TSCM: Inside the Investment Room

Navigating Higher Rates & Weaker Dollar: Defense, Discipline, and the Durability of AI

In this edition of Inside theInvestment Room, we examine how higher interest rates and a weaker dollar couldreshape sector leadership. From defensive healthcare and industrial positioningto rate-sensitive financials, consumer pressure points, and questionssurrounding the sustainability of AI infrastructure spending, the currentenvironment reinforces the importance of balance-sheet strength, pricing power,and disciplined stock selection.

Markets remain highlydifferentiated as investors navigate higher rates, currency shifts, andevolving capital needs. In this environment, the team is seeking high-qualitybusinesses with recurring demand, pricing power, and strong balance sheets,while remaining selective across more rate-sensitive areas. AI remains apowerful structural growth driver, though attention is increasingly shiftingtoward the economic returns needed to sustain elevated investment.

‍

Executive Summary

The investment backdrop remains highly sensitive to the path ofinterest rates and the dollar, creating meaningful dispersion across sectorsand individual companies. The team continues to favor businesses with recurringdemand, pricing power, and strong balance sheets, while maintaining a defensiveposture toward rate-sensitive areas such as early-stage biotech,housing-related consumer exposure, and leveraged businesses. At the same time,AI remains a powerful structural growth theme, though attention is increasinglyshifting toward the economic returns required to sustain elevatedinfrastructure spending. Across portfolios, disciplined stock selection andbalanced positioning remain critical as the team evaluates opportunities acrossmultiple macro scenarios.

‍

Sector Perspectives — Takeaways

Technology

Technology fundamentals remain broadly resilient, but the sustainability and economics of AI infrastructure spending are becoming increasingly important to the investment debate.

• Software companiesgenerally have manageable currency exposure and relatively low capitalintensity, limiting direct sensitivity to higher rates.
• Semiconductor companies remain heavily influenced by AI infrastructure demand and are increasingly trading as a group when investors reassess valuations or capital spending expectations.
• The central question is shifting toward whether large AI customers can generate sufficient economic returns on current infrastructure spending, making future disclosures from major AI platforms important indicators of cycle durability.

FInancials

The outlook for financials depends less on the absolute level of rates than on the shape of the yield curve and the broader risk environment, reinforcing the team’s balanced positioning.

• A higher long-termrate/weaker-dollar scenario could favor fintech, alternative asset managers, and selectvalue-oriented financial companies.
• A more hawkish Federal Reserve and higher short-end rate environment would weigh more heavily on commercial real estate and other rate-sensitive businesses, though share-price reactions to recent rate moves have been notably more muted than in 2022–2023, and banks have generally held up better than the stereotype implies.
• Portfolio construction remains intentionally balanced across real estate, fintech, alternative asset management, and brokerage exposures to avoid making a concentrated macro bet.

Industrials & Infrastructure

Quality industrial businesses with recurring demand, pricing power, and underlevered balance sheets remain preferred as higher rates pressure more cyclical and housing-sensitive areas.

• Waste businesses stand out defensively, supported by the least revenue variability in the group, non-exportable oligopoly market structures, and margins that more than compensate for relatively high capital intensity.
• Housing-related businesses remain vulnerable as elevated mortgage rates reduce turnover and remodeling activity, while for engineering and construction the greater concern is multiple contraction rather than end demand.
• Select niche industrial companies continue to screen well given strong pricing power, healthy balance sheets, and diversified end-market exposure.

Consumer

Consumer fundamentals remain mixed, with healthy underlying demand offset by pressure from higher rates, import costs, and sensitivity in big-ticket spending.

• Housing-linked businesses remain among the most exposed as higher financing costs weigh on remodeling and discretionary project activity.
• A weaker dollarcreates additional pressure for import-heavy businesses, particularly wherecompanies have limited ability to pass rising costs through quickly.
• Defensive businesseswith contractual pricing, recurring demand, and low leverage remain preferredas consumer-sector performance continues to lag the broader market.

Health Care

Healthcare remains relatively defensive at the demand level, though higher rates create meaningful dispersion between profitable commercial businesses and capital-dependent early-stage biotechnology companies.

• The portfolios remain tilted toward commercial, profitable, or near-profitable healthcare companies, limiting exposure to the most rate-sensitive areas of biotechnology.
• Earlier-stagebiotech remains the primary vulnerability in a rapid rate shock, as companieswith greater external funding requirements face higher capital costs.
• Biopharma M&Aremains an important structural support as large pharmaceutical companies lookto replenish pipelines ahead of the 2028–2031 patent-cliff period, potentiallyoffsetting some financing pressure from higher rates.

‍

Key Macro Trends

• Higher Rates Are Multi-Dimensional: The investment implications depend heavily on whether higher rates are driven by long-end inflation expectations or by a hawkish Fed, and on whether the backdrop is risk-on or risk-off.
• Defensive Quality Matters: Recurring revenue, contractual pricing, low leverage, and resilient end-market demand are becoming increasingly valuable portfolio characteristics.
• AI Economics Under the Microscope: The AI infrastructure cycle remains intact, but investors are increasingly focused on whether unprecedented capital spending can generate sustainable returns.
• Currency Creates Sector Dispersion: Aweaker dollar can benefit exporters and companies with foreign revenues whilepressuring import-dependent consumer and distribution businesses.‍
• Capital Availability Remains Selective: Higher rates increase financing sensitivity for early-stage biotech and more leveraged businesses, while well-capitalized companies may gain strategic flexibility. Capital access for AI infrastructure spending has so far remained ample; the more relevant debate is whether that spending earns an adequate return.

‍

The Bottom Line

The current environmentreinforces the value of scenario-based investing rather than making broaddirectional macro bets. Higher rates and a weaker dollar can create verydifferent winners and losers depending on the yield curve, balance-sheetstructure, pricing power, and capital needs of individual companies. Againstthis backdrop, the team remains focused on high-quality small and mid capbusinesses with durable demand and financial flexibility, while remainingselective in more rate-sensitive areas such as early-stage biotechnology,housing-related consumer exposure, and highly valued AI beneficiaries. As macrouncertainty persists, disciplined fundamental research and thoughtful portfoliobalance remain central to identifying opportunities and risks beneath themarket surface.

‍