Amid rising AI investment, stretched valuations and ongoing uncertainty over interest rates, EdenTree’s Sustainable Global Equity Fund is prioritising diversification and valuation discipline to uncover longer-term opportunities. Manager of the fund, David Osfield shares his perspective.
From a macro perspective, the path of inflation is likely to be the dominant driver of market performance in H2.
Following the US-Iran agreement of no further fighting in Iran, oil prices have retraced over $44 a barrel (c.38%) from their March peak, giving back most of their conflict induced spike.
Despite the severe disruption to shipping routes and molecule cargo flows, the inflationary pass-through has been more muted than anticipated.
Overall, recent commodity-driven inflation has been primarily a supply-side phenomenon, where monetary policy has limited influence.
Of greater concern for central banks would be any visible second order effects, and if some demand-side pressures may be underestimated.
For example, the ongoing AI infrastructure build-out is creating meaningful crowding-out effects across capex-intensive sectors such as construction, industrials and the broader energy complex.
AI-led growth, pricing power and monetary policy
Looking ahead, the second half will likely see the remainder of an unprecedented IPO pipeline come to market, namely Anthropic and potentially OpenAI, adding to the record breaking $85.7bn SpaceX raise .
This introduces an additional element of supply risk at a time when concerns around valuation within the AI theme are already elevated. More broadly, we would note that markets have effectively repriced several years of expected future growth in a relatively short period.
This rapid reappraisal has supported strong performance but also raises the bar for future expectations, with significant growth already reflected in valuations. As a result, the scope for positive surprises may be more limited, and pockets of overvaluation could prove susceptible to periods of selling pressure.
In the US, AI investment has already made a meaningful contribution to GDP growth, with multiplier effects increasingly evident in key data centre corridors. Anecdotal evidence from a recent Midwest conference highlighted companies implementing their second or third price increases this year, encountering minimal resistance within the AI ecosystem.
The extent to which these dynamics spill over into the broader economy remains uncertain; however, they underscore the complexity of the monetary policy backdrop, particularly given the bifurcated nature of growth between AI-related and non-AI sectors.
Implications for the Fed
With new leadership at the Federal Reserve, Chairman Warsh’s initial communication has been absolutely clear in establishing that policy will not be asymmetrically biased from the outset.
Should inflation continue to exceed already elevated expectations, this could have quickly evolved into a credibility challenge. Going forward, any concerns the market may have had regarding a willingness to tolerate higher inflation looks misplaced, with 1.5 hikes now expected by the end of H2.
Given the scale of committed capex by hyperscalers ($1trillion in 2027) and the apparent lack of rate sensitivity, it is difficult to envisage a meaningful easing cycle without a clear deceleration in investment activity.
While this would likely require a more pronounced deterioration in labour market conditions, such weakness has yet to materialise.
It’s worth noting that there are only three more Fed meetings before the 3 November mid-term elections, the outcome of which could materially restrict the fiscal policy backdrop in the event of a divided Congress.
With the EdenTree Sustainable Global Equity Fund’s strong valuation discipline (through our “Sustainability at a Reasonable Price” process), we’ve been actively taking profits in a number of exceptional performing holdings.
The net result is the Fund is currently underweight Information Technology, while assessing better valued opportunities.
A more diversified portfolio construction helps navigate and mitigate the sharper drawdowns seen in some areas of the market.
The Fund continues to be a core, valuation-sensitive strategy rather than portfolio that majors heavily on one single theme, remaining actively positioned to avoid any excessive exposure to any one style or market factor.
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