding this performance, we believe there is increasing doubt in markets that US stocks will be perpetually dominant (US exceptionalism). This, combined with the lopsided nature of major global indices (e.g. MSCI World Index) within which US stocks account for over 70% should be motivating investors to diversify out of mega-cap technology and the US.

All major country indices posted gains in May with Germany (+6.7%), Korea (+5.5%) and Japan (+5.3%) continuing their momentum from April.

At sector level within the US, health care (-5.7%) was the only sector to decline during May. The performance of technology-heavy sectors such as information technology itself (+10.8%), communication services (+9.6%) and consumer discretionary (+9.4%) eclipsed the performance of other sectors.

At factor level, growth stocks (+8.8%) outperformed value stocks (+3.3%) and large caps (+6.2%) outperformed small caps (+5.2%). These outcomes were once again the result of the above-mentioned performance of the mega-cap technology stocks.

Future energy stocks

The Clean Energy Index (+10.7%) outperformed global equities driven by solar (+328 basis points) and enabling technology (+182 basis points). Only critical materials detracted from its performance (-37 basis points).

Outlook

Structural, secular and cyclical tailwinds are converging for energy stocks. Global energy demand growth is accelerating – especially in advanced economies. In 2024, electricity demand grew at roughly double the 10-year average. Electricity is booming, driven by data centres (a secular growth trend) and the electrification of road transport (a structural shift). The winners in this boom will include energy generation, grid infrastructure, energy storage and electrification (as well as their direct supply chains, including critical minerals).

The world (and especially developed markets) needs more electricity generation. Our expectation is that this need will be met by a variety of different generation types, namely nuclear, gas and large-scale renewables. The lead time and cost of new nuclear and even gas-fired electricity generation creates a fertile environment for large-scale renewables, notwithstanding the prevailing perception to the contrary (especially Donald Trump’s ‘drill, baby, drill’ comments). We refer you to a short summary of our expectations for the future energy mix in the US.

Falling US interest rates (100 basis points of cuts so far) is a cyclical tailwind which is yet to have a material impact on these industries (which have historically displayed very high sensitivity to interest rates). We believe the lag is explained by recent policy uncertainty (especially following the US election) which has temporarily obscured the impact of this positive catalyst.