Water Fund Review June: +11% perfor­mance at the half-year mark

Halfway through

Time is flying! We are already closing out the first half of the year. Stock markets in the US managed to climb to fresh all-time highs during the month of June, mostly driven by large cap tech compa­nies. Economic data managed to keep soft-landing hopes alive, but it comes at the cost of sticky infla­tion. Which of course means less rate cuts than initi­ally expected. It has long been antici­pated that geopo­li­tical events could signi­fi­cantly impact the markets, and this concern has now been confirmed. The EU elections outcome was a shift to the right and on top of things we must thank Mr. Macron for crushing the European invest­ment case as a valid alter­na­tive to the US. Only a couple of weeks ago, some non-European investors were warming up to the appeal of more reasonable valua­tions and a rate cut cycle that started in June. Like Sisyphus pushing the rock, we’re back to square one.

The Tareno Global Water Solutions Fund posted a perfor­mance of ‑1.90% (W‑Euro Tranche) in June. The 2nd quarter ended slightly negative (-0.42%), but the year-to-date perfor­mance remains a pleasing 11.27%.

Our Month in Water – bits and pieces

June was quite a busy month in our universe. More due to external factors than funda­men­tals, but let’s have a look. We got the first earnings reports from Core&Main and Ferguson. They are among the leading distri­bu­tors of plumbing and water techno­logy products in the US. After a couple of quarters with outstan­ding growth, both names slightly disap­pointed with lacklustre results. They both noted rising pricing pressure in a few products. If this is the canary in the coal mine, or if defla­tion will remain isolated to a limited number of products remains to be seen. But of course, the uncer­tainty is not helpful. As Core&Main dropped double digit on the news, the reaction of Ferguson’s stock was more contained. While the outlook remains solid, pricing will be a key item to watch in the coming months.

On the other hand, Halma, a UK water techno­logy provider (leak detec­tion, quality monito­ring, UV-based water treat­ment) managed to beat consensus expec­ta­tions. They were rewarded with a plus of more than 20% on the news.

The primary influence on our stocks came from political events. The EU elections and Presi­dent Macron’s decision to call for elections in France triggered a wave of selling in European stocks. Veolia, one of our fund’s top holdings, saw its shares drop signi­fi­cantly follo­wing the announce­ment. Despite Veolia being a French company, only about 20% of its EBIT comes from France, and its contracts are generally awarded by munici­pa­li­ties where Paris has little sway. We see current levels as a buying oppor­tu­nity.

Turning to the US: Since the first presi­den­tial debate, the likeli­hood of a Trump victory has increased signi­fi­cantly. This is often misun­ders­tood as a negative for water-related stocks. In reality, during his first term, Presi­dent Trump supported water infras­truc­ture, enacting the Water Infras­truc­ture Act of (USD 200 billion) and the Moder­ni­zing Ameri­ca’s Water Infras­truc­ture execu­tive order. The National Associa­tion of Clean Water Agencies praised his strong support for infras­truc­ture invest­ment, inclu­ding water. Trump’s policies encou­rage a greater role for the private sector. Additio­nally, a second Trump presi­dency could boost the U.S. oil and gas industry, benefiting compa­nies like Tetra Tech, whose products and services enhance the environ­mental footprint of the energy sector. The recent pullback offers a good entry point.

Quiet summer days

As we approach the summer holidays, market volumes are likely to dry up, leading to quieter trading days. The upcoming earnings season will present a mix of positives and negatives, impac­ting various sectors differ­ently. We antici­pate some volati­lity but also oppor­tu­ni­ties for strategic invest­ments. Enjoy the summer and embrace the season of light and warmth. Take this time to relax and recharge, ready to face the market dynamics ahead. Happy summer holidays to everyone!

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