July has been a rocky month as the tentative peace agreement between the United States and Iran began to unravel, reigniting concerns over the Strait of Hormuz, oil supply and inflation. At the same time, technology and semiconductor stocks experienced a sharp correction as crowded and leveraged positions unwound.
The combination created a difficult environment for investors. Higher oil prices renewed concerns about inflation and interest rates, while the sharp correction in technology and emerging-market equities demonstrated how quickly market leadership can reverse when valuations and positioning become stretched.
The key lesson from July is not that the AI investment cycle is over, nor that the bull market has ended. Rather, the month highlighted the importance of diversification and risk management. Even strong long-term investment themes can experience severe corrections when expectations become excessive.
Iran-US Conflict: The Return of the Oil Shock
The fragile ceasefire between the United States and Iran failed to provide the lasting stability that markets had initially expected. Renewed tensions once again raised concerns over the Strait of Hormuz, through which a significant portion of global oil supplies passes.
Oil prices rebounded sharply as markets began pricing in the possibility of prolonged disruption. This renewed the inflation concerns that had temporarily faded following the April and May recovery. Higher energy prices are particularly problematic because they can simultaneously increase inflation and weaken economic growth, creating the risk of a stagflationary environment.
The implications extend well beyond oil-related companies. Higher energy costs increase business expenses, reduce consumer purchasing power and make it more difficult for central banks to lower interest rates. This creates a challenging backdrop for both equities and bonds.
Emerging markets are particularly vulnerable. Many Asian economies remain heavily dependent on imported Middle Eastern energy, meaning a prolonged period of elevated oil prices could put pressure on economic growth, corporate margins and currencies. This was one reason emerging-market equities came under pressure during the month.
More broadly, the renewed conflict reinforces a theme we have highlighted throughout the year: geopolitical fragmentation is becoming an increasingly important driver of financial markets. Investors can no longer assume that energy supplies, trade routes and global supply chains will remain as stable as they were during the previous decade.
Technology Correction: A Reset, Not the End of the AI Cycle
Technology and semiconductor stocks experienced one of the sharpest corrections in recent months, with the semiconductor sector falling approximately 28% from its late-June peak. The severity of the decline may appear alarming, but the underlying fundamentals have not deteriorated to the same extent.
Major technology companies continue to report resilient earnings and remain committed to substantial spending on AI infrastructure, including semiconductors, data centres and computing capacity. The main issue was not a sudden collapse in the AI investment story, but rather the positioning surrounding it.
The AI rally had become increasingly crowded, with investors using leverage to participate in a powerful momentum trade. Once semiconductor stocks began to reverse, leveraged investors were forced to reduce their positions, creating additional selling pressure. Falling prices then triggered further selling, amplifying the correction beyond what the underlying change in fundamentals might otherwise suggest.
Korea: When a Strong Theme Becomes Too Crowded
Korea provides one of the clearest examples of this dynamic. Korean equities had been among the strongest performers earlier in the year, benefiting from the global AI hardware cycle and strong demand for memory and semiconductor products. However, the same concentration that drove the market higher also left it vulnerable when sentiment reversed.
The KOSPI experienced a correction of approximately 35% from its recent highs as semiconductor stocks came under heavy selling pressure. Retail investors had also accumulated significant leveraged exposure to Korean equities, particularly in semiconductor-related companies. As prices declined, forced selling amplified the market's downward movement.
Concerns over increasing competition from China's semiconductor industry added another layer of uncertainty, particularly in the memory-chip market.
The Korean experience is an important reminder that a strong investment thesis does not necessarily translate into a good investment outcome at every price. AI remains a powerful structural growth theme, but investors who concentrate too heavily in a single country, sector or momentum trade can be exposed to much larger drawdowns when market sentiment turns.
For investors, this is why diversification remains critical. The objective is not to avoid strong themes such as AI, but to participate in them without allowing any single theme or market to dominate portfolio risk.
Gold and Interest Rates: Another Difficult Month
Gold remained volatile in July as markets reassessed the outlook for inflation and interest rates. While geopolitical uncertainty traditionally supports gold, the renewed escalation of the Iran-US conflict has created a more complicated environment for the precious metal.
The apparent ceasefire between Iran and the United States has effectively broken down, with Iran and its proxies disrupting shipping through both the Strait of Hormuz and the Red Sea, two of the world's most important energy and trade routes. A prolonged disruption could keep oil prices elevated for an extended period, increasing the risk of a stagflationary environment in which inflation remains high while economic growth weakens. With limited options for the U.S. to quickly resolve the conflict, the implications for medium-term oil prices and inflation expectations have become increasingly important for gold.
If higher oil prices lead to persistent inflation, the Federal Reserve may have less room to cut interest rates. Higher real yields and a stronger U.S. dollar would create further headwinds for gold, which generates no income. At the same time, higher interest rates could benefit banking and financial stocks by supporting net interest margins and improving returns on interest-bearing assets.
I will therefore be paying close attention to how the Middle East situation develops. Gold remains an important portfolio diversifier, but if the conflict persists and the resulting inflationary pressure leads to a prolonged period of higher interest rates, I will not hesitate to reduce gold exposure and rotate into sectors such as banking and financials that may benefit from this environment.
Portfolio Performance and Positioning Strategy
The portfolio delivered a negative performance in July as the renewed Iran-US conflict and technology correction weighed on Emerging Markets, China, Gold and Technology. The Cash portfolio returned -4.29%, CPF-IS -3.72%, and SRS -4.29%. Global markets staged a strong rebound in the first week of August as weaker-than-expected U.S. jobs data revived expectations of a more accommodative Fed, while gold surged nearly 7% on falling yields and a weaker dollar, marking its strongest weekly gain since January.
Despite the drawdown, our 60/40 equity-bond positioning continues to provide a balanced foundation, allowing us to remain invested while retaining defensive assets and liquidity to take advantage of opportunities created by further market dislocations.
My main concern is the medium-term outlook for gold. If the Iran-US conflict remains prolonged, sustained oil prices could create a more persistent inflationary environment, limiting the Federal Reserve's ability to cut rates and putting further pressure on gold. I will therefore monitor this closely and remain prepared to adjust the allocation if the underlying investment thesis changes.
The objective remains unchanged: not to predict every market correction, but to maintain a portfolio resilient enough to weather volatility while retaining the flexibility to deploy capital when valuations become more attractive.
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