July Wrap Up: Market Volatility Reinforces Key Investment Lessons

We say this a lot, but it was yet another interesting month for investors. There was significant volatility within share markets, even if headline returns were less volatile, rising interest rates, both locally and abroad, a rising kiwi dollar and resumption of hostilities in Iran. It was a reminder of key investment lessons that are sometimes forgotten; the importance of diversification, the role of sizing in managing portfolio risk and the importance of baking in inflation hedges in a world replete with inflation risk.

In previous monthlies we highlighted the meteoric performance of semiconductor chips, particularly memory, and the risk of a snap back in performance. That snap back happened in July. One measure of this is the performance of the Philadelphia Semiconductor Index which fell 20.6% over the calendar month. The broader, but still tech heavy, Nasdaq 100 also declined 6.6%.  

The performance of the technology sector didn’t tell the story of the overall market. International shares and shares outside of the technology sector performed well, cushioning overall market returns. For the month the S&P 500 was broadly flat at -0.1%, the MSCI World index gained 0.5% and developed market non-US equities measured by the MSCI World ex USA, rose 2.0% (in USD terms).

For kiwi investors, strength in the New Zealand dollar more than blunted this return. In New Zealand dollar terms the MSCI World index fell by 2.7%. The kiwi dollar strength was underpinned by higher New Zealand interest rates and a rise in the Reserve Bank of New Zealand’s official cash rate.

Rising interest rates are not good news for conservative investors, leading to capital losses on fixed income investments. To put some numbers on that, the Bloomberg NZ Government All maturity index declined 1.3% for the month. Rising rates and inflation pressures were also the story outside of New Zealand. Global fixed income markets fell, with the FTSE World government bond index (NZD hedged) down 1.1% for the month. 

With such dramatic movements over the month, and news of a high-profile hedge fund blow up, it was a month that reminds us of the importance of some key investing fundamentals. 

It is easy to get caught up in the current hot theme of the market; there is almost always one. For the first half of 2026 it was all about the semiconductors powering AI data centres.  

The investor rush to embrace the theme was intense. By the end of June, net inflows into US semiconductor ETFs for the year had reached approximately $39 billion, and by mid-July that figure had climbed even further to $46 billion, according to Bank of America Global Research and Bloomberg. This is more than double the combined inflows to semiconductor ETFs recorded for the 8 years from 2017 through 2025. The chase was on. 

It was not just retail investors in ETFs being drawn to the flame. Hedge funds were also heavily gearing into the theme. 

The most well-known, and what has become a salutary story, was hedge fund Situational Awareness. The fund was structured around the belief that more capable AI systems would drive enormous demand for semiconductors, memory, data centres, and power infrastructure. All very logical, but sometimes stock market volatility, excessive concentration and leverage can spoil the logic. 

The Fund and its strategy delivered spectacular returns, until it didn't. By June 2026 it had grown to as much as $45 billion. Then July happened. Semi-conductor stocks sold off, the shine came off the AI trade and other market participants became aware of a massive hedge fund in trouble. 

Situational Awareness collapsed from $45 billion in net assets to around $10 billion in mere days, with mounting margin calls, driven by reported leverage of up to 400%, forcing the sale of all its leveraged public stock positions at a massive discount.

There are three key lessons in this. 

First the importance of diversification and not having all your eggs in one basket. A portfolio that is overexposed to a single theme is inherently riskier than a well-diversified strategy. History has more than demonstrated that a resilient, well diversified investment strategy compounds wealth more reliably than shooting for the stars. 

This ties neatly into the idea of position sizing, how much of your capital to allocate to different investments. The short takeaway here is that the riskier an investment or basket of similar investments are, the smaller it should typically be in your portfolio, even if you are excited by its return potential. Getting the sizing decision right helps smooth returns and smoother returns compound at a higher rate over time. 

Finally, the perils of leverage should never be forgotten. We are long term believers in the AI mega force. But it won’t be a smooth ride. As the Situational Awareness experience demonstrates, leverage creates path dependent timing pressures. With no gearing the fund might have seen out a bad month or two. With significant borrowing it blew up in days, suffering permanent capital loss. 

ASB invests through a long-term lens. Our portfolios are well diversified. We do include exposure to some of the high-flying AI driven themes in the market, but this is balanced against a broader exposure to non-AI stocks, including infrastructure. This stood our portfolios in good stead in what was a challenging month. 

We have long held the view that the mega trends shaping the global economy, including changing geopolitics, ageing demographics and the transition to lower-carbon energy sources, point to inflation settling at higher levels than those seen in the past.

New Zealand is no exception to these global themes. Kiwi consumer prices rose 1.5% in the June quarter, taking the annual rate to 4.1% from 3.1%, the highest since December 2023. While fuel accounted for nearly a quarter of the annual rate, more than 80% of the CPI basket rose over the year.

This lies at the core of why we believe investing in a long-term portfolio of real assets like shares matters. Nominal assets like cash and fixed income perform poorly if inflation is more persistent. July showed the impact of that, with rates rising, fixed income returns negative and investor caution to the fore.

We favour shares, infrastructure assets, gold and inflation indexed bonds as worthy inflation hedges and key components in building a long-term portfolio.

Frank Jasper

ASB Chief Investment Officer

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