August aftermath: navigating challenges, championing strategies

And then came August…

August 2023 emerged as one of the most challenging months for AtonRâ's strategies in terms of performance. The decline was significant both in absolute and relative terms.

We thus decided to review and assess what drove such performances to identify eventual shortcomings in our approach and how to adjust going forward.

While we cannot control market movements, we are responsible for our decisions regarding sub-theme exposures and stock selection. In this paper, we offer a comprehensive explanation for the recent underperformance.

We have divided this article into three sections:

1. The first section focuses on the performance of August through the lens of the macro environment and our positioning at both the sub-theme and stock level.
2. In the second section, we elucidate why such events occur, considering our unique investment process.
3. In the final section, we discuss why the recent drawdown in our strategies represents an opportunity for long-term investors.

The macro landscape

The stock market correction is primarily attributed to the compression of companies' multiples, spurred by the abrupt surge in U.S. long-term rates. As we previously mentioned, it’s not the absolute level or the direction of change but rather the pace at which bond yields move that impacts valuation multiples. This is because markets respond to shifts in both inflation and growth expectations. High yields typically correlate with anticipated higher inflation, which tends to be unfavorable for high-growth stocks.

However, the current increase in long-term U.S. bond yields is more a result of bond market technicalities than a reevaluation of inflationary risks. In fact, on one side the 5-year breakeven inflation rate has consistently hovered between 2.2% and 2.3% since mid-July. Concurrently, on the other side, the treasury term-premium, as computed by the Federal Reserve Bank of New York (see chart), initially surged by ~70bps from the end of July, only to retrace some at the very end of the month.

Negative premia primarily stem from a scarcity of collateral, likely tied to the various refinancing facilities introduced by the FED in recent times. However, at the end of July, the U.S. Treasury announced an expansion of its issuance plans for the upcoming quarter, which, among other effects, led to the notable Moody's rating downgrade. This came on the heels of the issuance of substantial amounts of Bills following the debt ceiling agreement in June of this year.

This marked increase in the supply of U.S. Treasuries is expected to push term premia back into a more typical (i.e., positive) range, prompting long-end yields to adjust upwards quickly. If this shift is predominantly due to a technical realignment in the bond market, it should be relatively swift. Any associated downturn in the equity market would present a buying opportunity.

A short comment on each of our investment themes

Changes in bond yields aren't the sole reason for the August drawdown. Our sub-theme allocation and individual stock selections did play a role too, particularly during this earnings season when expectations were elevated for certain stocks. Detailed insights for each theme can be found in the subsequent sections.

• AI & Robotics

Of the ten sub-themes in which we've invested, only three had a negative contribution exceeding 1%, and none of these were among the top three in terms of allocation. AI platforms stood out as a significant contributor and a good illustration of this trend. Schrödinger plunged after revising its guidance downward while Palantir also dipped despite an upward revision.

Similar narratives unfolded in data infrastructure and machine learning, the other notable negative contributors. Investors consistently focused on the minor negative aspects within earnings reports, overshadowing the broader positive outlook and dismissing robust underlying trends.

We stand by the perspectives shared in our mid-year review: Generative AI isn't mere hype. It's poised to have a sustained and structural influence on the transition to digitalization and cloud computing. Its ripple effects will span the entire value chain, and our portfolio is well-positioned to capitalize on this trajectory.

Second quarter results confirmed our thesis. As usual, there were some misses, but overall, companies reported solid results and generally either confirmed or slightly raised their guidance. Yet, many stocks faced significant downturns, hinting at a prevailing sentiment of profit-taking. A perfect example of this is Nvidia’s results, which failed to generate a strong market reaction despite once again delivering an outstanding beat on earnings and guidance.

• Bionics

As recently highlighted, Novo Nordisk's SELECT study prompted investors to speculate about its potential implications for medical device manufacturers targeting cardiovascular diseases, sleep apnea, NASH, or diabetes.

This speculation triggered a significant decline in the therapeutic devices sector, particularly impacting stocks linked to obesity-related diseases. Notably, Inspire, Insulet, Shockwave, and Dexcom, all of which are in our portfolio, were negatively affected.

Considering the industry's limited market penetration, we are convinced that any potential consequences stemming from GLP-1 dynamics are expected to exert minimal, if any, impact on our companies, even in a worst-case scenario. Hence, the recent sector-wide downturn seems unjustified.

Furthermore, this situation unfolds against a backdrop of an industry witnessing consistent growth in sales, profit margins, and earnings. This growth is supplemented by strengthening core fundamentals (e.g.,  coverage decisions aligning favorably with innovation).

For investors, this presents a prime opportunity to delve into the transformative sector of medical devices on the cheap, which aims to enhance individuals' well-being and curtail healthcare expenses.

• Biotech 360°

Our portfolio suffered due to sub-themes in which we have a higher allocation, specifically life science tools and AI services. The drawdown is primarily attributed to the exposure we have in 10X Genomics and Schrödinger.

For 10X Genomics, while sales are increasing, the expense of marketing their new generation of large instruments is substantial, and sales in China have dropped by 16%. However, users have emphasized the exceptional biological data produced by 10X Genomics instruments. This aligns with our positive outlook on them, especially regarding their potential in spatial biology.

For Schrödinger, the Q2 results were mixed. Revenues decreased by 9% year-over-year, largely because of a decline in their software sales. Nonetheless, the FDA has given the green light to one of the company's assets for clinical trials. We anticipate that by next year, they will have three assets in such trials. Schrödinger is in the early stages of clinical trials for its drug pipeline. The potential of AI in drug discovery remains one of the most promising, yet formidable, opportunities in healthcare.

Concerns about cash reserves, cash burn rates, and drug pricing reforms continue to dominate the sector. However, specific stock catalysts in some medical indications (NASH notably) are expected to positively change the mood (and possibly act as a rerating) in the sector and our portfolio.

• Fintech

Our positions in blockchain, alternative lending, and payment companies (refer to Mobile Payments) were the primary drags on our performance in August. This downturn is attributed to a mix of broader market dynamics and specific company challenges.

In an environment of rising interest rates, riskier assets tend to underperform. Consequently, stocks related to blockchain have seen a pullback. Bitcoin has returned to its mid-June levels, a time when investor enthusiasm surged due to a series of Bitcoin ETF applications submitted by key asset managers. However, the Securities and Exchange Commission's continued response delays have affected market sentiment.

The August decline is largely tied to the earnings season for alternative lenders. Our bottom contributor in August is Upstart, a leading platform using artificial intelligence to drive credit decisions. While the company performed well this year thanks to securing third-party funding to run its operations, its latest quarterly revenue guidance fell short of expectations. We monitor the situation, although we believe that alternative lenders will benefit from tightened lending standards and the reduction of excess savings accumulated during the Covid-19 pandemic. 

• Mobile Payments

Within the payment industry, August 2023 will be remembered as the month where Adyen shifted from a high-growth story to “just-another-payment-company” in the eyes of the market. The company's results have been disappointing, with revenue growth below its long-term guidance. As the macro environment is challenging, companies are looking for substitution products.

Payment processing has become a commodity. Most clients will look for a cheaper processing solution if a platform offers only marginally better solutions.

Adyen’s management keeps believing that the superiority of its platform will make clients come back, without delivering any clear path towards achieving this goal. In parallel, the company keeps investing significantly (e.g., hiring), impacting its profitability.

Adyen has always traded at a premium compared to its peers due to its higher revenue growth and EBITDA margin. The market now fears that this financial profile is over.

Only time will tell, but Adyen's situation reminds us of when PayPal (that we exited) shifted its business model from prioritizing growth at any cost to focusing on profitability. A year and a half later, the stock isn't close to its previous levels.

More recently, a company like Nuvei has also adjusted its revenue growth projections for the mid-term, moving from ">30%" last year to ">20%" at the start of this year, and now to "15-20%". These revised forecasts indicate that identifying genuinely high-growth opportunities is becoming increasingly challenging. It seems all companies are gravitating towards the average growth rate of the digital payment industry, which is approximately 9% annually. 

• Security & Space

The Security and Space strategy proved to be the most resilient during the month. Two of its sub-themes posted slight gains, though, unfortunately, they were the ones with the least exposure.

Much of the negative contribution came from cybersecurity, accounting for >50% of our exposure. It somewhat cooled down after several months of outperformance. Rather than originating from a larger underlying trend, this entire underperformance can be explained by two stocks: Fortinet Inc going down after disappointing results and Palantir correcting after an exceptional run since the start of the year despite delivering excellent results.

The investment thesis remains intact for the sector: cybersecurity remains critical to enable increasingly digitized businesses and societies to simply exist, a fact that will be reinforced by the emergence of AI, which is built on data that needs to be protected. Additionally, we maintain our belief that new-generation players will outperform legacy ones, though we recognize this may come with increased volatility during market downturns.

Regarding the rest of the portfolio, our exposure to Space has faced some challenges, but we believe the fundamentals don't warrant this decline. A prime example is Rocket Lab, one of ours year’s favorites. The company successfully launched a mission for NASA using a previously flown engine, a feat only SpaceX had achieved before.

The company later announced that an upcoming mission would exclusively use such engines, setting the stage for greater reusability and reduced costs. This solidifies its stance as a technological rival to SpaceX. Yet, the market's response? A decline of approximately 15%.

• Sustainable Future

SolarEdge and Wolfspeed were the primary negative contributors.

The U.S. residential solar market is grappling with challenges such as rising interest rates and declining power prices, leading to a flattening demand. Many companies catering to this market have reported underwhelming results and forecasts.

Across the Atlantic, in Europe, SolarEdge's primary market, the narrative is more nuanced. While there's a strong inherent demand, distributors, having previously overstocked solar modules and inverters, are now adopting a conservative stance, trimming their inventory. This shift, combined with the U.S.'s subdued demand and Europe's typical Q4 seasonality, has prompted adjustments in near-term guidance.

In the Clean Transportation sub-theme, the underperformance can be largely attributed to Wolfspeed's results. Despite resolving past financing issues and securing recent deals that bolster the long-term demand for SiC devices, Wolfspeed faces challenges in executing its capacity expansion plans. Changes in accounting practices and weaker-than-expected guidance, stemming from delays in ramping up its 200mm Mohawk Valley fab, have further exacerbated investor concerns. Nevertheless, Wolfspeed remains a market leader, pioneering the move to 200mm and expanding its high-leverage devices business.

Our strategy's significant exposure to China (around 30%) contributed to underperformance in the first half of the year. However, recent developments, including the upcoming earnings reports of our Chinese holdings and renewed interest post the July politburo meeting, could alter this trajectory.

We remain steadfast in our belief that the global push for decarbonization will catalyze the adoption of clean technologies. The transition to renewable energy sources like solar and wind, coupled with stationary storage solutions, will play a pivotal role in decarbonizing power generation.

The EV revolution, already gaining momentum in China, is set to sweep Europe and the U.S. Policy initiatives, such as the U.S. Inflation Reduction Act domestic content tax credits and Europe's Critical Raw Material Act, are creating lucrative opportunities for local players and fostering East-West collaborations.

Asserting our investment style: Purity and consistency

This is not the first time we have faced a significant drawdown in our strategies. And given our investment style and philosophy, setbacks are part and parcel of the journey – but they are also invaluable learning experiences.

Our investment process is not static; it evolves continuously to adapt and capitalize on new opportunities. Having said that, there are core principles that define us and remain steadfast:

1. Sector focus: Technology, healthcare, and clean energy are not just sectors of choice; they hold the keys to future prosperity.
2. Thematic portfolios: Our knack lies in converting long-term trends into thematic equity growth portfolios. In a rapidly evolving world, we aim to be ahead of the curve.
3. Conviction driven: We don't just follow trends; we rigorously research them and aren't shy about sharing, and investing in, our convictions.

Theme purity

We acknowledge that the thematic investing landscape has changed since we introduced our first product in 2014. Investors often compare our strategies to products with similar names, and rightly so, we do the same. However, one thing we're certain of is that no one can match our level of purity.

When we promote a product as an “AI & Robotics” strategy, investors get exactly that. It’s not a cloud strategy, not a big data strategy, nor a Big Tech strategy. It’s a solution that invests in companies that are making the AI revolution and the automation of the world a reality.

Every asset manager might have their own definitions for the themes they invest into. However, when we observe investments in chip makers for data centers or traditional legacy banks within "Fintech" strategies from our competitors, we question the boundaries of their thematic definition. As an example, in our approach to fintech, the criteria are quite stringent: (1) technologies that are revolutionizing the financial industry, and (2) tech-native firms that challenge established players; nothing more.

Some of our competitors manage thematic strategies with several billions under management. Due to liquidity constraints, they are compelled to invest in mega-caps. Consequently, investors are no longer exposed to a pure theme but rather to a market portfolio with a sectorial tilt.

Defining a theme demands significant resources; gaining knowledge goes beyond just using a natural language processing script. This classification process is at the core of our investment process. Take, for instance, the current market map we employ for "Security & Space." We've pinpointed 79 categories related to our theme definition. This framework is our GICS, and it's what underpins our portfolio management.

After defining our theme, we must associate investable companies with each category. This step is crucial to ensure that we deliver what we promote. Essentially, a company's business activities and revenues must align with our definitions. We refer to this as "theme purity."

The implication of being pure

It's widely recognized that our strength lies in the small- and mid-cap segments. This is the result of our pursuit of pure themes, that translates into exposure to rapidly expanding companies. Beyond a market cap breakdown (which can be found on our factsheets), one straightforward method to observe how this exposure permeates our portfolios is by examining factor sensitivities.

We refer to the Fama-French three factor model, an asset pricing model that expands on the capital asset pricing model (CAPM) by adding size risk and value risk factors to the market risk factors. The model basically evaluates the sensitivity of a given portfolio to 3 key factors:

1. Market return minus risk-free rate (Mkt-Rf), or the excess return on the market;
2. Small minus big (SMB), or the historical size premium of smaller caps vs. bigger caps;
3. High minus low (HML), or the historical value premium of companies with high book-to-market ratios. 

The chart below displays the Fama-French factor sensitivities of our various core strategies since their inception.

From this chart, it's evident that we maintain a consistent investment process across all our strategies. Besides having a positive sensitivity to the size premium (SMB), the HML factor also indicates that our portfolios are attuned to growth factors, as intended.

Within the vast landscape of thematic investments, asset managers exhibit varying betas to risk premiums. When conducting the same analysis for our strategy peers (as shown in the subsequent chart, focused on Fintech), it becomes immediately apparent that while products might bear similar names, they don't offer identical strategies. Take peers 8 to 10, for instance. They brand themselves as "fintech" or "financial innovation" strategies. However, they exhibit low betas to the market and primarily invest in large-cap value companies. Investors won't find companies like nCino (modern banking software) or Coinbase (digital asset exchange) within such strategies.

Conviction, volatility and style

Having dozens of classifications and hundreds of stocks is not enough to make a portfolio. One still needs to build the actual portfolio.

We possess the tools to include all the stocks in a portfolio, much like many of our competitors. Consequently, the performance would closely mirror the broader market in terms of both returns and volatility. But we firmly believe that by examining value chains and total addressable markets, some opportunities appear more attractive than others.

The subsequent chart contrasts the number of stocks (indicating the level of conviction) and the volatility between the AtonRâ AI & Robotics strategy and its peers.

Having convictions means taking risks. There may be times when we're mistaken about a stock (or their related sub-themes), as August seems to suggest. Timing isn't always perfect. However, given the strength of the trends we invest in, most of our convictions tend to materialize, sooner or later.

Using the AI & Robotics strategy once again as a representation of our investment style, historical performances demonstrate that our process can add value for investors. The subsequent graph displays the performance of our strategy, marked with an orange x, in comparison to our peers.

In this chart, the box displays the top performer (top line), the top quartile (upper part of the box), the median (line within the box), the bottom quartile (lower part of the box), and the bottom performer (bottom line).

While we may not delve into the specifics of each year, a brief overview indicates that our strategy has consistently performed well compared to its peers, with the notable exception of the year 2022. This offsets the volatility inherent in our strategies.

Harnessing volatility, embracing opportunities

As we progress, it's crucial to comprehend why placing trust in our approach will benefit long-term investors. To shed light on this, we'll delve into two distinct viewpoints:

1. Synergy with our investment style: In the previous section, we detailed our unique investment style. This distinct approach not only resonates with positive market dynamics but also enhances their impact, making our strategy more attractive to long-term investors.
2. Embracing the future of innovation: In an era driven by innovation, the future holds immense potential. Our carefully crafted strategies and thoughtfully selected stocks are poised to capitalize on the powerful catalysts that innovation brings forth.

Beware of hidden risks in large caps

Large-cap growth stocks have notably outperformed the broader market. The top 10 companies in the Nasdaq contribute to approximately 80% of its year-to-date performance. Several factors could account for this trend:

1. Large caps provide stability in the face of macroeconomic uncertainties.
2. Investors continue to gravitate towards passive strategies without discernment. According to the Investment Company Institute, there have been net outflows of $300bn from equity mutual funds, contrasted with $170bn of net inflows into equity ETFs, year-to-date.
3. Beyond Nvidia, the frenzy for artificial intelligence has reached Big Tech.

However, none of these reasons appear to be both satisfactory and sustainable. The U.S. economy has shown greater resilience than initially anticipated. Consumers continue to spend, even though the surplus savings accumulated during the Covid-19 era are depleting. The concentration risk in indices combined with an over-reliance on passive strategies poses a looming threat. While we acknowledge the AI initiatives of companies like Microsoft, it's improbable that these giants, regardless of their excellence, will double their revenue in the next 18-24 months due to AI, given their vast scale. In contrast, smaller and more specialized entities are more likely to achieve such a feat.

Also, valuations in the broad stock market haven't uniformly increased. In particular, after the downturn in 2022, there has been virtually no re-rating of the companies we've invested in. Another perspective on the risk associated with large caps is to contrast the performance of growth stocks with that of value stocks. The subsequent chart speaks for itself. The growth surge observed during the Covid-19 era has dissipated for smaller companies. However, for larger entities, the narrative is different.

Over the past 20 years, growth stocks have consistently outperformed value stocks. The rapid pace of technological advancement and innovation remains a powerful driver for growth stocks. As we are entering a new era with artificial intelligence, growth stocks will keep outperforming value stocks. But the outperformance of growth stocks should be reflected in all market caps. There are two conclusions that can be drawn from the above chart: (1) Large caps growth stocks are unlikely to experience the same appreciation as they have this year, and (2) smaller growth companies are poised to catch up.

It’s not “if” but "when" small caps will make their comeback

In terms of valuation, small caps are trading at strikingly low levels when compared to large caps. Research from JPMorgan Asset Management indicates that the valuation disparity between the Russell 2000 (which tracks U.S. small caps) and the Russell 1000 (which tracks U.S. large caps) has reached such a level only four times since 1989: in the early 1990s, during the dot-com bubble, amidst the Great Financial Crisis, and presently.

The existing differential signifies a relative discount ranging from 30-35%. Market trends are cyclical, and such pronounced disparities are unlikely to persist indefinitely.

When examining global indices, the longer the timeframe, the greater the likelihood of smaller companies outperforming. However, the narrative has shifted in the past decade.

The MSCI World Small Caps Index has surpassed the MSCI World Index in just three of the last ten calendar years. Historically speaking, such deviations tend not to persist.

Are we there yet?

Risky assets are likely to face continued heightened volatility, as long as the Fed policy remains uncertain. However, as observed at the end of August, negative news started to be viewed positively, fueling hopes for a potential pause in rate hikes. The Fed aims to control inflation, which has already seen a significant decline from a peak of 9.1% (year-over-year), implementing the most aggressive series of interest rate hikes in four decades.

We wrote (here and here) that the hike will not stop as long as the Fed Funds are not higer than core inflation. You can pick the measure of your choice for inflation, but here we are.

The official Fed’s target for inflation is 2%. Economists depict two scenarios to reach that target: (1) Maintaining the Fed rates at the current levels and waiting for another 3 years for inflation to reach that level, or (2) further raising Fed rates and pivoting the monetary policy quickly once in recession.

For our strategies, the ultimate outcome is likely the same, though the paths may differ.

In the first scenario, our strategies will perform well due to their superior revenue and earnings growth.

In the second scenario, the market may decline further before a turnaround benefits us more than others.

In either case, not having exposure to our investment style could result in suboptimal outcomes. In the first scenario, the compounded effect of short-term returns would be absent, while in the second, precise market timing is improbable.

Looking beyond the monetary policy, companies keep evolving. There are signals that we are entering a new regime for our stocks.

• First, the IPO market is ready to be reborn from its ashes. The semiconductor company Arm (see our related interview in the local newspapers), the delivery company Instacart, and the marketing automation firm Klaviyo will unfreeze large tech IPOs. Others are likely to follow.
• The M&A market is also likely to enter into a new dynamic. It is estimated that private equity funds hold $1-1.5tn of cash reserves, i.e. dry power. With clear potential in sales and profits, our companies will be at the forefront of this deployment.
• Finally, we note early signs of a renewed interest in the equity market in general. Industry surveys (e.g., UBS Global Family Office Report) show that smart money plans to add exposure to the equity market again, as the move in favor of fixed income and alternative investments is mostly completed. And according to FINRA, margin accounts are on the rise again, after having declined continuously since October 2021.

Catalysts and drivers for our strategies

Beyond our investment approach, we firmly believe that each of our strategies possesses catalysts on the horizon that will enhance the intrinsic value of our holdings. The next event akin to "ChatGPT" is just around the corner, whether it pertains to a sub-theme or an individual stock.

The world is grappling with major economic and social challenges, stemming from an aging population and climate change to name a few. Technological disruption stands as a pivotal part of the solution, propelled by rapidly growing and innovative companies. Choosing not to engage with these sector is a risky gamble.

Please find below the catalysts and drivers for each of our core strategies:

AI & Robotics
Bionics
Biotech 360°
Fintech
Mobile Payments
Security & Space
Sustainable Future

AI & Robotics

• Operational implementation of contemporary generative AI technology in major businesses.
• Advancement of AI technologies resulting in wider adoption, particularly on smartphones.
• Increased clarity on regulations, especially concerning data, which is essential for training large AI models.

Bionics

• Approval of the Transitional Coverage for Emerging Technologies (TCET) pathway, which bridges the gap between device approval and reimbursement.
• Starting in October, Shockwave will see enhanced inpatient reimbursement.
• Next year, Dexcom intends to release a new device for non-insulin users, which should alleviate concerns regarding its total addressable market.
• With major companies finalizing their divestitures, merger and acquisition activity may see an uptick. 

Biotech 360°

• Big Pharma aims to influence numerous trial decisions against the drug pricing reform (Inflation Reduction Act) to their advantage, benefiting the entire industry, including biotech firms.
• At the stock level, 21 clinical trial catalysts within the portfolio are anticipated between 3Q2023 and 2Q2024.
• We've noted a pronounced interest in tech-related IPOs. This trend is also evident in Biotech, with 10 companies poised for IPOs. This suggests a likely resurgence of public offerings and a potential influx of cash. 

Fintech

• Software companies possess pricing power, particularly those that have successfully established a loyal user base. We anticipate further price hikes across the industry in the upcoming six months, which will benefit fintech software companies.
• The approval of the Bitcoin ETF seems inevitable, whether sooner or later. Following this, a more robust regulatory framework will be established in the U.S., reducing risks associated with the blockchain ecosystem.
• While the conclusion of the student debt moratorium poses a risk to the broader economy, it presents an opportunity for specific companies. For instance, SoFi, a loan refinancing firm, stands to gain from this situation. 

Mobile Payments

• Shopify is poised to enhance its margins, owing to its recent integration with "Buy with Prime" by Amazon. Additionally, we'll be keeping an eye on the IPO of Klaviyo, given that Shopify holds approximately 10% of the company's shares.
• With current valuations being subdued, we anticipate a surge in M&A activity. For example, the revamped Worldpay, recently acquired by a buyout group, remains intent on being a significant player in the M&A landscape.
• As Brazil rolls out expansive public programs, job creation is expected. This should lead to a rise in consumer spending. Furthermore, the Central Bank is adopting a more lenient stance, and the ambiguity surrounding interchange fees has been resolved. 

Security & Space

• The introduction of advanced cybersecurity solutions is essential to address the evolving cyber landscape, particularly with the emergence of AI technologies. This need is further amplified by escalating global tensions that are propelling cyberwarfare.
• Progressive rollout of space-based game-changing services (satellite-to-smartphones connectivity, higher-resolution imagery thanks to relaxed rules from NOAA, large new satellite constellations).
• The space sector is set to witness notable events, such as the development of SpaceX's Starship, NASA's lunar program, and the introduction of commercial space stations.

Sustainable Future

• With just 17 months remaining until the elections, it's anticipated that the Biden Administration, in collaboration with the Department of Energy, will release definitive guidelines regarding the distribution of remaining subsidies from the Inflation Reduction Act.
• After showcasing positive results on a global scale, Chinese investments are predicted to rebound, especially with the government implementing increased supportive actions.
• The process of inventory reduction is projected to reach equilibrium, leading to a significant surge in demand for essential products. This includes items like solar panels and inverters in Europe, as well as batteries for electric vehicles in China.

Catalysts

• End of rate hikes. A change of paradigm will begin for smaller companies, once the Fed will stop its current monetary policy.

• Generative AI. The implication of generative AI goes well beyond our strategy AI & Robotics. The entire society will be impacted. A new boost for innovative companies has started.

• Government initiatives. The Infrastructure Act, the CHIPS Act, the Inflation Reduction Act will drive the reshoring of supply chains, bringing business opportunities for smaller companies.

Risks

• Second inflation spike. Oil prices and the suspension of U.S. dollar convertibility to gold lead to two inflation spikes in the 70s. Today environment is much different. But a pandemic brought the latest spike. So what black swan could bring a second spike?

• End of student debt moratorium. Millions of Americans will have to restart paying off their debt. The impact on U.S. consumption remains to be seen.

• Geopolitical tensions. The bilateral relationships between the United States and China is likely to remain complex.