As a United Nations-supported Principles for Responsible Investment (UN PRI) signatory, we are pleased to share the results of our 2025 Assessment Report. This year, CC&L Infrastructure advanced several risk-management and value-creation initiatives that supported increased scores. These strong results reflect the team’s hard work, disciplined approach and commitment to active asset management.
Learn more about how we are putting PRI Principles into practice.
Our Emerging Markets team attended a series of corporate meetings at a technology conference in Taipei last week. During these meetings, one topic kept emerging: as semiconductors become more advanced and complex, the importance of testing them is growing rapidly. This theme appeared consistently across our meetings, including with companies involved in probe cards, system-level testing and metrology. As the current AI-driven arms race accelerates investment in high-performance computing, testing has become a foundation for semiconductor reliability.
For many decades, progress in semiconductors came from shrinking transistor size and fitting more of them onto each chip. But as Moore’s Law approaches its physical limits, chip designers are increasingly turning to advanced packaging to continue pushing performance forward. This approach helps sustain technological momentum but also introduces new challenges and more potential points of failure. That is why semiconductor testing matters more than ever.
Modern semiconductors must now be tested at several points during a complex fabrication process. At the wafer level, testing examines individual dies (individual chips on a wafer) to determine which are viable before sending the wafer to subsequent steps. This is critical because the packaging stage adds significant dollar value, and if a defective die is mislabeled as good, the cost of assembling it into an advanced package can be substantial.
Once a chip enters packaging, it undergoes final electrical and functional testing, which confirms that the packaged device is assembled correctly and works as intended. A growing number of AI accelerators also require burn-in testing, where devices are stressed under elevated temperature and voltage to screen for early-life failures.
Finally, system-level testing validates each device under real-world operating conditions. As AI processors draw more power and generate more heat, system-level testing has become one of the most critical stages of the entire test flow.
In a sense, modern chips now go through the semiconductor equivalent of an endurance triathlon: wafer-level tests, post-packaging reliability tests (including burn-in) and finally system-level verification. Each stage is designed to catch a different type of failure and skipping even one dramatically increases the risk of defects later in the cycle.
Importantly, the most advanced AI accelerators require far more testing, nearly doubling test time and test content relative to previous generations. It is also why AI chips are now 100% tested, unlike many consumer electronics where sample testing remains common. As one management team noted in a meeting, “reliability can no longer be assumed; it must be verified.”
The economics of chip failure have also changed dramatically. Today’s AI accelerators are among the most expensive devices ever produced. A single AI server rack powered by NVIDIA chips can cost around USD3.5 million. One faulty component can compromise the entire system. Meanwhile, testing typically represents only about 2-3% of total chip cost, yet it protects assets worth millions. This asymmetry also explains why switching test solution providers mid-generation is rare: the potential savings are small, while the risks are substantial. Robust testing has therefore become a form of value protection.
Taiwanese testing companies are uniquely positioned because they operate in close proximity to TSMC, which today manufactures virtually all of the world’s most advanced chips, and within a rich ecosystem of its partners. Supported by deep engineering expertise, this environment enables tight co-development of testing solutions aligned with the industry’s most advanced semiconductor processes.
Among the firms we met at the conference were two companies we own in our Emerging Markets portfolio, both of which illustrate how we leverage this theme in practice.
MPI Corporation (6223 TT)
MPI provides tools used for wafer-level testing, particularly probe cards with fine needle-like contacts that touch each die on a wafer to verify it functions before packaging. The company is a key supplier of customized, high-performance probe cards for ASICs (application-specific integrated circuits) used by hyperscalers.
As AI and advanced packaging increase chip complexity, wafer-level testing now requires more precise and specialized probe card designs. This is contributing to rising unit sales and higher prices for MPI’s solutions. The company has also been enjoying sustained market share gains, supported by its ability to offer superior customization, short lead times and close integration with customers early in the chip design process. These strengths position MPI well for structurally rising test intensity across next-generation logic and AI devices.
Chroma ATE Inc. (2360 TT)
Chroma complements the theme at the opposite end of the test flow. The company is a global leader in system-level testing, power-testing equipment and metrology tools. As chips become more power-hungry and thermally constrained, ensuring reliable performance under real operating conditions becomes essential. Chroma’s solutions support both the growing energy demands of data centres and the precision requirements of advanced packaging.
As semiconductor complexity rises and Moore’s Law slows, innovation is increasingly shifting to packaging, integration and system design. Testing is what bridges that complexity with reliable performance. MPI and Chroma play important roles in this ecosystem. As fundamental investors focused on quality and growth durability, we view testing as a structurally growing and increasingly critical part of the semiconductor landscape.
In our view, testing matters.
Connor, Clark & Lunn Investment Management (CC&L Investment Management) is pleased to announce a new CPP Investments case study that highlights its enduring partnership with CC&L Investment Management. At the heart of our partnership is a commitment to continuous research and development of quantitative investing on a global scale.
Since 2004, CC&L Investment Management has been a trusted investment partner to CPP Investments. The case study details the evolution of this collaboration – from an innovative long/short equity overlay mandate to a sophisticated global quantitative equity strategy.
CPP Investments made its initial investment based on CC&L Investment Management’s capabilities, people and processes. Since then, CC&L Investment Management’s embrace of advanced data science and development of expertise and proprietary investment models has grown and evolved in step with CPP Investments’ needs.
The relationship between CPP Investments and CC&L Investment Management is more than an investment management mandate – it is a strategic partnership, a shared journey of innovation, problem-solving and mutual growth. In 2024, we celebrated 20 years of partnership, a remarkable testament to the strength and resilience of our collaboration.
“The depth of our partnership allows us to withstand both strong and weak periods and make the changes required,” says Martin Gerber, President & Chief Investment Officer of Connor, Clark & Lunn Investment Management. “What we do for CPP Investments today is very different from what we did 20 years ago – and that’s because of partnership and trust.”
To read the full case study, visit the CCP Investments Insight Institute.
Global money trends suggest that major economic weakness will be deferred until later in 2026.
Six-month real narrow money momentum in the G7 and seven large emerging economies recovered further in October, almost returning to its March high – see chart 1.
Chart 1
The fall from March into the summer is expected here to be reflected in a slowdown in industrial momentum – as proxied by global manufacturing PMI new orders – into late Q1 2026. The recent money growth recovery suggests a partial PMI rebound in Q2 – chart 2.
Chart 2
The cyclical framework used here implies rising recession risk, with the stockbuilding and housing cycles in time windows to begin downswings. Monetary weakness would signal that a negative scenario is crystallising. The latest numbers appear to signal a delay.
The composition of the money growth rebound gives pause. The return towards the March high has been driven by further strength in the E7 component, with G7 real money momentum lagging significantly – chart 3.
Chart 3
Narrow money trends are respectable or strong across major EMs, with the exception of Brazil – chart 4.
Chart 4
Soft G7 growth reflects a slowdown in the US and continued – though moderating – weakness in Japan and the UK. Eurozone momentum rose further last month, though remains unexceptional.
Chart 5
Japan’s equity market is undergoing a structural reset. In October, Japan experienced its strongest month in net equity inflow in at least two decades. Net purchases by foreign investors reached 3.44 trillion yen, largely beating the previous record of 2.68 trillion yen in April 2013. A few factors contributed to the rally:
According to Bloomberg, net equity outflows during 2015–2022 were about 13 trillion yen. So, it is reasonable to think that there is plenty of room for more inflows in the future.
Political impact and AI sentiment can be volatile. At Global Alpha, we would rather focus on structural changes such as sweeping TSE reforms and normalization of policy interest rate for healthy inflation. These two factors have been the game changers of Japan equity market in the past three years.
Game changer #1: TSE reforms
The positive impact of the TSE reforms on the market is mainly reflected in higher dividends, share buybacks, return on equity (ROE) and price-to-book value (P/B). Since TSE’s initiative on increasing shareholder values in 2023, we have seen notable increases in dividend and share buybacks.
Sources: Factset, Jefferies
In the global context, Japan still has a long way to go to improve its ROE and P/B. Currently, 47% of stocks in Japan Prime Index are trading below 1x P/B. In contrast, the percentage is 15% in MSCI Europe and 5% in S&P 500. Median ROEs during 2000–2024 for MSCI regions are 10.1% in Japan, 12.0% in Europe and 16.2% in the United States. Working toward global standards could be attractive opportunities for Japan equities.
Game changer #2: Normalization of policy interest rate
In March 2024, Japan exited its negative interest rate policy with the first hike in 17 years. Since January 2025, the rate has been stable at 0.5%. Bank of Japan (BOJ) expects core inflation to be around 2.7% for fiscal year 2025, slowing to 1.8% in fiscal year 2026 and returning to its 2% target in fiscal year 2027. Recent BOJ meeting summaries indicated a chance of further interest rate hikes.
Year to date, “banks” is among the top performing industry groups in the MSCI Japan Small Cap Index, up 46.8%. We have two holdings directly benefiting from both the rising interest rate cycle and improving corporate value.
The introduction of coal ignited the first major energy transition and powered industry, cities and progress for hundreds of years. It was not until the 1970s that oil products took centre stage, and fossil fuels became the backbone of modern life. Natural gas gained prominence in more recent decades. The world stands at the brink of another energy transformation, but this time, the stakes are higher. Previous energy transitions were driven by economic growth and soaring consumption. Now, the challenge is to ensure everyone has access to energy, while urgently reducing emissions to protect our planet.
Earth’s atmosphere is like a greenhouse, with gases such as water vapour, carbon dioxide, and nitrous oxide acting as invisible walls. They let sunlight in and trap heat, keeping our planet warm enough for life. Without them, Earth would be a frozen wasteland. Yet, as we pump more greenhouse gases into the air, the planet is heating up.
Carbon dioxide is the most significant contributor to warming, far outpacing other gases. Five major sectors: energy, agriculture, industry, waste management and land use change are the main culprits. The energy sector alone is responsible for a staggering 76% of emissions, mostly from electricity and heating production, transportation, and manufacturing.
Since the dawn of the Industrial Revolution, atmospheric carbon dioxide has soared by more than a third, driven by human activity. Global warming reached new levels in 2024, becoming the hottest year ever recorded, surpassing 1.5°C above pre-industrial levels for the first time.
The warming of the planet has consequences for many areas, including our oceans, weather, food sources and health.
Climate change risk is not just about environmental issues, whether preventing rising sea levels or protecting forests, it is also about businesses and communities navigating transition and adaptation risks.
Governments worldwide are stepping up. The Paris Agreement set ambitious goals for cutting greenhouse gases, and now countries are pushing for even tougher targets, with most aiming for “net zero” by 2050. Each nation must share its plan for the next decade, explaining how it will cut emissions, adapt to climate impacts and what help it needs.
Carbon pricing is gaining ground, with around 40 countries charging for carbon pollution to encourage cleaner energy and fund sustainable projects. The goal is to keep global temperatures from rising more than 2°C above pre-industrial levels, and ideally, limit the increase to just 1.5°C.
While 2024 was the first year global temperatures exceeded 1.5°C, climate science looks at long-term averages, not just single-year spikes. Staying below 1.5°C could help avoid irreversible tipping points, reduce extreme weather and protect food supplies.
Another challenge with the climate action plan is that humans are not good at long-term planning. We tend to focus on what is right in front of us, making it tough to stick to long-term climate goals, as witnessed by the United States twice leaving the Paris Agreement, and the Canada Pension Plan quietly dropping its net zero 2050 goal when rules around environmental claims became stricter.
People tend to give more weight to short-term risks and rewards than those far in the future. The latest World Economic Forum Global Risks report shows this bias. When asked about the next 10 years, climate risks dominate the top five risks. But when asked about the next two years, only one climate risk makes the top five. If we keep thinking short-term, we risk missing the bigger picture and holding back real progress in the battle against climate change.
Institutional investors have a pivotal role to shape how the climate change story unfolds. By directing capital toward renewable energy and climate-friendly projects, these investors have the power to accelerate the world’s transition to a low-carbon future. Through shareholder engagement and proxy voting, they can push companies to cut emissions and be more transparent about climate risks.
Canadian regulators are sounding the alarm, highlighting that climate change is not just an environmental risk, it is a financial one too. The latest guidelines from the Canadian Association of Pension Supervisory Authorities (CAPSA) urge boards to take climate risks seriously, warning that both physical and transition risks will only grow over time. Effective risk management means looking to the future and preparing for what lies ahead.
Energy transition is not just about responsibility; it is also about opportunity. Investing in renewables, electrified transport, power grids and energy storage has already attracted nearly USD2 trillion, with double-digit growth even in challenging times. Figure 1 highlights where the money is flowing, with electrified transport and power grids getting the lion’s share.
Figure 1 – Where investment is flowing
The path to renewable energy is not straightforward. For example, while battery storage is improving, many systems only last a few hours, so innovation is needed for longer battery storage. While technology is contributing to the climate change battle, it is also creating environmental and productivity challenges. Digital infrastructure and artificial intelligence (AI) are driving up electricity demand. For example, data centres powering AI models are energy-hungry, adding new pressure to the grid.
Emerging opportunities, such as geothermal and renewable fuels, are lagging the more mature sectors, drawing only 7% of total investment and seeing a material decline from previous years.
The scale of future infrastructure investment needed is staggering. Roads, airports, power plants, water utilities and telecom networks all need major upgrades. Without a surge in investment, the world could face a USD15 trillion infrastructure gap by 2040. For this reason, fossil fuels will remain part of the energy mix for years to come, despite the decline in use and rapid growth in renewables. Nuclear is also making a comeback as a cleaner option for large-scale power, although it is costly and slow to build so there are limitations to how much it can contribute.
Climate change is a risk we cannot ignore, but it is also an opportunity for those ready to act. Whenever there is a discussion about risks and opportunities, they will typically be viewed as opposites. However, for climate change, they are not necessarily in conflict, since the opportunity, such as investment in renewable energy sources, can play a key role in managing climate-related risks.
The energy transition journey requires investment, innovation and leadership. Investors have a pivotal role to play, and those who step up stand to gain not just healthy returns, but a chance to make a lasting impact on the planet.
A measure of UK annual core CPI inflation excluding direct policy effects fell further to 2.8% in October, the lowest since August 2021 – see chart 1.
Chart 1
The measure adjusts for the imposition of VAT on school fees and bumper one-off rises in water bills and vehicle excise duty. It does not strip out the indirect impact of government actions, including national insurance and minimum wage rises and new packaging waste fees. The NI increase alone may have boosted annual core inflation by 0.25 pp, based on projections in the February Monetary Policy Report.
Policy effects are fading from shorter-term rates of change. The adjusted core measure rose at a 2.5% annualised pace in the three months to October from the previous three months, and by 1.9% between July and October – chart 2.
Chart 2
The core slowdown is consistent with lagged monetary trends, which suggest further deceleration in H1 2026.
Lows in annual broad money growth preceded lows in adjusted core inflation with mean and median lags of 26 and 29 months respectively since WW2. Money growth bottomed in October 2023, suggesting an inflation low between December 2025 and March 2026 – chart 3.
Chart 3
The indirect policy effects cited above may have delayed transmission, raising the possibility of a longer-than-average lag on this occasion.
Money growth, moreover, has remained weak since 2023, suggesting that low core inflation will be sustained into 2027, at least.
Beyond core, food inflation has remained sticky but could break lower in 2026. Annual food inflation of 4.8% in October compares with 1.9% in the Eurozone. Readings were similar at the time of the October 2024 Budget, suggesting that most of the current wedge reflects policy effects. Average UK food inflation was below the Eurozone level over 2015-24.
Based on plausible core / food assumptions, and assuming a neutral Budget impact, annual headline CPI inflation could fall to c.2.25% by Q2 2026 (versus a Bank forecast of 2.9%), with a return to target during H2.
Chinese October money / credit numbers were mixed, suggesting a continuation of sluggish economic growth.
On the positive side, six-month growth of narrow money M1 extended its recent recovery, reaching its highest since March – see chart 1. (A fall in the year-on-year measure reflected an unfavourable base effect.)
Chart 1
Broad credit slowed further, however, while growth of broad money – on the preferred definition here excluding deposits of financial institutions – fell back.
Concern about downside economic risks is supported by October activity numbers, showing faster rates of contraction of fixed asset investment and housing sales / starts – chart 2.
Chart 2
The weakness of the fixed asset investment data is difficult to square with Q3 GDP results showing an investment contribution of 0.9 pp to annual growth of 4.8%. The national accounts number includes stockbuilding but there is no indication from other evidence – admittedly limited – of a rapid build-up of inventories.
Industrial output growth continues to hold up while retail sales recovered after September weakness.
The authorities announced modest additional stimulus measures in September / October – new investment financing and an increase in local government bond issuance, each of RMB500 bn – and probably need to see greater weakness in the data before considering further action.
A positive gap between money growth and nominal GDP expansion may continue to offer support to equities, given low bond yields and still-negative property trends.
From a global perspective, lacklustre Chinese news presents no challenge to the forecast here of a loss of industrial momentum into early 2026 – see previous post.
After decades of offshoring, companies are increasingly building capacity closer to end markets. This nearshoring trend has triggered a surge in new factories, warehouses and intermodal terminals. The world is entering a new phase of industrial investment as countries rebuild supply chains, renew critical infrastructure and accelerate the shift to cleaner logistics. Manufacturing nearshoring, port electrification and large-scale public infrastructure programs are reshaping industrial demand.
Governments are deploying significant stimulus toward infrastructure modernization. The U.S. Infrastructure Investment and Jobs Act, Europe’s Green Deal programs and national port renewal projects all call for automation and emissions reduction in logistics. Port operators, for example, are increasingly replacing diesel-powered cranes with hybrid or fully electric units, a market where Konecranes is already a technology leader.
Among the beneficiaries from that multi-year capex cycle stands Konecranes (KCR FH), the Finnish leader in lifting equipment and services, positioned at the crossroads of automation and reindustrialization. Konecranes is one of our holdings in our International Small Cap Strategy.
As one of the largest global players in its niche, Konecranes benefits from scale-driven pricing power, a broad installed base and a growing stream of recurring service revenue. Its service segment, representing about 40% of group sales, generates EBITA margins above 20% – roughly double those of new equipment – thanks to long-term maintenance contracts and critical spare-parts sales that are largely price inelastic. The company services more than 600,000 cranes worldwide, leveraging its digital platform for predictive maintenance and uptime analytics. This connectivity creates high customer switching costs and allows for value-based pricing rather than cost-based competition.
Scale also enhances resilience. Through years of acquisitions and regional integrations, Konecranes has consolidated a fragmented market, broadening its service reach across 120 countries and multiple industries. This global footprint enables it to spread R&D, logistics and data infrastructure over a larger customer base while improving service response times – a key differentiator versus smaller peers. Moreover, the company’s ability to bundle equipment, parts and digital services strengthens customer relationships and supports long-term contracts that are difficult for competitors to displace.
Equipment downtime can be very costly for customers. For Konecranes, this translates into pricing leverage and high renewal rates on service agreements. The inelastic nature of maintenance pricing, combined with the company’s deep integration into clients’ safety and compliance frameworks, provides durable margins and steady cash flow. Over time, Konecranes’ mix shift toward services and automation has driven operating margins from 7% to over 13% in five years, positioning it among the more profitable industrial equipment consolidators globally.
Konecranes combines a diversified portfolio with a clear strategy centred on electrification, automation and data-driven service. This balance provides resilience across economic cycles while capturing long-term secular growth from reindustrialization and infrastructure renewal. We believe Konecranes is well placed to capture these structural tailwinds. Its technological leadership, digital service model and exposure to automation-driven capital expenditure make it a key indirect beneficiary of the ongoing industrial transformation.
We argue that a narrow focus on company fundamentals leaves investors increasingly exposed to powerful external forces like structural and cyclical liquidity shifts.
These forces influence capital availability, investor behaviour and asset pricing, often overriding fundamentals in the short to medium term.
Below, we run through two EM-specific examples of how we think about structural liquidity, along with a brief comment on market structure globally.
The “China is un-investable” doldrums from early 2021 to the beginning of 2024 saw the MSCI China Index drop from a peak to trough by over 50% in USD terms. Haphazard regulatory clampdowns on the technology and education sectors, a collapsing property market, and Sino-US tensions saw foreign investors run for the exits.
At the peak of the revulsion, we saw many liquid and high-quality companies being dumped, seemingly irrespective of fundamentals. For us, this was a painful experience with many of our favourite names caught up in the stampede. It was also a valuable lesson about the impact of what we call structural liquidity in markets and its power to create extended and sharp periods of disequilibrium where prices appear completely detached from fundamentals.
In our process, we define structural liquidity as the long-term, underlying availability of capital within a financial system or market. Unlike short-term liquidity (which can fluctuate daily), structural liquidity is shaped by:
Our clients are very familiar with our work analysing monetary cycles, with the aim of anticipating economic and market environments over the next year or so. This is a powerful tool for understanding the prevailing investment backdrop and how we expect it to evolve.
Structural liquidity gets less coverage, but understanding this factor can be just as impactful for performance, especially at extremes. Analysing the evolving composition of a country’s financial markets can provide insights into how changes in liquidity flows may be felt across asset classes.
Through the China doldrums, structural liquidity was working against us. Foreign investors were more heavily weighted to higher-quality companies, aligned with our stock picking bias. As these investors yanked funds from the market, we saw favoured names get cut down regardless of the fact that many of these business were fundamentally well positioned to weather China’s weak economy and geopolitical turbulence.
At the same time, state allocators in China (the “National Team”) were instructed to support the market. The reflex for these institutions was to buy ETFs loaded up with state owned enterprises (SOEs). This created an odd dynamic where more economically sensitive, highly indebted and relatively poorly governed companies (including distressed banks and property companies) were dramatically outperforming quality companies in an economic slump.
Investor flows and their composition had a huge impact on returns through much of the 2022–2024 period. In hindsight, the optimal strategy to navigate the volatility would have been to reduce the risk budget for “foreign favourites” while increasing the weighting to select SOEs which fit our stock picking framework. Unfortunately, we were slow to pick up the trend and by the time we had a firm grasp of the situation, valuations of our favourite businesses were starting to look incredibly cheap while already robust fundamentals appeared to be strengthening.
We reviewed China exposure in depth and exited a few positions that were exposed to persistently weak consumer sentiment. We also travelled in China extensively to meet with dozens of companies as soon as the country reopened from the pandemic. This helped to accelerate idea generation and generate more competition for capital within our China exposure. The rest was behavioural, with our iterative process of testing and re-testing stock theses and country views underpinning our conviction to stick with a number of out-of-favour companies.
The slump in quality stocks came to an end as Chinese authorities announced monetary and fiscal loosening in September 2024 to stimulate the economy. This was followed by the Deepseek shock in January 2025, which shone a light on Chinese innovation in AI which was progressing rapidly and at a fraction of the cost in the United States. Suddenly, domestic allocators were rushing into Chinese consumer tech stocks leading China’s AI development. Improving liquidity supported a broadening out of the rally, boosting other innovative companies such as battery leader CATL, drug development company Wuxi Biologics and Hong Kong financials such as Futu Holdings.
Structural liquidity is playing an important role in providing fuel for the rally. With China’s weak housing markets and longer-term bond yields recently moving up from record lows, equities have been the default beneficiary of improving monetary trends which has fuelled a liquidity-driven bull market this year.
China nominal GDP* (% 2q) & money / social financing* (% 6m)
*Own seasonal adjustment
Source: NS Partners and LSEG.
So far it has been domestic money within China participating in the rally, with foreign investors yet to return. Global investors will likely want to see Sino-US tensions cool further following the October APEC summit between Trump and Xi where a temporary truce was announced.
China equities flows: domestic vs. foreign investors
Source: EPFR
While it is pleasing to see our investment style come back into favour, we aren’t falling in love with this rally. Any downturn in liquidity would be a signal to reduce exposure. In addition, while our companies have broadly reported well, much of the wider rally this year has come from re-rating.
Source: Jeffries, October 2025
We are wary of chasing momentum in the China AI thematic without support from fundamentals. This is a fragile trade and vulnerable to a stall in money growth in our view.
India offers a different perspective on the importance of structural liquidity. Indian equities outperformed for years leading into 2025, and yet most EM investors were underweight the market citing rich valuations.
GEMs active vs. passive country allocations
Source: EPFR
While we were certainly mindful of India’s valuation premium to wider EM, the rise of domestic mutual funds driving flows into equities as Indian workers contribute to their pension accounts is a major structural change. We have seen this before in places like Chile or Australia, and once this trend picks up steam it can be dangerous to rely too heavily on your mean reversion tables!
While we did shift to an underweight in India at the end of 2024, the move was modest and largely based on a view that a deluge of IPOs coming to market was soaking up too much liquidity. This factor, combined with high valuations, supported our view that the market looked to be due a period of consolidation after several years of strong gains.
Model GEM portfolio: India strategy macro ratings and weightings
| India | Rating | Exposure | Share of risk | Relative weight |
|---|---|---|---|---|
| October 2025 | 3 | 13% | 16.9% | -2.5% |
| June 2025 | 3 | 17% | 22% | -1.1% |
| December 2024 | 4 | 19% | 20% | -0.5% |
| June 2024 | 3 | 21% | 30% | +1.9% |
| December 2023 | 2 | 19% | 19.7% | +2.6% |
| June 2023 | 1 | 17% | 14.4% | +2.2% |
Source: NS Partners
More recently however, agressive central bank rate cuts have fuelled a pick-up in cyclical liquidity, and while it is a near-term headwind, the flurry of IPOs will deepen the market and produce a more vibrant opportunity set. At the company level, earnings growth is set to lead EM for the next few years. While we are happy to wait for the market to come back to us for now, we see no reason to dismantle our India exposure with such a strong structural backdrop and will be ready to add back when the opportunity arises.
Thinking more broadly, we have been reading some eye-opening analysis from market strategist and investor Michael Green on the impact of rising passive dominance in markets. I won’t rehash the whole thesis in detail, but in a nutshell, Green argues that passive investing has fundamentally reshaped market dynamics by inflating valuations of the largest stocks and undermining traditional price discovery.
As index funds allocate capital based on market cap rather than fundamentals, they create a self-reinforcing cycle where rising prices attract more flows, further distorting valuations. This mechanism favours size and trend over intrinsic value and ignores quality companies outside major indices.
Markets become increasingly inelastic as passive share grows and the share of active and valuation-driven investment falls. The outcome is that liquidity no longer scales with market cap. This makes large stocks more vulnerable to outsized price impacts from passive flows.
Therefore, the largest beneficiaries of a constant inflows to passive vehicles could suffer sharp reversals should those flows reverse, exposing the market to volatility and mispricing.
Finally, Green highlights what he sees as an absurdity, being the construction of rigid rule-based investment strategies meant to operate in markets, which are complex adaptive systems. The dominance of this approach to investment is distorting markets and capital allocation which will have negative real-world impacts in magnifying the power of megacap firms and stifling innovation and creative destruction.
Having always considered the impact of structural liquidity in our markets as a part of our process, Green’s work resonates with our team. In our view, it will be crucial going forward for active investors to have an awareness of how rising passive dominance will create distortions in markets and identify the risks and opportunities that will flow from them.