Decarbonization continues in parts of the world, although there is a long way to go. Ongoing use of coal amid rising energy demand somewhat negates the transition to natural gas and/or the implementation of carbon capture technologies. On average, coal-fired power plants emit about 2.2 to 2.5 tons of CO2 per megawatt-hour (MWh) of electricity produced. By contrast, natural gas-fired power plants emit about 0.4 to 0.5 tons of CO2 per MWh.

But the good news is that we are making strides in other areas. Consider green steel.

Traditional steelmaking emits approximately 3 billion tons of CO2, mostly from smelting which turns iron ore into steel. This process is very energy intensive and is a top-3 CO2 emitter, with electricity production at number one and cement number two. However, metallurgical processes to turn iron ore into steel are now converting from traditional furnace smelters, which emit 2 tons of CO2, to low-energy Electric Arc Furnaces (EAF), which emit 0.5 tons per ton of steel.

Historically, new metallurgical processes have been difficult to scale. Fortunately, the steel industry, as it moves towards greener production methods, has been borrowing proven technology from its aluminum counterparts. EAF today play a crucial role in the global steel industry, with around 2,500 to 3,000 units in operation and a combined capacity of approximately 500 to 600 million tons per year. The share of EAFs in global steel production is around 5% and growing, reflecting their expanding importance in the industry and in a (slowly) decarbonizing world.

Major steel-producing regions like North America, Europe, China, and India are enhancing their EAF capacities to improve sustainability and reduce carbon emissions. Recent EAF investments include Nucor, $2.7 billion for 3 million tons of steel in 2024, and Steel Dynamics, $1.9 billion for 3 million tons in 2024. Cleveland Cliff, Arcelor and Gerdau are also transforming to EAF.

Transforming the entire supply chain will produce green steel, which represents a transformative shift in the steel industry towards significantly reduced CO2 emissions and more sustainable practices. Key technologies in this greening process include hydrogen-based steelmaking, EAFs powered by renewable energy, and advanced methods like molten oxide electrolysis. While there are challenges, including high costs and technical feasibility, green steel holds promise for a more sustainable future in steel production.

One company benefiting from EAF is Australian-based iron ore producer Champion Minerals (CIA:AU). By acquiring a distressed Canadian asset from Cleveland Cliff in 2017, Champion revitalized the asset towards producing over 12 million tons of iron ore per year. This North American asset represents the main value of the company, as it has received over USD$4.8 billion of investments over the years from past and present owners. Its products receive a premium to market, justified by the quality of its iron ore.

Champion has multiple catalysts on the horizon. For example, they are adding transportation links to help reach nameplate production of 16 million tons, and start-up of its EAF material processing facility will soon commence. As well, any further steel tariffs on Chinese steel will help bolster demand for its production, particularly among the new EAF North American steel mills. Indeed, Champion expects its exports to China to decrease from 70% to 30% in the coming years as the firm switches to markets closer to home.

This client diversification has many positive implications for Champion, and savings on cross-ocean transit costs are worth the EAF investment alone. It is important to note that all the electricity used in Champion Minerals operations are from hydropower except for the mobile fleet. It is therefore a definite leader in green steel branding.

There are other methods of reducing CO2 emissions while producing steel. We own a small position in Aperam (Apam.NA), which produces steel from its facilities in Brazil, Belgium and France. Aperam was spun out of ArcelorMittal at the start of 2011. Their Brazilian facility uses charcoal from a series of eucalyptus forests owned and managed by the group, rather than coking coal. Their European facilities use EAF furnaces fed with scrap.

(EAF requires scrap steel, as it is does not work well with high contaminant iron ore. Producers of iron ore have adjusted and are now producing high-quality ore, as well as metal bars instead of contaminated iron powder.)

We are also exposed to EAF in other commodities, specifically copper. The copper market is 10 times smaller than steel, so CO2 headlines have been less prolific. Yet copper CO2 emissions are still fairly elevated, at 3 tons of CO2 per ton.

Aurubis AG (NDA.GY) is a leading global provider of non-ferrous metals, particularly copper, and it operates several key assets and facilities across the globe. The company’s assets include smelting and refining facilities in Germany, Bulgaria and Finland. The Helsinki and Luebeck facility are flash smelting furnaces, which emit around 1.5 to 2.5 tons of CO2 per ton of copper produced. This is lower compared to traditional furnaces. Aurubis also operates EAF facilities at different production sites.

Aurubis has leading recycling operations in Europe, especially for copper, and it is developing the copper recycling market in North America. The company recently opened a new smelting facility in Richmond, British Columbia.

The days of complete green steel are likely years away, but they are within view. We continue to follow developments in these areas so as to participate in important decarbonization investment themes going forward.

When global investors think of opportunities in Taiwan, the first thought that often comes to mind is its technology sector, particularly its world-leading semiconductor cluster. This tendency is understandable given that the semiconductor industry is a cornerstone of Taiwan’s economy, directly contributing more than 15% to the nation’s GDP. The relevance of the country’s semiconductor capabilities extends far beyond its borders. Taiwan produces over 60% of the world’s semiconductors, and more than 90% of the most advanced, leading-edge integrated circuits. Most of these advanced chips are manufactured by a single company – Taiwan Semiconductor Manufacturing Corporation (TSMC) – giving it a critical role in the global technology supply chain. From smartphones to most advanced AI accelerators, most of the tech advancements we see today would not be possible without the world leading foundry. Jensen Huang of Nvidia has repeatedly praised the indispensable role of TSMC in driving global innovation.

TSMC’s dominance has a significant influence on decisions of investors in emerging markets (EM). As of July 2024, TSMC accounted for 9.3% of the MSCI EM Index, while Taiwan as a whole made up 18.5%. Such concentration can pose challenges for investors who are trying to diversify their portfolios. Being heavily exposed to a single, cyclical company, even one as dominant as TSMC, can increase risk, especially during periods of high market volatility. This is where the benefits of small-cap equities come into play.

We believe that small-cap stocks offer a unique mix of growth potential and diversification. While the MSCI EM Index is heavily weighted toward large-cap tech giants like TSMC, Tencent, Samsung, Alibaba and SK Hynix, the MSCI EM Small Cap Index provides a more balanced exposure. As of July 2024, no single constituent represented more than 0.5% of the total weight. More than 350 companies from Taiwan accounted for 21.4% of the MSCI EM Small Cap Index. This broad distribution reduces the risk associated with any single company, making small-cap equities an attractive choice for those looking to diversify while still tapping into Taiwan’s economic strengths.

Nien Made is a perfect example of the opportunities available in Taiwan beyond the technology sector. Founded in 1974, Nien Made has become one of the world’s largest manufacturers of window coverings, including blinds, shutters and shades. The company has successfully harnessed Taiwan’s advanced manufacturing and commitment to innovation to maintain its global competitive edge. Nien Made has invested heavily in production automation, allowing the company to achieve significant cost efficiencies while upholding the highest quality standards. Nien Made has developed proprietary machines used in its production process, further enhancing its operational efficiency and product consistency. Another key factor in Nien Made’s success is its high level of vertical integration, with 90% of window covering components produced in-house.

Nien Made’s success is also driven by its strong portfolio of brands, each recognized for quality and innovation in the window coverings industry. The company’s flagship brands, including Norman and Veneta, cater to diverse market segments ranging from premium, custom-made products sold primarily through professional designers to more affordable, ready-made options available at big-box retailers like Home Depot and Walmart. These brands have helped Nien Made establish a significant presence in markets across North America, Europe and Asia. Operations outside of Taiwan account for more than 95% of Nien Made’s business, underscoring its global reach.

Innovation is a core element of Nien Made’s growth strategy. The company continuously invests in research and development to enhance its product offering and improve production efficiency. Nien Made has been a pioneer in developing motorized window coverings catering to the growing demand for smart home solutions. These products offer the convenience of automation while preserving the familiar look of traditional window coverings. One of Nien Made’s most significant innovations is the development of cordless window coverings. This initiative was driven by new US regulations aimed at improving child safety by eliminating cords in window coverings, which pose a danger to young children. Nien Made’s proactive response to these regulations not only ensured compliance with safety standards but also strengthened its reputation as an industry leader.

Nien Made’s ability to navigate global challenges has further solidified its market position. The COVID-19 pandemic, geopolitical tensions, rising raw material costs and global supply chain disruptions have all presented significant operating challenges. However, Nien Made’s strategic investments in expanding production capacity in Vietnam, Cambodia, Mexico and the US have enabled it to navigate these challenges, ensuring undisrupted customer satisfaction and product quality and availability.

The company’s commitment to sustainability and corporate responsibility enhances its investment appeal. It has implemented environmentally friendly practices in its manufacturing processes, reducing waste and lowering its carbon footprint.

We appreciate Nien Made’s product quality, competitive lead times, extensive service network, cost advantages and broad client reach. All these factors contribute to its high level of profitability, with net profit margins exceeding 20% and returns on capital ranging from 20% to 30%. Nien Made is run by the second generation of the founding family, who maintain substantial ownership in the company. The management team demonstrates a prudent capital allocation strategy, supported by a strong balance sheet with a net cash position, allowing it to weather economic cycles over time.

For investors looking for opportunities in Taiwan, Nien Made offers a compelling case. While the technology sector remains a major driver of Taiwan’s economy, companies like Nien Made offer a less conventional path to capitalize on the island’s broader success story. With its competitive advantages, clear growth strategy, robust financial position and capable management team, we believe that Nien Made stands out as an attractive investment opportunity.

On May 15, 2024, Singapore swore in its first new prime minister in 20 years. Lawence Wong, at the age of 51, previously the deputy prime minister, succeeded Lee Hsien Loong.

While Lee Hsieng Loong is the son of Lee Kuan Yew (the founding father of Singapore), Lawence Wong was born to a family he described as ordinary, growing up in a public housing flat. He started his career as an economist at the Ministry of Trade and Industry (MTI), and later held several important positions in energy, culture, national development, education, healthcare and finance, among other departments.

Last week, Wong delivered his maiden National Day Rally speech and called for major reset of policies and attitudes. He is expected to keep the city-state as open as possible, maintaining independence through a wide network of bilateral and regional free-trade agreement. He pledged to look after various groups of Singaporeans, including the elderly, families and lower-income households. A few highlighted policy changes from his speech include: more paid paternity leave and shared paternity leave; temporary financial help for lower and middle-income workers who lose their jobs; discontinuation of the Gifted Education Program in primary schools; increasing support for affordable housing; and strengthening of the sporting culture.

A top-5 country by GDP per capita

Once known as one of the four Asian Tigers, Singapore experienced rapid economic growth thanks to exports and industrialization between 1960s and the Asian Financial Crisis of 1997. The 2000s were a tumultuous period for the country, however. Faced with the dot.com bust, SARS and the global financial crisis, Singapore restructured and diversified its economy. It began to bounce back, and is now the fifth richest country in the world based on GDP per capita, according to The Economist.

Resilient economic growth

2024 Q1 GDP growth of 3.0% and Q2 of 2.9% were both better than expected. Last week, MTI raised Singapore’s annual GDP growth forecast in 2024 to 2-3%, adding that external demand outlook is expected to be resilient for the rest of the year. Growth sectors will be manufacturing (especially electronics related to smartphones, PC, and AI-related chips), chemicals, tourism, aviation, finance and insurance.

A home to multinationals

Singapore and Hong Kong have traditionally been viewed as rivals, attracting many international companies and talents to work and live there. But Hong Kong’s ever-closer ties with mainland China have raised increasing concern among some people about democracy and safety, causing more and more foreign companies and foreign nationals to leave Hong Kong for Singapore. While Hong Kong’s standard corporate tax rate is as low as 16.5%, Singapore’s 17% tax rate can be cut to 13.5% or less for some activities. As a matter of fact, Singapore was regional headquarters to 4,200 multinational companies in 2023, compared to 1,336 in Hong Kong. A list of such companies includes FedEx Corp., Microsoft Corp., Google, TikTok, Shein and General Motors Co., etc. The often-cited reasons for this big gap are better relations with the West, a broader talent pool, diversified economy, and tax incentives.

Asia’s top financial center

According to the latest 2024 Global Financial Centres Index, Singapore overtook Hong Kong for the third year in a row to become Asia’s top financial center, ranking third globally, behind New York and London. Singapore has also become an attractive asset management hub. Wealth overseen has doubled in the past six years, to about US$4 trillion, and about 80% of that is foreign. Government initiatives are the key driving forces. For example, in 2020, the government introduced a new legal structure called a variable capital company that provides tax and legal incentives to hedge funds, venture capital and private equity firms to set up in Singapore, comparable to Cayman Islands and Luxembourg.

Singapore’s economic backyard is Association of Southeast Asian Nations (ASEAN), a 10-nation region with a population of 680 million and an economy of US$3.6 trillion. Singapore’s stable political climate and high living standards make it an ideal destination for high-net-worth individuals and global financial professionals.

Our portfolio holding in Singapore – Raffles Medical Group

Founded in 1976, Raffles Medical is Singapore’s largest homegrown private healthcare provider and the first member in Asia to join the Mayo Clinic Care Network. It owns four hospitals and over 100 clinics in five countries including Singapore, China, Japan, Vietnam and Cambodia. It has over 7,000 corporate clients and 2.2 million patients.

Covid impacts on the company were mixed. On the one hand, hospital development in China was seriously delayed. On the other hand, Singapore business accelerated thanks to government-related Covid services.

Like many stocks that benefited from upticks in Covid-related revenue, Raffles Medical experienced tough comps following the pandemic. However, we are very confident about its growth potential thanks to its strong reputation in the industry, net cash position and consistent growth strategy in Asia.

Since February 2024, Dr. Loo Choon Yong, the owner and founder of Raffles Medical, has spent almost S$35 million of his own money to buy back shares in his company.

New chapter for Singapore

Although Singapore came into being only in 1965, it has developed from a red dot to a shining star in Asia. Looking ahead, Lawrence Wong, the fourth Prime Minister, will have to navigate through a challenging time with increasing geo-political tension, weak global economy and deglobalization. His party’s popularity will be tested, as will his personal popularity, in the general election to be held no later than November 2025. Let’s hope Singapore’s best years are ahead of us.