CC&L Financial Group Ltd.

Since taking office in January, the Trump administration has attacked the wind and solar energy industry. It withdrew the United States from the Paris climate agreement and rolled back the Inflation Reduction Act (IRA).

President Donald Trump took swift action on the first day of his second term. He paused federal permits and leasing for onshore and offshore wind projects and ordered a review of existing leases. On April 17, he went even further and blocked work on a wind project already in progress off the shores of New York State.

This is not a new direction for President Trump.

In January 2018, the first Trump administration put a 30% tariff on solar panel imports. Despite the challenges, the federal Investment Tax Credit (ITC) remained in place and the solar energy industry continued to grow. However, amid much confusion in the tariff announcements and rollbacks of the last few weeks, solar cells were not exempted from US tariffs and are now subject to tariffs that range from 50% to 3,521%. If we add the 25% tariffs on steel and aluminum imports, the cost of installing solar energy has increased dramatically.

Why is this important?

In the last two decades, the growth in both US oil and gas production and in renewables made the United States an energy superpower that enjoyed a competitive advantage over most countries.

Electricity prices for enterprises worldwide in March 2024, by country (in USD per kilowatt-hour)

UK	0.52	Mexico	0.19
Italy	0.43	Canada	0.14
Singapore	0.32	India	0.12
Japan	0.19	Brazil	0.11
France	0.18	China	0.09
USA	0.14

Source: Statista

However, in the last few years, with the reduction in costs for solar and wind energy, the cheapest additional kilowatt of electricity is wind-powered, closely followed by solar (taking into account capital cost, operating costs and efficiency). The advantage the United States is currently enjoying will disappear fast and become a disadvantage by 2035 – possibly before.

It is already a major disadvantage compared to China.

While the United States backtracks, China is accelerating, installing more wind and solar power last year than ever before. The nation built capacity for 357 gigawatts (GW) of solar and wind power generation, a 45% and 18% respective increase over what was operating at the end of 2023, according to China’s National Energy Administration. That is equivalent to building 357 full-sized nuclear plants in one year.

The United States also had a record clean energy installation in 2024, supporting millions of jobs. Although less than China, it built capacity for 268 GW of solar and wind energy, according to preliminary numbers from the American Clean Power Association.

With the restrictive legislation put in place by the administration, the impact of tariffs, the complexity of multiple jurisdictions, as well as multiple grid operators with complex interconnections, the cost to install a GW of solar or wind power in the United States is now among the highest in the world: twice that of the UK or Germany and over 400% more than in China.

As the share of renewables in total electricity generation increases, the United States will soon face some of the highest electricity costs in the world. This, at a time when demand is increasing significantly – driven by AI, data centres, warming temperatures, etc. – will prove to be costly.

Let us examine how various countries and region are investing in renewables:

Europe

The Ukraine war was an enormous shock for Europe. About a quarter of the energy Europe consumes comes from natural gas and before the Ukraine war, much of that gas came from Russia. Europe needed a new source of gas quickly. It built LNG terminals and increased its imports from the United States, Norway and Qatar. As a result, Russia’s natural gas now accounts for less than 12% of Europe’s imports.

High energy prices pushed Europe to accelerate the green transition. Renewables doubled as a share of EU energy consumption from 2004 to 2022 but still accounted for only about 20% of total consumption.

In 2023, the EU increased its 2030 target for renewable energy from 32% (set in 2018) to 42.5%. By easing regulations surrounding new projects, it should reach that target ahead of the deadline.

EU countries invested over €110 billion in renewable energy generation in 2023 – ten times more money than it invested in fossil fuels. The EU wants to end its dependence on foreign sources.

Investment in the energy transition ($ billion), by region

Source: Bloomberg NEF. From 2020, grid investments are added.

Solar power is booming in Asia and Europe
Total installed solar power capacity

Source: IRENA 2024

What about China?

Clean energy contributed a record 10% of China’s GDP in 2024, represented 40% of the economic growth in China and overtook real estate sales and agriculture in value. China’s 2024 investment in clean energy alone was close to the global total invested in fossil fuel and was similar in size to Saudi Arabia’s entire economy.

China’s investment in solar power capacity has risen 10-fold in five years
Value of investments in new clean power capacity, billion yuan

Source: CREA analysis for Carbon Brief.

Solar and other clean energy sources have gone global in the past decade. In 2010–2015, 70% of solar and 50% of global wind installation occurred in developed economies. By 2023, these proportions had fallen to just over 20%. The United States now represents only 7% of the global market for newly installed solar power plants. The EU is around 12% while the rest of developed economies is around 47%.

The United States has imposed tariffs on imports from China for a long time. As a result, most of the United States’ clean energy supply now comes from Southeast Asia which was just imposed new tariffs of up to 3,521%. Only 4% of China’s total exports of solar power and wind power equipment and electric vehicles (EVs) go to the United States. Almost half of China’s export of clean energy products now go the Global South.

So, despite what looks like a step backward in the United States, the rest of the world is moving on.

According to the IEA (International Energy Agency), global renewable electricity generation is forecast to climb to over 17,000 TWh by 2030, an increase of almost 90% from 2023. This is more than the combined total power demand of China and the United States projected for 2030. Over the next six years, several renewable energy milestones are expected:

In 2024, solar and wind generation together surpassed hydropower generation.
In 2025, renewables-based electricity generation overtakes coal-fired.
In 2026, wind and solar power both surpass nuclear.
In 2027, solar electricity generation surpasses wind.
In 2029, solar electricity generation surpasses hydropower and becomes the largest renewable power source.
In 2030, wind-based generation surpasses hydropower.
In 2030, renewable energy sources are used for 46% of global electricity generation.

How do Global Alpha portfolios participate in the clean energy boom?

Over the last fifteen years, Global Alpha has always had investments that benefit from the growth of renewable energy. We have written numerous weekly commentaries on the topic and our exposure, all of which are available on our website under the Insights tab. Below are a few of our current holdings.

Ormat Technologies Inc. (ORA US) is a holding in our Global, International and Global Sustainable funds and has been profiled numerous times in our weeklies. Ormat is a global leader in geothermal power, recovered energy and solar energy, as well as energy storage solutions.

Nexans S.A. (NEX FR), a holding in our international small cap portfolio, is a leading global player in sustainable electrification, supplying high-voltage transmission cables.

Nextracker Inc. (NEX US) is a holding in our global sustainable small cap portfolio and is a global leader in intelligent, integrated solar tracker and software solutions used in utility-scale and distributed generation solar projects.

Mentioned earlier, the Global South and emerging markets are now the fastest growers in the renewable energy market. In our emerging market small cap portfolio, we own many companies benefiting from that growth.

One example is Cenergy Holdings S.A. (CENER GR). Cenergy is a global leader in energy transmission infrastructure, and a competitor of Nexans, highlighting the synergies between our research analysts and opportunities created by our thematic overlay.

MENA equity markets ended the first quarter of 2025 with returns of 2.7% (for the S&P Pan Arab Index Net Total Return) broadly in line with the MSCI Emerging Markets Index which was up 2.9% in the same period.

While index-level returns were healthy in the first quarter, they were flattered by rather aggressive buying in large cap Saudi stocks (the largest member country in the index) in the four days leading up to the Eid holidays (close of March 27). In fact, 1.9% of the 2.7% gains for S&P Pan Arab Index in the quarter occurred in those four days of trading. Underlying trends in the Saudi market were far less encouraging, with 169 of 246 stocks in the Tadawul All Share Index posting a negative quarterly return amidst significant underperformance from midcap stocks (MSCI Saudi Midcap Index -4.0% in the quarter).

Uncharacteristically, it was the smaller Kuwait market that stood out in the quarter, with the MSCI Kuwait Index up 11.4%. After nearly a year’s wait, the country’s reform program is beginning to take shape, with the cabinet approving the long-awaited debt law that is counted on to unlock a significant proportion of the financing required for a much-needed infrastructure spending program. The approval of the debt law also paves the way for the new mortgage law, which is expected imminently. The mortgage law creates a new market estimated at $65 billion (source: Bloomberg) which allows banks – for the first time – to offer mortgages. Kuwaiti banks are obvious beneficiaries as they are sitting on significant excess capital which can be deployed in attractive risk-adjusted assets in corporate lending (infrastructure spending), government bonds (via the debt law) and mortgages.

Another (even smaller) market that performed positively in the quarter is Morocco. The MASI Free Float Index was up a remarkable 25.6% in the quarter, although its impact on the regional index is limited due to its small size. The market was supported by a one-off 5% tax amnesty that brought almost $10 billion worth of assets and cash (from Morocco’s large grey economy) into the banking system and the equity market. Interestingly, this also resulted in a doubling of retail investor participation from the historical average of 12-15% to over 30% year-to-date ending March. The market was further bolstered by a policy rate cut of 25 bps which catalysed further flows into equities. Moroccan institutions have limited options to deploy capital outside of their local capital markets and as a result exhibit high-interest rate sensitivity that manifests itself in visible and sometimes aggressive shifts between equities and bonds.

Looking forward, the investment outlook has been muddied by the ongoing escalation and volatility in US trade policy. While the direct impact of tariffs on the region is limited, the indirect impact is significant and captured primarily by the weak oil price. Cracks in the OPEC+ alliance are also beginning to appear, which, together with slower global trade, cast a long shadow on the oil price outlook. While there are varying degrees of sensitivity to the oil price in the region, a sustained low oil price (in the low $60s on Brent) is invariably negative. Fortunately, the region’s countercyclical buffers are plentiful and can absorb the fiscal and current account pressures of a lower-for-longer oil price environment.

The region’s geopolitical position also appears robust and highly relevant, which puts it in a good position (relative to other regions) to weather the fallout from the rising tensions in Sino-American relations. The end of the multi-year USD bull run is another factor to consider; increasing openness to foreign portfolio investors and the USD peg increased the share of the region’s ex-US capital inflows in the last decade or so. Insofar as USD bearishness is coupled with a weaker oil price (as is the case now), the region’s share of global inflows is likely to decline in % terms. This, of course, would be the opposite for the smaller oil-importing markets in MENA like Egypt and Morocco, where a weak USD and a lower oil price sets up an accommodative environment for fiscal and monetary conditions, and ultimately asset prices.

While we have a view on macroeconomics, that is certainly not our investment edge and therefore not a tool we count on for making major investment decisions. As we’ve articulated in previous letters, our edge comes from having a deep understanding of the companies we invest in. This understanding is critical in our ability to determine the impact that macroeconomic changes have on the earning power of our companies.

Crucially, this knowledge is leveraged in our valuation framework and gives us a good (and historically reliable) barometer of when our companies are under or over-valued by the market. As stated in previous letters, valuations are the ultimate determinant of our capital allocation reflexivity and is a key tool we rely on in making investment decisions. This has served us well year to date as it reduced the portfolio’s exposure to areas where the market was not prepared for any bad news, and subsequently increased exposure to areas where good news was not needed for outperformance.

As a result, we find ourselves in a strong position where the portfolio generates a dividend yield that is nearly the same level as the index (~4%) and trades at comparable multiples on a P/CF basis (~7x), but with vastly superior fundamentals (captured in an ROE of 18%, which is 500 bps over the index average). The portfolio is sitting on a healthy level of cash which puts us in a good position to make surgical and incremental bets when we deem that the market has overreacted (negatively) on stocks where earning power remains relatively intact. The environment remains fluid and volatile, but our barometer is beginning to signal pockets of under-valuation that we aim to take advantage of in the coming period.

We look forward to continuing to update you on the strategy in the next letter.

The strategy focuses on investing in frontier and emerging market companies that our team expects will benefit from demographic trends, changing consumer behaviour, policy and regulatory reform and technological advancements.

Below, we explore several key factors that influenced returns during the first quarter of 2025 and share observations on the portfolio and the markets.

Internet and technology portfolio

The portfolio’s investments in the internet and technology sector led returns in the first quarter of the year. This was driven by Fawry for Banking Technology & Payments S.A.E. (FWRY EG), the Egyptian payments company. Fawry’s strong execution over the past few years culminated in a record 2024, with revenue and operating profit growing 68% and 160% y-o-y respectively. The value of the payments ecosystem that Fawry’s management team developed over the last few years is now being validated by strong financial results, to which the market is reacting positively. While Fawry’s multi-faceted suite of products, services and business verticals is admittedly complicated to grasp for investors, we believe it is also a source of competitive advantage. Fawry is scaled across several use cases and has a large balance sheet that gives it an advantage in a market with high interest rates and tight liquidity. The company’s ability to leverage technology and deep local expertise to provide their customers (merchants and consumers) with several financial products and services in a seamless online/offline environment is still understated by the market, in our opinion.

The portfolio experienced positive returns from our investment in Allegro.eu S.A. (ALE PW), the leading Polish e-commerce company. Allegro posted a strong fourth quarter results report which included a confident medium-term guide, and a capital allocation policy that was both thoughtful and ahead of the market’s expectations. Allegro also announced a new CEO who, unlike his predecessors, is a native of Poland and comes with 25 years of relevant experience in that market – our preference is always for local talent to lead a company we own if that talent is available. Allegro is the most polarising stock in our portfolio with enough fodder for the bulls and the bears to make a credible case. The recent positive developments contribute to a partial de-risking of the investment thesis and with it, the dial moves closer to the bull camp in which we are situated.

The portfolio’s largest drag in the quarter came from our long-held investment in FPT Corporation (FPT HM), the Vietnamese IT services company. Entering 2025, FPT was the portfolio’s third largest holding (~6% of AUM). We recognised early on in the year that we had too much exposure to a company we liked but with a stock that was becoming increasingly difficult to justify owning as much of, having run up ~150% in USD terms since January 2023. We also began to notice some cracks in the AI universe with Nvidia’s shares beginning to roll over in mid-January and we were well aware that a big part of the multiple expansion in FPT’s shares last year is explained by the company’s proximity to the AI theme.

Putting all that together, we began selling the stock in the first week of February and did another round of selling in mid-March. The selling, while preventing a larger negative impact on the portfolio, was not sufficient to protect the portfolio from a reasonable bps drawdown from the balance of the shares we decided to hold onto in the quarter. While Vietnam has been in the news for the all wrong (tariff) reasons as of late, we have determined that FPT’s service-based business and diversified geographical exposure (including a strong presence in Japan, where the company is long an appreciating JPY) will mean that its earning power remains relatively intact, and that the valuation on the shares we decided to hold onto are now reasonable.

A major highlight from the quarter in the internet and technology portfolio was our decision to finally exit from Kaspi.Kz (KSPI.KZ US), Kazakhstan’s super-app and a truly incredible business. We’ve owned Kaspi since its early days as a London-listed company and continued to own it (in different percentages) through the turbulence in the country in January 2022, to its listing on the Nasdaq in January 2024, and until our eventual full exit early this year.

We were the first foreign investors to visit Almaty and meet with Kaspi in its HQ (according to the company) after the unrest that toppled the regime of Nursultan Nazarbayev in 2022 and have spent considerable time and resources to understand the ins and outs of the business. At this point, we believe that Kaspi will experience slower growth in its home market as it exhausts its ability to monetise its well-penetrated userbase, while digesting an increase in the cost of capital that is essential for the profitability of its lending business. Kaspi’s decision to enter the Turkish market, by way of acquiring Hepsiburada.com, is strategically sound and we will certainly not bet against Kaspi’s management to turn this into a successful venture. However, a slowing home market in Kazakhstan and a competitive and new market in Turkey might prove to be (at least in the short term) too much for even Kaspi to manage. As a result, we chose to watch from the sidelines, hoping to get a chance to re-enter the stock (which is reasonably lower than our exit price now), but pleased with the results of our investment since we acquired our first shares.

Financials portfolio

The financials portfolio was the second largest contributor to returns in the quarter. Our investment in Boursa Kuwait Securities Co. (BOURSA KW), the owner and operator of the Kuwait Stock Exchange and the Kuwait Clearing Company, delivered solid returns. Boursa’s natural monopoly position and its embedded operating leverage to the country’s banking sector market capitalisation and average daily traded value makes it a very good proxy for Kuwait’s reform story. After nearly a year’s wait, the country’s reform program is beginning to take shape with the cabinet approving the long-awaited debt law that is counted on to unlock a significant proportion of the financing required for a much-needed infrastructure spending program. The approval of the debt law also paves the way for the new mortgage law, which is expected imminently. These are very positive developments for Boursa via the prospect of new products being introduced in the market (e.g., fixed income trading and margin lending) and is supportive for valuations and trading activity in the stock exchange (YTD value traded ending March is up over 30%).

On the other hand, the portfolio experienced a drag from our investment in Indonesia’s Bank Syariah Indonesia Tbk Pt (BRIS ID). BRIS is a state-owned entity that has been forged through the merger of Indonesia’s three largest Islamic banks in the country back in 2021. The bank is the largest player in the Islamic financing market with over 40% market share. Indonesia is home to the largest Muslim population in the world (along with Pakistan) and so BRIS has a natural right-to-win in that market. Of course, much rests on management’s ability to execute on its strategy of building a market-leading banking proposition so that they can gain share from the dominant conventional banks in the country (BRIS’ share of the total system assets is only ~6%). We bought BRIS shares last year as we became familiar with their strategy and appreciated the clarity with which they articulated it. We also noticed that there was a visible increase in profitability with return on equity increasing by nearly 400 bps between 2021 and 2024 (to 16.4%) and concluded that there is still another 400 bps of improvement in the next three years that management can deliver that the market did not fully appreciate.

Unfortunately, the Indonesian market had a difficult quarter with the Jakarta Composite Index down 10.3% in USD. Concerns about the country’s political and economic direction weighed on the market and on sentiment. These concerns are valid; the new administration embarked on a series of big projects, including the implementation of a new sovereign wealth fund (Danantara), changes to the 2004 military law (allowing military officers to serve on boards of state-owned companies), and the rollout of the President’s flagship ambitious and fiscally burdensome free school meal program.

Fortunately, the final shape of these initiatives seems to be much better than the market feared. For example, concerns on who would run the new sovereign wealth fund were dispelled quickly when a credible team composed of technocrats and business-friendly professionals was announced. There was also some relief from the details of the appointment of an advisory board that includes the 6^th and 7^th presidents of Indonesia (especially the popular Jokowi), and an advisory council that includes the likes of Ray Dalio and Jeffery Sachs. We see a lot of value in Indonesia at the moment and are sticking with our investments in that market with a potential to increase our investment as the dust settles, including in BRIS.

Healthcare and education portfolio

The weakness in the ASEAN markets in the first quarter was particularly visible in the negative price action experienced in our healthcare and education portfolio. In Thailand, the portfolio experienced a large drawdown in the shares of Singapore International School Bangkok PCL (SISB BK), the operator of K-12 schools that teaches the Singaporean curriculum to over 4,500 students in six locations in and around Bangkok. SISB is a founder-led business that has built a small (in public listed company terms; the company made $25 million net income in the last 12 months) but successful business. It has operating and free cash flow margins in excess of 30% and a healthy return on invested capital of 23%. SISB is a small-/mid-cap Thai stock and so was implicated in the weak sentiment around the market (FTSE Small Cap Thailand is down 30% from September 30, 2024 to March 31, 2025).

SISB built a strong international student base (~30% international) and since Covid-19 received a large influx of students from China. This proved to be a double-edged sword in 2025 as news of the abduction of a Chinese actor in Thailand spread like wildfire on social media, culminating in a sharp decline in tourism from China and raising safety concerns among Chinese nationals living in the country. While SISB’s business is intrinsically defensive, the link to China via its student body (which we gather is about 20%) meant the stock was caught up in the fallout of the news. SISB did see some Chinese students leave, but we believe the market had overly punished the stock for its exposure to that market. We have been in communication with SISB’s CEO and met him in Bangkok in February. Our conclusion is that some of the pressure they are seeing (on the business and the shares) will be temporary as they digest the impact of the China exposure.

Outlook

Looking forward, the investment outlook has been muddied by the ongoing escalation and volatility in US trade policy. From a portfolio standpoint, our direct exposure to tariffs is limited. We estimate that 85% of the portfolio is invested in service-based industries, 9% in product-based, and the rest in cash. Across the portfolio, 87% is invested in companies that make no money outside of their core region. At a country level, nearly half the fund is in countries that were not named in the first tariff announcement. Of course, we are well aware of second-round effects on our companies’ fundamentals from slowing global trade which can come in the form of lower disposable incomes, lower oil prices (on our Middle East portfolio specifically) and a lower wealth effect across the board. We also know (from experience) that markets dislocate and that prices can deviate significantly from intrinsic values. This is especially true now as long-held assumptions about world-order and the established American role in it are being questioned.

On the other hand, as with any crisis, there will be opportunities. We cannot help but feel bullish about the implication of a weak US dollar and the prospect of an end to US exceptionalism. We see a lot of value in our markets today and believe there is a scenario where the current dynamics can favour certain countries and companies that we believe the strategy is over-indexed to.

We look forward to updating you on the strategy in the next letter.

Global monetary trends suggest demand support for economic activity in late 2025 / early 2026. Such support could offset the negative impact of the US trade policy shock. Growth could bounce back solidly should tariffs be scaled back.

Global (i.e. G7 plus E7) six-month real narrow money momentum is estimated to have risen further in March, reaching its highest level since August 2021, based on monetary data for countries accounting for three-quarters of the aggregate. Nominal money growth appears to have ticked up in March while six-month consumer price momentum slowed – see chart 1.

Chart 1

A fall in global real money momentum between June and October 2024 was expected here to be reflected in an economic slowdown in spring / summer 2025 – chart 2. The US policy shock, therefore, is occurring at an inopportune time, threatening a much more serious downturn.

Chart 2

Real money reacceleration since late 2024, however, suggests a short, sharp hit to economic activity rather than a sustained recession. A recovery in domestic demand could outweigh net export weakness by late 2025, particularly if the tariff regime that eventually emerges is less onerous than currently feared, or at least allows businesses to plan with less uncertainty.

The estimated March rise in global six-month real narrow money momentum was driven by China and India, with the US little changed and Japanese weakness becoming more extreme – chart 3. (Eurozone and UK March numbers will be released next week.)

Chart 3

Could the monetary pick-up reverse? US broad – and possibly narrow – money growth has been supported by an enforced run-down of the Treasury’s cash balance at the Fed, which will be rebuilt if / when agreement on lifting the debt ceiling is reached.

Tariffs will have a temporary impact on CPI numbers, squeezing real money momentum. Still, effects should be small outside the US and offset by recent weakness in energy prices.

The trade shock, meanwhile, is resulting in faster monetary policy easing outside the US, reflecting both economic fears and US dollar weakness.

Prospective influences, therefore, are mixed and a further rise in global real money momentum appears as likely as a relapse.

The end of “US exceptionalism” as an investment narrative, the value on offer in EM, and the potential for these maligned markets to enter a virtuous circle of performance are themes that we have been banging on about for months now.

While the unwinding of the “Trump trade” was in keeping with our outlook published to investors in past months, we clearly did not anticipate how the chaotic imposition of tariffs on “Liberation Day” would serve as such a potent accelerant.

This was a radical outcome

Markets expected a gradual and predictable rollout of tariff measures, but what we got was random and unpredictable. The economic fallout, should the 90-day tariff reprieve fail to yield de-escalation, will hit the United States harder than most other countries as the affected share of GDP is much higher. US goods imports alone are equivalent to c.11.5% of US GDP versus total bilateral trade (exports plus imports) with the US of 3.5–5.5% of respective GDPs in Japan, Europe and China.

Exports plus imports of goods as % of GDP
US – total, others – bilateral with US

Source: NS Partners and LSEG Datastream.

Unless there is a dramatic reversal, a return to protectionism threatens a supply shock in the United States, which will drive the price of many things higher and create shortages for many basic goods. This will be destructive for demand and ultimately deflationary unless the Fed accommodates the shock by increasing the money supply.

What is the tariff endgame?

Is President Trump willing to risk a financial crisis in the pursuit of reindustrialising America? Or is this all in the “Art of the Deal,” a negotiating tactic designed to secure better trade terms? Or is it about completely decoupling from and isolating China?

Uncertainty over the outcome sought, the potential fallout from American businesses pausing investment and consumers reining in spending are undermining sentiment for all US assets.

The soft economic underbelly of the United States is being exposed. Liberation Day saw the dollar falling along with bond and equity markets. This is how emerging markets are meant to behave on political risks spiking, and not the global market safe haven.

If Trump truly seeks a dramatic reduction in the US trade deficit, this will be accompanied by a reduction in the capital account surplus, meaning that foreign investors do not need to buy the same quantum of US assets as before.

The trouble is that a falling capital account surplus as foreigners repatriate funds (or simply invest less in US assets) puts upward pressure on government bond yields. It was persistent demand for US Treasuries irrespective of the fiscal profligacy of the government that allowed it to build up a debt pile of $36 trillion, with $9 trillion of that due to be refinanced this year.

So President Trump wants a weaker dollar to boost domestic manufacturers, but what to do about yields? The most simple solution will be financial repression, by forcing domestic financial institutions to increase their holdings of US Treasuries. Where do the funds come from for these purchases – from selling US equities perhaps?

The damage is done

Course corrections were inevitable. As former President Clinton’s political advisor James Carville famously said:

“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”

President Trump backed down in the face of spiking bond yields with his 90-day tariff pause to everyone but China, but it is likely that damage has been done here that cannot be undone.

We may be in the early innings of a broader secular shift in markets. Our economist Simon Ward has asked whether this will be similar in magnitude to the dollar bear market sparked by President Nixon’s suspension of gold convertibility and imposition of tariffs in 1971.

While this could signal a rocky period ahead for US equities, a falling dollar flushes emerging markets with managed currency regimes with liquidity and allows central banks to cut rates.

Historically, this has been a good signal and driver of EM outperformance.

EM relative performance and USD

Source: NS Partners and LSEG Datastream.

Expect some unsettling trade headlines in the months ahead, but things could start to get very interesting for emerging markets fuelled by a falling dollar.

Portfolio strategy notes

High level

Tariffs will be deflationary if central banks do not accommodate them – see Smoot-Hawley tariffs in the 1930s which were massively deflationary. Compare and contrast the inflationary oil price shock in 1973 where the central bank accommodated, and the second oil price shock in 1979 which was not inflationary as the Fed under Volcker kept monetary policy tight. We do not expect Powell to accommodate.

It is likely that this will be a very deflationary event for the rest of the world as supply is diverted from the United States elsewhere resulting in downward pressure on rates.

We were already relatively defensively positioned as money trends were suggesting a Q2/Q3 economic slowdown before trade war shock – this will be negative for US growth. Our expectation is for a short, sharp economic shock, but not a crisis (based on our cycles analysis).

Strategy

Inflation boost from tariffs expected to be small/temporary – monetary backdrop still disinflationary
Relative money trends positive for China/EM
Excess money backdrop neutral/negative
Favour more defensive exposure – underweight oil and commodities
Favour interest rate sensitive countries and companies
Falling dollar beneficiaries
Highly cyclical markets downgraded – especially consumer cyclical exposure
Avoid exporters with high exposure to the United States
China consumer – stimulus to step up as tariff response

- The MSCI ACWI earnings revisions ratio plunged to a post-pandemic low in April, led by the Eurozone / US and materials / energy (see charts).
- Expectations in the New York / Philadelphia Fed manufacturing surveys and the German ZEW analysts’ survey have similarly crashed (see charts).
- However, Indeed job postings continue to decline gradually; ditto growth in US tax withholdings (see charts).
- Solid Chinese Q1 GDP growth reflected a large but unsustainable boost from net exports (see charts).
- Japanese core CPI inflation (global definition) remained below 2% (see charts).
- UK core CPI inflation undershot expectations while vacancies weakness contradicts a reported GDP pick-up (see charts).
- US equities have given up all their outperformance since end-2023 (see charts).

The MSCI All Country World Index earnings revisions ratio (12m forward earnings) fell to its lowest since May 2020 this month, suggesting that upcoming manufacturing PMI results will be very weak:

Chart 1 showing Global Manufacturing PMI New Ordes & MSCI ACWI Earnings Revisions Ratio (IBES, sa)

The monthly drop was entirely due to DM, with EM revisions holding up for now:

Chart 2 showing Earnings Revisions Ratios (IBES, sa)

The Eurozone was even weaker than the US (strong EUR); meanwhile, China held up and Japan may be starting to catch down:

Chart 3 showing Earnings Revisions Ratios (MSCI Indices, IBES, sa)

Materials, energy, industrials and consumer discretionary / staples were weakest; relative resilience of IT / communication services is at odds with YTD share price performance:

Chart 4 showing MSCI World Sector Earnings Revisions Ratios (IBES, sa)

Expectations crashed further in the NAHB homebuilders’ and New York / Philadelphia Fed manufacturing surveys, mirroring the previous week’s Michigan consumer survey:

Chart 5 showing US Economic Expectations (Z-scores)

The German ZEW analysts’ survey matched pessimism in the earlier Sentix survey, suggesting weak upcoming Ifo results:

Chart 6 showing Germany Economic Expectations (Z-scores)

Indeed job postings numbers still show generally moderate declines through the second week of April (exception: Germany):

Chart 7 showing Indeed Job Postings (% 3m)

Similarly, daily US tax withholdings have slowed but aren’t yet flashing red (source: taxtracking.com):

Chart 8 showing Recent Days: Withholding Growth

Note, though, that job postings and tax receipts are coincident not leading indicators.

Solid Chinese Q1 GDP growth reflected a large but unsustainable boost from net exports; however, a consumption revival is modestly hopeful:

Chart 9 showing China GDP (% yoy) & Demand Contributions (pp)

The authorities have used USD weakness to depreciate vs. the basket:

Chart 10 showing China CFETS RMB Index & USDCNY (inverted)

Japanese core CPI inflation (global definition) remained comfortably below 2%, with monetary weakness / yen strength suggesting a coming decline:

Chart 11 showing Japan Consumer Prices (% yoy)

The Q2 Eurozone bank lending survey was slightly less upbeat, suggesting that six-month loan momentum will stabilise or pull back:

Chart 12 showing Eurozone Bank Loans to Private Sector (% 6m) & ECB Bank Lending Survey Credit Demand & Supply Indicators* *Average of Balances across Loan Categories

UK core CPI inflation undershot expectations, supporting a May rate cut before release of key April numbers:

Chart 13 showing UK Consumer Prices (% yoy)

Private earnings momentum cooled but the more timely PAYE proxy suggests stickiness:

Chart 14 showing UK Private Average Weekly Regular Earnings (% 3m / 3m annualised)

The decline in vacancies has reaccelerated, contradicting a reported GDP pick-up:

Chart 15 showing UK GDP / Gross Value Added & Vacancies* (% 3m) *Single Month, Own Seasonal Adjustment

The BoE credit conditions survey signals weaker housing / mortgage demand:

Chart 16 showing UK Mortgage Approvals for House Purchase (yoy change, 000s) & BoE CCS Future Demand for / Availability of Secured Credit to Households

US equities have given up all their outperformance since end-2023:

Chart 17 showing MSCI Prices Indices USD Terms, 31 December 2023 = 100

EM ex China catch-up ahead?

Growth / quality fell back – value / yield remain defensive for now:

Chart 18 showing MSCI World Style Indices Relative to MSCI World, 31 December 2024 = 100

A cyclical forecasting framework implies that current economic events will contain echoes of developments at the same stage of previous cycles.

Similarities should be more pronounced at around 18- and particularly 54-year frequencies, corresponding to average lengths of the housing and Kondratyev inflation cycles respectively.

A previous post noted the similarity of Fed tightening episodes in 1967-69 and 2022-23. The Fed funds rate (month average) rose from peak to trough by 540 bp and 530 bp respectively, topping in August 1969 and August 2023, exactly 54 years later – see chart 1.

Chart 1

The US economy entered a recession at the end of 1969. GDP was recovering by Q2 1970 but suffered a second hit from a prolonged auto strike.

The Fed cut rates much more aggressively than recently but reversed course temporarily from early 1971 as the economy rebounded strongly and inflation remained high. The current Fed pause has occurred at the same cycle time.

Inflation fell sharply into 1972, mirroring a big slowdown in broad money growth two years earlier. The Fed resumed easing later in 1971, with the funds rate reaching an ultimate low in February 1972.

A possible scenario is that President Trump’s tariff shock triggers the recession “missing” from the current cycle, causing the Fed to ease aggressively later in 2025, with rates and inflation falling to lows in 2026 corresponding to those reached in 1972.

US disruption to global economic relations is itself is strongly reminiscent of policy developments 54 years ago. In August 1971, President Nixon shocked trading partners by suspending convertibility of the dollar into gold within the Bretton Woods system while imposing a 10% tariff on imports.

The backdrop was a US balance of payments deficit and an accelerating loss of gold from US reserves. According to a Federal Reserve history of the period, President Nixon blamed the deficit “on unfair trading practices and other countries’ unwillingness to share the military burden of the Cold War”. Sound familiar?

The “Nixon shock” triggered a crisis, with global policy-makers fearing that “international monetary relations would collapse amid the uncertainty about exchange rates, the imminent spread of protectionism, and the looming prospects of a serious recession”.

The crisis was resolved, at least temporarily, by the December 1971 Smithsonian Agreement, involving trading partners agreeing to revalue their currencies against the dollar in return for the removal of tariffs. “The net effect was roughly a 10.7 percent average devaluation of the dollar against the other key currencies … Foreign nations also agreed to comply with Nixon’s request to lessen existing trade restrictions and to assume a greater share of the military burden.”

Could a revaluation of currencies against the dollar be part of a “deal” to end the current crisis, once President Trump comes to recognise that the economic costs of his high tariff policy greatly exceed any benefits?

The Nixon shock occurred with the real trade-weighted value of the dollar at a similar premium to its long-run average to today. The shock accelerated a secular decline into and beyond the following housing cycle trough – chart 2.

Chart 2

As the global economy contends with mounting climate-related losses – over USD600 billion in insured damages over the last two decades – the investment case for climate adaptation is gaining strength. From flooded subways in New York and burnt-out neighborhoods in California, to drought-stricken farms in Europe and storm-ravaged coastlines in Japan, major environmental disasters are no longer fodder for movies, and the costs to rebuild are no longer abstract.

In the United States alone, hurricane Milton and Helene in 2024 were amongst the costliest hurricanes in US history, at approximately USD35 billion and USD80 billion in damages respectively, while Canada’s wildfires in 2023 became the most expensive on record for the country, with damages surpassing $1 billion.

The future also holds a sobering reality: insurance claims are likely to rise in regions that were once considered “safe.” In fact, properties along Florida’s eroding shorelines are beginning to lose insurability altogether as entire homes inch closer to the sea with every storm surge. Meanwhile, infrastructure around the world faces the stress of extreme heat, intense rainfall and prolonged droughts, putting pressure on insurers, governments, and private capital to respond.

While mitigation (reducing emissions and overall environmental impact) remains essential, adaptation (making systems more resilient to the physical impacts of climate change) is emerging as an investable trend. For long-term investors, this shift presents an opportunity to capture growth, hedge risk, and align capital with real-world resilience.

Companies that help communities, infrastructure and ecosystems adapt to physical climate risks are unlocking new growth markets while also de-risking their operations and strengthening their long-term resilience. For investors, these businesses represent not only defensive plays but also strategic exposure to rising demand for resilient systems in sectors like water, energy, agriculture and construction.

At Global Alpha, we aim to capture these adaptation-driven opportunities across our small cap portfolio. Several of our holdings are actively contributing to building climate resilience from various angles including conservation, advisory services and infrastructure.

Valmont Industries Inc. (VMI US) offers advanced adaptation solutions for the agricultural sector. As climate change intensifies, the demand for efficient water management and resilient farming practices grows. Valmont’s innovative irrigation technologies, such as their Valley® centre pivots and remote monitoring systems, help farmers optimize water usage, enhance crop yields and reduce operational costs. These solutions not only support sustainable agriculture but also position Valmont as a key player in addressing the challenges posed by climate change.

Mueller Water Products Inc. (MWA US) develops smart water infrastructure, including leak detection and pressure management solutions. These technologies help cities reduce water loss, extend infrastructure lifespan, and ensure a stable supply of clean water – all essential in the face of increasing droughts and floods. By investing in smart water technologies, Mueller enables communities to make informed decisions and prioritize spending on critical assets, thereby enhancing resilience against climate-related challenges.

Montrose Environmental Group Inc. (MEG US) captures opportunities by providing end-to-end solutions for environmental risk management. From air and water quality monitoring to remediation and climate risk advisory, Montrose helps clients adapt operations to a changing climate. Their expertise in climate risk assessment and sustainability advisory helps clients navigate the complexities of climate adaptation, ensuring resilient and sustainable operations

Casella Waste Systems Inc. (CWST US) plays a critical role in climate adaptation by delivering resilient waste management and recycling services. From post-disaster clean-up to ensuring service continuity in rural and underserved areas, Casella helps communities recover quickly and maintain public health as climate-related events grow more frequent.

Rockwool A/S (ROCKB DC) supplies stone wool insulation that improves energy efficiency and helps buildings withstand extreme heat, fire and moisture. As the built environment faces growing physical risks, Rockwool’s products contribute directly to urban structural climate resilience.

Investors should consider these companies as part of a diversified portfolio aimed at capitalizing on the growing demand for climate adaptation solutions. By investing in firms that prioritize resilience, investors can not only mitigate risks but also drive sustainable growth and long-term value.

Monetary trends suggest that China’s economy is better placed to withstand tariff damage than Japan’s.

Chinese six-month real narrow money momentum rose further in March, reaching its highest level since August 2020. Japanese momentum moved deeper into contraction – see chart 1. (US March numbers will be released next week, with Eurozone / UK data the following week.)

Chart 1

Inflation divergence has contributed to the wide gap but it mainly reflects nominal money trends: Japanese narrow money is contracting even in nominal terms.

The Japanese fall is partly explained by money-holders switching out of sight deposits (included in narrow money) into time deposits (excluded), which now pay modest interest. Still, broad money trends are also weak: M3 grew by just 0.5% at an annualised rate in the six months to March. Broad money expansion has been dragged down by BoJ QT and a fall in bank lending to non-bank financial corporations.

By contrast, six-month growth of Chinese broad money – on the preferred definition here excluding deposits held by financial institutions – was stable in March at a level close to the 2015-19 average. This pace was associated with solid nominal GDP expansion – chart 2.

Chart 2

Broad money trends have been supported by PBoC and state bank purchases of government bonds issued to finance fiscal stimulus measures. In addition, six-month growth of bank lending has revived recently, despite a drag from debt swap operations (under which funds raised through bond issuance are used to repay bank loans of government-related entities).

Previous posts suggested that Japanese monetary weakness would be reflected in downside economic and inflation surprises. The composite PMI output index fell sharply last month, to well below levels in the US, Eurozone, UK and China.

Annual growth of scheduled earnings, meanwhile, undershot expectations in February. Inflation believers have been relying on a developing wage-price spiral but bumper headline pay awards in the spring Shunto may not be representative of trends across the whole economy – chart 3.

Chart 3

The stock market experienced significant volatility last week due to escalating trade tensions following President Donald Trump’s announcement of new tariffs aimed at reducing the US trade deficit. These tariffs were implemented on April 2, 2025 – a day referred to as “Liberation Day” – leading to widespread market reactions across developed markets globally.

The technology sector for both large and small caps were among the sectors most adversely affected during this period. Technology stocks faced substantial declines, with companies like Tesla and Nvidia experiencing drops of 36% and nearly 20% respectively, over a two-day span. Industrials and consumer discretionary also suffered notable losses, as companies within these industries are often sensitive to trade policies and global economic conditions.

In contrast, defensive sectors such as consumer staples, healthcare and utilities showed resilience. These sectors tend to be less sensitive to economic cycles and trade fluctuations, providing a buffer during periods of market volatility.

The new US tariffs could reduce global GDP growth by 50 bps, with a 100-150 bp drag on US growth, a 60 bp drag on Asian growth and a 40-60 bp drag on Euro-area growth. It is expected the US administration will negotiate country-specific comprehensive packages involving trade, defense, energy and immigration. The aim is de-escalation in the global trade war over the coming weeks and months, though negotiations with China will likely prove difficult, given the geopolitical tensions between the two countries.

Global Alpha will continue to monitor the effect of tariffs on the companies it is invested in. From supply chain to end consumer, the ripple effects are multi-factor dependent. Can production relocate? Is it a service or a good? Where are competitors located? Can the buyers absorb the price increase? And ultimately, what is the demand destruction?

The length of tariffs is also unknown as we recently saw with Vietnam which offered to remove tariffs less than 48 hours post Liberation Day. Nike re-couped half its losses on the announcement.

Presently, our largest exposure to tariffs is the aluminum company Alcoa Corp. (AA US) with 50% of its Canadian production destined to the United States with no real US substitution. The company estimates that a car price tag will increase by $1200 from aluminum alone. If tariffs persist, on-shoring plans could re-surge.

On-shoring will continue to accelerate whether tariff induced or not. Political tensions are only increasing and productivity will continue to rise and automate. In fact, we may be on the verge of one of the largest productivity gains in recent times through the realization of a theme society has dreamt of for a long time: humanoid robotics.

In our discussion with companies, we can start seeing mid- to near-term plans to use humanoid robots. Tesla’s development plans for the Optimus humanoid robot begins with progression of human-superior autonomous driving by Q4 2025 (sensorial decision making). Following that step would be the replication of that technology in humanoid robots. The first launches of the Optimus Robot in the logistics sector are planned for Q1 2026. With this plan, it is easy to imagine Mr. Musk telling President Trump that his industrial labour shortages will be solved in the mid-to-long term.

The global humanoid robot market size was valued at USD 2.4 billion in 2023 and is projected to grow from USD 3.3 billion in 2024 to USD 66.0 billion by 2032, exhibiting a CAGR of 45.5% during the forecast period. Asia Pacific dominated the humanoid robot market with a share of 42.0% in 2023.

The wheel-drive version (versus biped) segment held the highest market share of 65.6% in 2024 and an even higher market share in real-use cases; the biped is still in its infancy when addressing performance.

In 2022, Elon Musk suggested that the Optimus robot could eventually be priced at around $20,000 to $30,000 per unit when mass production begins. This price range is based on Musk’s vision for the robot to be affordable, allowing widespread adoption and possibly replacing some human labour in industries like manufacturing, logistics and even home use.

The Optimus robot is designed to resemble a human in both appearance and movement. It stands 5’8” tall (around 173 cm) and weighs about 125 lbs (approximately 57 kg).

Global Alpha is a shareholder of GXO Logistics Inc. (GXO US)

GXO is a global leader in supply chain solutions and logistics services. The company focuses on providing advanced logistics capabilities for customers across a variety of industries, including retail, e-commerce, consumer goods, automotive and technology. GXO operates with a strong emphasis on innovation and technology, aiming to enhance efficiency, optimize operations and improve customer service through automation, robotics and artificial intelligence.

Today, GXO is a leader in the implementation of traditional robots like autonomous mobile robots (AMRs) or robotic arms. However, the company is likely to continue exploring humanoid robots as the technology evolves.

Key areas of GXO:

Warehouse management: GXO operates large-scale, automated warehouses that utilize sophisticated technology to manage inventory, order fulfillment and distribution. This includes the use of robotics, AI and data analytics to improve efficiency and accuracy in managing supply chains.
E-commerce fulfillment: GXO specializes in providing logistics services for e-commerce companies, including fast order processing, picking, packing and last-mile delivery solutions.
Transportation and distribution: The company offers end-to-end transportation management services, optimizing routes and using data-driven systems to improve fuel efficiency, delivery time and cost-effectiveness.
Cold chain logistics: GXO also manages cold storage and temperature-sensitive goods, offering specialized logistics solutions for food, pharmaceuticals and other perishable products.

GXO is exploring humanoid robots for:

Assistive tasks in warehouses: Humanoid robots are being developed with the potential to assist in warehouses with tasks that require human-like dexterity and mobility. They could perform tasks like sorting, packaging and even delivering materials across different sections of a warehouse.
Customer service: Humanoid robots might also be used in customer-facing roles within logistics operations. For instance, they could assist with customer queries or provide support in retail environments where GXO provides fulfillment services.
Human-robot collaboration: GXO, like other companies in the logistics and supply chain sector, is likely to focus on robots that complement human workers rather than replace them entirely. Humanoid robots can be deployed in environments where human workers are still essential, but can be augmented by automation to handle repetitive or physically demanding tasks.

Global Alpha also owns Kerry Logistics Network Limited (636 HK)

Kerry Logistics is a Hong Kong-listed third-party logistics (3PL) provider offering a comprehensive range of supply-chain solutions. Their services include integrated logistics, international freight forwarding (air, ocean, road, rail and multimodal), industrial project logistics, cross-border e-commerce, last-mile fulfillment and infrastructure investment. With a presence in 59 countries and territories, Kerry Logistics has established a solid foothold in many of the world’s emerging markets.

Incorporating robotics into their operations has significantly enhanced Kerry Logistics’ efficiency and profitability. For instance, in 2023, they implemented the “KOOLBee” sorting robots across facilities in Hong Kong, Tianjin and Dongguan. These intelligent and flexible robots increased overall sorting productivity by 270%, enabling the company to meet the growing demands of fashion e-commerce fulfillment.

Additionally, in 2021, Kerry Logistics introduced “KOOLBotic” robotic arms dedicated to cold chain logistics in the food and beverage industry. These robotic arms improved sorting productivity by 20% and allowed operations to run 20-hour shifts in low-temperature environments, effectively reducing human contact during the pandemic.

By integrating such robotic solutions, Kerry Logistics has not only boosted operational efficiency but also enhanced its capacity to handle large volumes and meet customer expectations, thereby positively impacting profitability.

Although we are excited by the prospect of humanoid robots, the early stages of the technology keeps us from integrating their commercial viability in our financial assumptions. It is a question of “when,” not “if.” These themes continue to provide us with opportunities and earnings growth in our investment universe.