Coronation Global Capital Plus Houseview Currency Class

MARKET BACKDROP

The turmoil from the Middle East conflict, which pushed equity markets into correction territory at the end of March, already feels like a distant memory. At least to the equity market, given that many indices ended the second quarter (Q2) at all-time highs, 15%–20% above their March lows. Other asset classes tell a more complicated story. Because this was an inflationary shock rather than a growth shock, the traditional crisis playbook inverted: rather than rallying as safe havens, government bonds sold off alongside equities, with the oil price spike repricing inflation expectations and central bank policy. For example, the US two-year Treasury yield rose from around 3.4% before the conflict to above 4%. Most strikingly, gold – the archetypal geopolitical hedge – has fallen by a quarter since the conflict began. In short, the assets investors traditionally rely on for protection offered little of it. Yet we believe the greatest dislocations today lie not between asset classes but within one: beneath the surface of equity indices at all-time highs, the gap between what is loved and what is neglected has rarely been wider. It is on these opportunities that the remainder of this commentary focuses.

So far, the Middle East crisis is following the sequence of recent macro-driven sell-offs, the Tariff Tantrum of 2025 among them: an external shock triggers indiscriminate, market-wide selling, leaving some thriving – and in some cases perfectly insulated – businesses even more dislocated. Every crisis reshapes the opportunity set. And while we don’t expect every sell-off to resolve as quickly as the recent ones have, the mispricing created by indiscriminate declines can be extreme.

The nature of this recovery makes the relative opportunity even more compelling, because while the rebound has been strong and sharp, it has been driven by a remarkably narrow cohort of stocks. The Philadelphia Semiconductor Index (SOX) rallied 88% in Q2 – by some distance its best quarter ever.

The following quote from an Empirical Research Partners note sums the level of concentration up well:

“We’re starting the knockout phase of the World Cup and at this point it’s still anyone’s tournament. That’s not at all the case in the stock market, where investors are quite certain they’ve already got the winners and losers figured out, as evidenced by one of the biggest momentum markets in the modern history of equities. Forget Messi and Mbappé, it’s the AI Spending Beneficiaries that are seen as close to a sure thing, having produced 85% of the market’s return this year.”

The result is a one-dimensional market, where relative success has been predicated on building undiversified, ‘one-idea’ portfolios and riding the trend. Semiconductors now represent nearly one-fifth of the S&P 500 – a weight that has quadrupled since mid-2020. More than double the dot-com peak.

The corollary of a narrow market is that as narrative, attention, and capital converge on what is working, ‘Everything Else’ (as shown in Figure 2 above) is neglected. Nvidia CEO Jensen Huang describes AI as a ‘five layer cake’ (see below, originally from their company blog) – a useful way to see where that neglect is concentrated.

To date, almost all economic value in the AI chain has accrued to the bottom four layers (models, infrastructure, chips, and energy). In almost every other technological innovation, however, most value was ultimately created at the application layer – by companies using the technology to improve their products, drive down costs, and extend their competitive advantages. In an environment where the ‘AI winners’ category is defined almost exclusively by semiconductor supply chain exposure, companies applying AI to enhance their businesses are being ignored. We believe this has created a material disconnect that will correct in time.

FUND POSITIONING AND PERFORMANCE

Two examples illustrate our approach: ASML – a business at the very bottom of the cake, which we owned when it was dislocated and exited as enthusiasm returned – and Visa and Mastercard, application-layer beneficiaries the market is currently treating as potential AI casualties.

ASML designs and sells the photolithography machines essential to advanced chipmaking. As the world’s only producer of EUV lithography systems, it holds an effective monopoly on the equipment required to manufacture leading-edge semiconductors – the chips on which OpenAI’s and Anthropic’s models are trained. Like the market, we have long admired the business, and it has typically commanded a very high forward price-to-earnings (P/E) multiple, averaging in the low 30s and peaking at almost 50x earnings. In March 2025, however, ASML sold off significantly amid widespread tariff-related de-risking. By then, the stock had underperformed the global equity market by c. 40% – its worst relative performance, by a meaningful margin, in over two decades. We saw a dominant business at a very attractive price and doubled the Fund’s position. Over the following 15 months, the stock returned c. 160% in USD, driven primarily by a re-rating back to 45x earnings. Post quarter-end, we exited the position, notwithstanding a very favourable outlook for the company: the price one pays matters, and today’s very high starting valuation already reflects that favourable outlook, in our view.

In the first half of 2026, Visa and Mastercard found themselves where ASML stood at its lows: trading at their lowest multiples in over a decade, having underperformed by roughly the same 40% over the prior year, as investors feared that stablecoins and AI-agent payments would route transactions around the card networks entirely, compounded by proposed US interest rate caps on credit cards. Visa and Mastercard operate the two dominant global payment networks, connecting billions of cards to over a hundred million merchants. This entrenched duopoly – protected by network effects no rival has replicated at scale – allows them to collect a small toll on a vast share of the world’s electronic transactions. We think it is likely that agentic commerce will run on this existing, trusted payment infrastructure, so to the extent that AI reshapes online shopping, it could prove an accelerant to their growth rather than a threat. We used the share price declines to build and add to positions.

The Fund’s relatively short journey in ASML shows the pattern completed – from building the position to full exit. Visa and Mastercard, by contrast, are investments still in progress. Stepping back, the Fund today holds a diversified collection of thriving businesses at attractive valuations – a positioning quite distinct from the narrow leadership driving today’s index highs, and one that drives our asset allocation.

At quarter-end, the portfolio was positioned as follows:

• 11% in short-dated T-bills
• 34% in investment-grade fixed income instruments
• 13% in inflation-linked assets
• 3% in high-yield fixed income
• 6% in real assets (listed infrastructure and property)
• 33% effective equity

The Fund had a good quarter, advancing by 4.3%, compared to the benchmark’s 0.9% return. We remain genuinely encouraged by the opportunity set presented by this dynamic market backdrop. As we said last quarter, history has shown repeatedly that when the market paints with too broad a brush, it creates compelling alpha opportunities for long-term, valuation-focused investors. In recent years, we capitalised on similar dislocations during Covid (2020), the long-duration sell-off driven by rate-hikes (2022), and the Tariff Tantrum (2025) to add value to client portfolios.

The equity portion of the portfolio is an attractive collection of businesses firmly in the winner’s camp: competitively advantaged, with strong growth prospects and compelling valuations. The remainder is invested primarily in liquid investment-grade bonds, with a further 13% allocation to US inflation-linked bonds, which, at c. 2% real yields, represent good value.

Thank you for your support and interest in the Fund.

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