Challen­ging market condi­tions in August

Water­fund report

August 2024

The first trading days of August saw markets melting like the wax on Icarus’ wings. Concerns over a poten­tial US reces­sion and the sudden unwin­ding of short positions in the Yen, follo­wing the Bank of Japan’s surprise interest rate hike, led to a massive spike in volati­lity. While sharp drops in markets are common, especi­ally during the summer when trading volumes are thin, the extent of the drop was signi­fi­cant. As the month progressed, fears subsided thanks to reassu­ring state­ments from both the BOJ and Fed Chair Powell. The Fed announced plans to ease monetary condi­tions in September. Overall, the outlook brigh­tened towards the end of the month, and losses were parti­ally recovered.

The Tareno Global Water Solutions Fund recorded a perfor­mance of ‑1.48% (W‑EUR tranche) in August.

Our month in water

Earnings season slowed down signi­fi­cantly from its July peak, with only a handful of compa­nies reporting. Watts Water exceeded expec­ta­tions, though the near-term outlook was slightly disap­poin­ting. Watts, which supplies water techno­logy to the construc­tion sector, noted a continued slowdown in activity across Europe, a senti­ment echoed by peers like Geberit and Wiener­berger. Advanced Drainage Systems met expec­ta­tions, as demand for storm­water drainage systems remains robust. Reports from American Water­works and Essen­tial Utili­ties also held no surprises. We recently increased our positions in both compa­nies, reflec­ting a shift towards more defen­sive names.

The standout report came from Tetra Tech, a leader in environ­mental consul­ting. The company remains one of the most compel­ling growth stories in our universe and a long-time favorite of ours. Net revenue rose by double digits, and the order backlog reached a new all-time high. Tetra Tech secured several high-profile contracts, inclu­ding a USD 56 million deal for the design of a PFAS removal solution. With US federal agencies as key custo­mers, some bears are concerned about how the upcoming elections might impact future spending. However, given the strong backlog and the associated visibi­lity, Tetra Tech appears well-positioned for any shifts in spending priori­ties.

Apart from the earnings reports, there was little news. We are still digesting the sell-off in Japan, which left many compa­nies in our universe well below the highs reached earlier this year. While we remain confi­dent in the funda­men­tals of compa­nies like Kurita, Ebara, and Kuraray, we prefer to stay on the sidelines until the volati­lity finally settles.

Play defen­sive

It is diffi­cult to predict how September and October will unfold for stock markets. These months are seaso­nally soft, and the upcoming US election will likely keep investors on their toes. On the other hand, infla­tion is moving in the right direc­tion, and the antici­pated interest rate cut is on the horizon. As we remain in the “soft landing” camp, this should bode well for small and mid-caps.

Nonetheless, we believe it is appro­priate to maintain a cautious, defen­sive positio­ning.

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