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 September, materially outperforming global equities with comparable annualised volatility (a common measure of risk). Please refer to the monthly report for detail specific to the performance of the fund.
• We maintain our positive outlook for the electricity sector which is driven by structural, secular and cyclical tailwinds all converging.
• Rising electricity demand represents a compelling opportunity for investors. Being led 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

An interest rate cut in the US saw risk appetite increase further during September, resulting in major US equities indices achieving new all-time highs. Notable was the strong performance from stocks and indices with high short-interest, especially unprofitable early-stage technology stocks.

We remain of the view that investors in risk assets (such as equities) are overlooking a number of serious risks, including:

• elevated US debt levels;
• the unsustainably high US budget deficit;
• the likelihood that the One Big Beautiful Bill Act exacerbates these issues (at least in the short term);
• the US Federal Reserve losing its independence; and
• uncertainty in relation to the impacts that tariffs will have on the US and global economies (especially on inflation, employment and economic activity).

We believe that these issues create a much higher than normal risk of a serious economic slowdown or period of economic stagflation and this should be motivating equity investors to seek exposure to defensive sectors, such as utilities and gold.

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.

We have published a separate paper detailing the attractiveness of gold.

Macroeconomic data

Interest rate expectations

Much weaker than expected employment data was a contributing factor to the Federal Open Market Committee (FOMC) cutting interest rates during September, notwithstanding elevated inflation. Interest rate expectations for the next six months continue to oscillate, with between one and two cuts priced in before the end of the year.

Inflation data

The Core Personal Consumption expenditures Price Index (Core PCE) was steady at 2.9%. While this was in line with market expectations, it remains stubbornly elevated which is concerning as we await the inflationary impacts from US-induced trade war. The general assumption is that tariffs will be inflationary but that it is still too early to be observing much of an impact. The magnitude to which tariffs increase inflation and therefore interest rates is a critical issue to monitor over the next 6-12 months – we see the potential for the impact to be material.

Employment data

The labour market is suddenly showing a concerning level of weakness, adding only 22 thousand jobs during August (you will recall that 100 to 150 thousand is considered to have a more or less neutral impact on unemployment). Once again, the general assumption is that tariffs will be a headwind to employment in the short term, but that it is still too early to be observing much of an impact. The magnitude to which tariffs increase unemployment and therefore interest rates is a critical issue to monitor.

Consumer confidence

Consumer confidence (you will recall that consumer spending accounts for nearly 70% of US economic activity) came in slightly weaker than expectations in September at 94.2 and the prior reading of 97.4 in August. This level indicates modest weakness in absolute terms, with the context that readings of less than 100 indicate a more pessimistic than normal outlook.

The response of US consumers to the tariff shocks will be a key determining factor for the trajectory of the US economy. In the short term we are cautious on the basis that consumer confidence is believed to be driven by a combination of job security, wages, inflation and interest rates – while interest rate cuts may provide some relief, the other factors do not appear to be headed in the right direction in the short term.

Market impacts

Bonds

The bond market benefitted from the cut to US interest rates with the Global Aggregate Bond Index (+0.7%).

The yield curve flattened as illustrated by the value of 1-3 year US Treasuries (unchanged) relative to 7-10 year US Treasuries (+0.3%) and 20+ year US Treasuries (+3.2%). The yield on 10-year US Treasuries ended the month 8 basis points lower at 4.15%.

Recent concerns in relation to the long end of the curve appeared to ease with yields on 20-year US Treasuries falling 17 basis points. You will recall that we have been speculating that a yield of roughly 5% on 20-year US Treasuries may not be sufficient compensation for the risk of lending to a government with a debt level of 150% of gross domestic product and an outlook for material budget deficits for the foreseeable future.

Currencies

The US dollar (US Dollar Index unchanged at 98) was unchanged month-over-month. Serious questions remain in relation to the US currency’s role as a global safe haven, driven by investor concerns about US economic policies such as tariffs, budget deficits as well as political interference with the US Federal Reserve and government agencies such as the Bureau of Labor Statistics.

Commodities

Hard commodities were strong with the exception of crude oil (-1.6%) as OPEC production increases were implemented. Precious metals led the charge, although gold (+4.8%) was once again outperformed by the ‘precious-industrial metals’ such as silver (+17.4%), platinum (+14.9%) and palladium (+14.3%). Copper (+4.1%) was the best performer of the industrial metals following unexpected supply disruptions at major mines.

Equities

Broad-based momentum propelled global equities (+3.1%) higher. US indices (S&P 500 Index +3.5%, Nasdaq 100 Index +5.4%) achieved new all-time highs and were only eclipsed by Korea (KOSPI Index +7.5%) and Hong Kong (Hang Seng Index +7.1%). Germany (DAX Index -0.1%) was the notable laggard as a result of concerns over its economic outlook.

At sector level (within the US), information technology (+7.2%) and communication services (+5.5%) were the strongest performers, driven by the mega-cap technology stocks (Magnificent Seven Index +9.0%). Utilities (+4.0%) also outperformed, benefitting from the interest rate cut.

From a factor perspective, growth stocks (+5.3%) outperformed value stocks (+1.3%), while small caps (Russell 2000 Index +3.0%) performed more or less in line with large caps (Russell 1000 Index +3.3%).

Future energy stocks

The Clean Energy Index (+11.0%) rallied across a majority of industry segments to outperform global equities. A key driver appears to have been aggressive short-covering as indicated by the short interest ratio which was compressed from just over 3 days in July (a 12-month high and a level which is considered elevated) to 0.5 days by the end of September (which is a roughly 3-year low). Coincident with this, the Goldman Sachs ‘highest short interest basket’ (+12.4%) generated a powerful monthly return.

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).

We believe that electricity is the key constraint to the growth of artificial intelligence. Electricity is much more scarce than the risk capital required to fund the development of AI models and build the data centres.

The winners in this boom will include energy generation, grid infrastructure, energy storage and electrification (as well as their direct supply chains, including critical raw materials).

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 and open hostility towards renewables). We refer you to a short summary of our expectations for the future energy mix in the US.

Falling US interest rates (125 basis points of cuts so far in this cycle) is a cyclical tailwind which is yet to have a material impact on electric utilities and their supply chains (these industries have historically displayed very high sensitivity to interest rates). We believe the lag is explained by policy uncertainty (especially following the US election and the repeal of the Inflation Reduction Act) which temporarily obscured the impact of this positive catalyst.

We expect that falling US interest rates will remain a tailwind on the basis that the consensus ‘neutral’ interest rate is between 2.25% and 3.25% indicating that material easing remains the base case.