DNCA Invest SRI Euro Quality

Rising interest rates have been the defining theme of this start to the economic year, as concerns about inflation and the budget have fueled investor jitters. On the one hand, rising energy prices (oil up 35%–40% from July lows), combined with resilient economic activity—both in terms of growth and employment—led several major central banks to adopt a more restrictive monetary policy to curb this resurgence of inflation (the Fed, ECB, BoJ, and RBA all raised key interest rates by 25 basis points). On the other hand, political and fiscal risks have put additional pressure on government bonds, particularly in Europe and among countries with the most expensive public spending policies. As a result, long-term sovereign yields in several countries reached levels not seen in over fifteen years: the 10-year U.S. Treasury yield stood at 5.28% (+53 basis points over the month), the 10-year French OAT at 4.86% (+68 basis points), and the 10-year German Bund at 3.59% (+27 basis points).

Nevertheless, equity markets showed remarkable resilience (MSCI World: -1.1%, S&P: -0.3%, Stoxx 600: -2.4%). Strong first-half earnings reports and expected earnings growth for 2026 and 2027 (33% and 15% in the U.S., 20% and 9% in Europe, respectively) have so far helped absorb this rate shock.

September also marked a turning point for the AI sector with the launch of OpenAI’s new Astra model and Meta’s new personal agent, Muse, which illustrates the gradual shift from conversational assistants toward agents capable of performing tasks and becoming a new interface with consumers. Following this summer’s correction, companies exposed to the AI sector have thus staged a notable rebound.

Against this backdrop, the fund posted a monthly return of -2.71%, compared to -1.93% for its benchmark index.

The main positive contributor to performance this month was ASML (+10%). In addition to the resurgence of the AI theme, the company saw its new generation of “High-NA EUV” lithography systems validated by its client TSMC after a period of skepticism regarding its cost. Furthermore, rising demand for production capacity and an improved outlook for the fourth quarter have reignited investor interest. We took profits on the stock given that the 10% regulatory limit had been reached.

Nokia (+3%) rose on the back of renewed investor interest in its exposure to AI infrastructure. Strong growth in the AI & Cloud order book, market share gains in optical networks for data centers, and the ramp-up of new production capacity are supporting the growth outlook. This outlook was reinforced by feedback from the ECOC conference, which confirmed sustained demand from hyperscalers.

Legrand’s Capital Market Day (+3% for the month, +6% post-CMD) enabled the company to raise its 2030 targets to annual organic growth of 6 , and 8% (previously 3–5%) and an operating margin ranging from 21% to 22% (previously >20%). While electrification and the data center boom remain key drivers, this event also reassured the market about the group’s ability to meet the needs of the new direct-current (800V DC) power distribution architecture for data centers powering AI models. We had strengthened our position ahead of the Board of Directors’ meeting given the market’s skepticism regarding Legrand’s positioning on 800 V DC.

Iberdrola (+3%) benefited from its continued investments in grid infrastructure, as exemplified by the acquisition of Caruna in Finland shortly before Google announced a $15 billion investment in the country’s digital infrastructure. Expectations surrounding the upcoming strategic plan, as well as the anticipated upward revision of its 2026 targets, also bolstered investor interest.

Conversely, the entire consumer sector is in the doldrums. Post-summer earnings calls revealed bleak prospects for luxury groups such as LVMH (-14%) and Hermès (-15%). While Hermès is expected to post 5% growth in thethirdquarter—and thus perform much better than LVMH, which may report a decline in sales—the quarter-over-quarter slowdown in growth casts doubt on the desirability and exclusivity of the iconic Faubourg Saint-Honoré brand. Inditex (-7%) reported remarkable growth of 9.5% for the secondquarter, as well as “current trading” at 9%; however, its margin was impacted in the short term by logistics costs due to freight rates. Finally, while EssilorLuxottica (-9%) should be buoyed by the success of Meta Muse (compatible with Ray-Ban Meta), the stock was impacted by governance-related noise and doubts regarding the sustainability of the connected eyewear franchise.

Among the month’s key moves, we initiated two new positions: Prysmian, in connection with its capital increase intended to finance the acquisition of Atkore, and Munich Re, to manage the portfolio’s interest rate risk. We increased our positions in Iberdrola, Airbus, L’Oréal, and UCB. Conversely, we reduced our holdings in LVMH, Siemens Energy, SAP, Allianz, and GTT, and exited Rheinmetall (due to high expectations).

In the short term, the geopolitical environment and its impact on oil prices will continue to fuel market volatility. However, the latest leading indicators (notably the PMI) point to an acceleration in economic activity on both sides of the Atlantic. Third-quarter earnings reports and earnings growth expectations should therefore remain positive. In this context, earnings momentum will remain a key driver for equity markets despite rising interest rates and costs. Inflation, however, remains the primary concern and could stay persistently above central banks’ targets, even in the event of geopolitical de-escalation and a decline in energy prices. “Higher for longer”…