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This month we dig into the frenzy over China’s DeepSeek and ask whether this has punctured the narrative of US tech supremacy.

Has DeepSeek just punctured the market narrative of American tech supremacy? We think that is a stretch, but the revelation of DeepSeek’s ability to innovate in AI with shocking efficiency is a reminder that there are only two contenders in this battle to build artificial general intelligence – China and the United States.

DeepSeek has unveiled two new models – DeepSeek-V3 and DeepSeek-R1, as well as instructions called R1 Zero – that deliver performance on offerings from OpenAI and Anthropic. These models have set off a media and market frenzy, both because they appear to match or exceed the capabilities of more famous systems, and because DeepSeek is offering API access at a fraction of the cost.

Highlights:

DeepSeek uses a method called reinforcement learning. Essentially, the models are allowed to solve the problems themselves with few guidelines and limited example solutions. Remarkably, this was accomplished using only 8,000 math problems, whereas other research groups often need millions.
DeepSeek has managed to compress memory usage, circumventing the need for loads of expensive GPUs.
DeepSeek has shown that AI models can work remotely and on edge computing very effectively without needing the power of data centres.

Overall, DeepSeek demonstrated that you don’t have to invest massive amounts (exactly how much is debatable) of money, hardware or human oversight to build an AI that excels at difficult tasks. The arguments about how much money they spent to get here are irrelevant: by relying on focused reinforcement learning and efficiency-boosting techniques, DeepSeek proved that powerful models can be created with fewer resources.

All training steps and code have been shared so others can also try it and change things, making concerns over “censorship” entirely moot. The result was a model that can rival Anthropic and OpenAI, even when turned into a much smaller version that can be run locally on a pair of Mac Minis! (Which use ARM architecture: the M4 Pro uses TSMC 3nm, and runs at 80W.)

The team behind DeepSeek is open about its own limitations. First, the model is akin to a brilliant scientist but would struggle to write a poem as it lacks “creativity.” Second, it doesn’t deal with languages beyond English and Chinese very well. And third, it lacks the experience in building large-scale software projects.

Implications

Anyone who has followed this story is probably now aware of Jevons Paradox. Originating from the work of economist William Stanley Jevons in 1865, the observation suggests that as technological advancements make a resource more efficient to use, the overall consumption of that resource may increase rather than decrease. This paradox occurs because increased efficiency often lowers the cost of using the resource, leading to greater demand and, ultimately, higher total consumption.

Applying Jevons Paradox to AI tools, as these technologies become more efficient and cheaper, their usage is likely to grow significantly. Just as more-efficient cars led to wider adoption over horses, more-efficient and cost-effective AI models like DeepSeek’s will encourage broader usage across various industries. This greater adoption can drive further innovation, but it also means that the demand for AI resources, such as data and computing power, will continue to rise.

As a result, businesses and developers will need to consider the implications of widespread AI deployment, including potential increases in energy consumption and the need for sustainable practices in AI development and usage.

To summarise:

Large language models (LLM) have become commoditized. For instance, Meta’s Llama (an LLM) is open-source and therefore free. The key takeaway here is that the cost and compute requirements to run these models could potentially be reduced significantly.
The implication is that demand for AI infrastructure including computer chips, the semiconductor supply chain and power requirements (particularly for AI training) may be lower than first thought.
However, as highlighted by Jevons Paradox, history shows that for most technological advancements, reduced costs are almost always offset by increased demand.

What does this mean for the stocks of different global tech leaders?

It’s still early days, but how could the broad adoption of DeepSeek models impact global tech leaders’ stock prices?

Type of tech company	Stock impact
AI infrastructure and some semiconductor companies Jevon’s paradox will likely spur more AI applications, with the end result potentially being greater demand for compute down the line. However, the market is questioning the margins of semiconductor players and infrastructure solution providers (i.e. cooling tech). We need to see the mix of LLMs vs. “distilled models” and, more importantly, inferencing vs. training. Training requires much less compute power than inferencing.	Unclear
Hyperscalers On one hand, processing AI could become significantly cheaper which will reduce their cost/capex. On the other, their moat could be lowered if AI workloads can be run on less powerful data centres. Microsoft has already stated that it is prioritizing enterprise inference workload over AI training for its Azure business. That is why OpenAI went to Oracle/Softbank/Project Stargate for compute because Microsoft won’t sell them all the compute OpenAI demanded.	Neutral/unclear
Application-specific integrated circuit (ASIC) companies Possibly beneficial for custom ASICs as chip architecture diversifies/specialises.	Neutral/unclear
Applications, such as software, with access to proprietary data This is where I believe the most significant AI equity value will be created over time. Lowering AI costs is unlikely to negatively impact these companies. In fact, it could even be a positive development. The moat is in the access to data. Compute is a cost item.	Positive/unclear
Specialised edge computer chip companies	Positive/unclear

In emerging markets, we believe major positions like Taiwan Semiconductor Manufacturing Company (TSMC), Mediatek and select niche names (in custom chip design and energy efficiency) remain well positioned for growth in overall demand for AI. We doubt that DeepSeek will change the demand for the highest performance chips running at the lowest possible power. In that regard, TSMC’s dominance in leading-edge production processes and advanced packaging solutions remain an intact competitive moat. We expect that their customer mix may change, but the demand for their capabilities will be resilient.

We are more cautious on data centre assemblers and memory, and see potential for an improving sentiment in software, with several high-quality names in the portfolio and on our watchlist in China, ASEAN and Latin America.

Much ink has been spilt recently on the falling fortunes of the Chinese economy. While the OG dragon of Asia struggles with the malaise of a weak economy and declining population, a smaller dragon in the neighbourhood has been making quiet economic strides earning the moniker “Ascending Dragon” owing to its geographical shape.

Vietnam is formally classified as a frontier market, but it looks and feels like an emerging market economy that has arrived. In 2024, we saw a parade of high-profile executives from Tim Cook to Jensen Huang announce billions of dollars’ worth of investments. Sure, it has challenges, with the coming threat of tariffs and the recent turmoil in the property and corporate bond market. But with a new leadership and the upcoming prospect of being upgraded to an emerging market, Vietnam could very well consolidate its position as ASEAN’s newest growth engine.

The story of Vietnam’s rise parallels to some extent the timeline of China’s rise. After the ravages of the Vietnam War with its GDP per capita stagnating at $300, the government decided to introduce the “Doi Moi” reforms in 1986 to reorient the economy from the existing soviet central planning model to a “socialist market oriented” economy. It’s easy to forget that until as recently as 1994, Vietnam was under a US-led trade embargo.

With the embargo lifted, tailwinds from globalization in the 1990s and early 2000s boosted the economy as it joined the ASEAN free trade zone in 1995 and the World Trade Organization in 2007. Investments in primary education and infrastructure to equip a young and restless population (now approaching 100 million) has paid off handsomely. The result has been an average GDP growth rate of 6.8%, far ahead of its ASEAN peers as seen below.

ASEAN-6: GDP growth

Source: Oxford Economics

What makes Vietnam interesting in our opinion is its positioning as a neutral player in the current geopolitical climate. As key trading partners like the United States have looked to diversify their supply chain from China, Vietnam has received foreign direct investment (FDI) from both the United States and China while also receiving FDI from big players like Korea and Japan. Geographical proximity, its strategic maritime location and similar culture make it an easy choice for global companies to relocate their factories. The World Bank expects Vietnam to grow at 6.7% in 2025, making it the second fastest growing economy behind India.

It also expects to draw $25 billion in additional capital into the stock market by 2030 if it gets classified by the FTSE as an emerging market later this year. Vietnam took an important step in this direction last year when it eliminated “prefunding,” the practice of ensuring investors have sufficient funds before purchasing a security. In a market that is 90% retail driven, we expect institutional participation to lift trading multiples, leading to better liquidity and market efficiency. Finally, crossing the much higher hurdle of the MSCI’s criteria for emerging market classification (expected between 2026-28) means Vietnam would get the full attention it deserves as the ascendant dragon of Asia.

One of the holdings in our portfolio that is a beneficiary of the rise of the Vietnamese consumer is Phu Nhuan Jewelry JSC (PNJ VN). With over 400 stores, PNJ is the market leader in branded jewelry space in Vietnam. It caters to the mid- and high-end consumer, offering everything from gold bars to value-added jewelry and high-end watches. It has a longstanding relationship with traditional artisans, allowing it to manufacture up to 4 million pieces of jewelry every year making it fully vertically integrated.

The beauty of investing in emerging markets is seeing parallels in themes, customs and market dynamics across disparate markets. Similar to India, the Vietnamese consumer has a deep love for gold for reasons both material and spiritual. Besides bringing health and good luck, a history of war, foreign occupation and hyperinflation means gold remains top of mind as a store of value vs. the more recently introduced Vietnamese Dong. We also see similarities to India with regard to formalization of the economy with over 70% of the jewelry sector in Vietnam operating in the unorganized space, providing a long runway of growth for PNJ.

There has been a shift from Canadian equities to global equities, coinciding with an emergence of dedicated global small cap allocations to further enhance portfolio diversification. Taken together these changes have resulted in Canadian small cap equities becoming a forgotten asset class. Despite the reduction to Canadian equity allocations, many investors have a significant dollar allocation to the asset class. This article discusses the merits of Canadian small cap equities and how investors can benefit from its potential contribution.

Background on Canadian Small Cap

As a general rule, small cap companies offer investors more room for growth, but also confer greater risk and volatility than large cap companies. The S&P/TSX Small Cap Index is a float adjusted and market capitalization (cap) weighted index, which was developed as a leading benchmark for those with small cap exposure in the Canadian equity market.

At the end of September 2024, there were 246 constituents in the index with a total market cap of CAD 279 billion. The mean market cap of the constituents was CAD 1.1 billion, but there was quite a range in the size of companies with the smallest being valued at CAD 97 million and the largest at CAD 4 billion. This compares to Royal Bank of Canada, the largest company in the S&P/TSX Composite Index, whose market cap was over CAD 170 billion.

The S&P/TSX Composite Index is concentrated in a small number of companies. The largest 10 companies comprised over 35% of the index at the end of September 2024 with Royal Bank of Canada alone representing 6.9% of the index. In contrast, the small cap index is more diversified with the top 10 companies comprising less than 15% of the index. The largest stock was Bausch Health Companies Inc., which represented 1.4% of the small cap index.

Small versus Large Cap Performance

Whether smaller or larger companies perform better varies over time based on the broader economic climate. Looking back over the last 40 years, a relative constant has been that small caps tend to decline more than large caps in bear markets but bounce back more strongly when sentiment changes. Two recent illustrations of this experience are the global financial crisis and the COVID-19 pandemic (Figure 1). In both periods small caps underperformed when the markets declined, but significantly outperformed large caps in the recovery stage.

Figure 1: Relative Performance of MSCI World Small Cap vs MSCI World*

Source: MSCI, FTSE Russell & Thomson Reuters.

The extent of the small cap recovery in 2020, particularly Canadian small caps, is evident in Figure 2. It shows the Canadian small cap index was up over 80% in the last nine months of 2020, resulting in a full calendar return more than double that of the S&P/TSX Composite Index. There was a similar experience for global developed small cap versus large cap companies.

Figure 2: Index Returns During 2020 (in CAD)

Asset Class	Market Index	Q1 Return (%)	9 Months Ended December 31, 2020 (%)	Calendar Year 2020 (%)
Canadian Equities	S&P/TSX Composite	-20.9	33.5	5.6
Canadian Small Cap Equities	S&P/TSX Small Cap	-38.1	82.4	12.9
Global Equities	MSCI World	-13.2	31.9	14.4
Global Small Cap Equities	MSCI World Small Cap	-23.1	48.1	13.9

Source: MSCI, FTSE Russell & Thomson Reuters.

Potential Benefits

While small cap stocks are generally more volatile, there are several benefits.

Growth opportunities: Smaller companies tend to have greater flexibility to respond to opportunity or adversity and their potential growth can continue much longer when they have a desired product or service. Large companies start small. If you can find the next generation of small companies that grow faster and graduate into a larger cap segment, the reward is significant. It is easy to forget that the market capitalization of Shopify, which is valued at over CAD 220 billion, was less than CAD 1.5 billion in June 2015 (Macrotrends.net). Smaller companies also tend to have a more focused line of business and higher insider ownership, resulting in greater alignment of interests between the owners and shareholders.

Sector Differences: The S&P/TSX Small Cap Index is not a microcosm of the larger S&P/TSX Composite Index. Therefore, investors can benefit from the different sector representation offered by the small cap index, which introduces opportunities that may not be present in the large cap segment of the market (Figure 3). For example, over the first nine months of 2024, the S&P/TSX Composite Index communications services sector declined 2.5%, while the S&P/TSX Small Cap Index communications services sector return was up 18% for the same period.

Smaller companies tend to have greater flexibility to respond to opportunity or adversity and their potential growth can continue much longer when they have a desired product or service.

Figure 3: Canadian Equity Sector Allocations

Sector	S&P/TSX Composite Index (%)	S&P/TSX Small Cap Index (%)
Energy	16.7	19.1
Materials	12.5	30.7
Industrials	13.0	12.0
Consumer Discretionary	3.4	3.4
Consumer Staples	4.1	2.9
Health Care	0.3	6.2
Financials	32.2	6.5
Information Technology	8.5	5.2
Communication Services	3.1	1.5
Utilities	4.0	1.5
Real Estate	2.3	10.8
Total	100.0	100.0

Source: MSCI, FTSE Russell & Thomson Reuters.

Less researched: Small cap companies are generally less researched by the external analyst community. The number of research analysts covering both large cap and small cap stocks has declined over the last 10 years, with the number covering smaller cap companies significantly less (Figure 4).

Figure 4: Analyst Coverage of TSX Companies

Source: Bloomberg

Often the research analysts covering small cap companies are less senior and experienced compared to their large cap analyst counterparts. These differences create greater opportunities for active managers to outperform the index benchmark by undertaking independent due diligence on these less researched companies, whose share price may not fully reflect their intrinsic value or growth prospects.

Collectively, active small cap equity managers have delivered significant added value above the small cap index. More than three quarters of the active managers delivered at least 1.9% per annum above the index for the 10-year period ended September 30, 2024. The median added value over the 10 years was 3.5% per annum (Figure 5).

Figure 5: Active Management Excess Returns

Source: eVestment

Collectively, active small cap equity managers have delivered significant added value above the small cap index.

Case for Canadian Small Caps

Despite a general reduction in Canadian equity allocations, there are many institutional investors with a significant dollar allocation. By including Canadian small caps, investors can tap into a different type of market exposure, as well as the added value potential from active management.

When the COVID-19 lockdowns happened, it was no surprise that travel-related stocks were among the hardest hit. However, as the world emerged from the pandemic, these stocks saw an impressive recovery as people were eager to start traveling again. With tourists armed with excess savings accumulated during the pandemic, tourism and business travel rebounded, filling planes, hotels and rental cars around the globe.

Now, fast forward to 2025, the post-pandemic recovery is behind us and the picture looks very different. Consumer spending data indicates a slowdown as higher interest rates and the potential return of inflation are putting a pinch on consumers. Even though personal savings are now back down below pre-pandemic levels, it’s important to focus on absolute wage growth, which remains strong in many regions. In other words, people are earning more, but also need to spend more just to maintain their lifestyles.

US disposable personal income and personal savings
Source: The Fed – An update on Excess Savings in Selected Advanced Economies

With the weak outlook for consumer spending, the question arises: should we really be viewing all categories of discretionary spending the same way? In a market that’s constantly swayed by daily news and short-lived noise, it’s crucial to look past the temporary trends or “hype.” Instead, we should focus on identifying secular trends – those underlying shifts – that will remain resilient, no matter where we are in the economic cycle. From our perspective, travel and leisure is certainly an industry that will benefit from one of these secular shifts in the years to come.

One trend we’ve been seeing is a shift from spending on goods to a growing preference for experiences. With wage growth remaining strong across developed markets, there comes a point where consumers naturally pivot – there’s only so much you can buy, but experiences, like travel, have no limits. That’s exactly what we’re seeing play out: higher-income groups in developed markets are showing a strong appetite for travel, and consumer surveys are backing this up with increasing indications of a preference for experiences over material goods.

Young affluents show stronger appetite for travel post-pandemic

Source: Understanding affluent travel behaviors and aspirations

Another key tailwind for the resilience of travel, even in a weak consumer spending environment, is the rising demand from the emerging market middle class. As some emerging economies such as India, China, Korea, Mexico and Brazil continue to develop, their expanding middle class is increasingly seeking travel experiences, both domestic and international. The World Economic Forum estimates that by 2030, Asia – home to three of the world’s five most populous countries (India, China and Indonesia) – will have 3.5 billion people in its middle class, making up two-thirds of the global middle class. Furthermore, a travel survey by Skift found that these travelers plan to allocate an average of 23% of their income to travel in the next year, with 81% stating that it remains a priority despite economic challenges.

India: Change in passenger arrivals vs. 2019 levels, by destination country

Source: Travel Trends 2024: Breaking Boundaries

Greater mobility is another key tailwind for travel-related companies. With remote work still prevalent worldwide, we’re seeing the rise of a new generation of digital nomads – individuals who leverage flexible work arrangements to explore the world. This shift toward a “work from anywhere” model is reshaping travel patterns and creating lasting demand for the travel and leisure industry.

Given our strong conviction in travel and leisure, here are some of the key plays in our portfolios and why we hold them.

Founded in 1912 by Martin Sixt, and managed by the family since, Sixt SE (SIX2 DE) is one of the oldest car rental companies in the world. The company is headquartered in Germany and operates across more than 110 countries. It differentiates itself from competitors through its premium car offering, thanks to its German heritage and strong relationship with German carmakers. Its motto is “Don’t rent a car, rent THE car.”

After becoming a top two player in Europe, Sixt has expanded in the United States by prioritizing a presence in the busiest airports, which has yielded above average results, but has brought some challenges along with it. The key difference between the US and European car rental business models lies in the accounting of fleet ownership. In the United States, rental companies primarily assume the risk of lease or buyback agreements, meaning they bear the depreciation risk.

Sixt experienced that risk first-hand in early 2024 when the resale value of electric vehicles fell as much as 20% and the company had to book accelerated depreciation in its book which sent the stock price down close to 30% over Q2. We took that opportunity to initiate a position in this high-quality name as we expect the impact of depreciation to be short term in nature as the management has taken steps to accelerate the rotation of its fleet. We remain confident in the company’s ability to successfully execute its US expansion plans and take market share from competitors such as Hertz and Avis.

Founded in 1995, easyJet plc (EZJ UK) is one of Europe’s leading low-cost carriers (LCC), offering a pan-European point-to-point flight network at a cost advantage to legacy and charter airlines. With a strong brand recognition, the company has grown notable presence at capacity-strained airports. Unlike ultra-low-cost-carrier (ULCC) peers, easyJet differentiates itself by operating from major primary airports rather than secondary hubs, prioritizing customer experience and maintaining competitive, flexible service offerings that command significant brand loyalty from its passengers. easyJet also benefits from a streamlined cost structure and ability to rapidly adjust capacity to market conditions, giving them a competitive advantage in times of sector disruption. Additionally, the company is taking market share from traditional full-service carriers by extending its reach beyond standard short-haul flights through its easyJet Holidays business, tapping into the roughly $80 billion European package holiday market. easyJet’s focus on cost efficiency, network optimization, diversifying revenue streams and gaining market share from legacy carriers positions it as a long-term winner in European aviation.

Meliá Hotels International S.A. (MEL ES) is a leading global hospitality group founded in Spain in 1956. As the second-largest hotel group in Latin America and the third largest in Europe, Meliá has expanded to over 390 hotels across 40 countries with 63 new hotels in the pipeline. The company operates through a multi-brand portfolio spanning the premium, upscale and midscale segments. Meliá caters to a diversified mix of leisure and business travelers in key resort destinations across the Americas, Spain and EMEA. Their strategy to increasingly adopt an asset-light model – more than half of their portfolio consists of managed and franchise properties – reflects their focus on scalability and margin improvement. Meliá differentiates itself with a strong brand portfolio, a high Global Reputation Index score, and growing direct-to-consumer sales, which enhance margins and strengthen customer loyalty. With an established presence in high-growth markets, along with its ongoing upscale repositioning and expansion pipelines, the company is well positioned for continued growth.

Founded in Denver, Colorado, Samsonite International S.A. (SMSEY) is the world’s largest lifestyle bag and travel luggage company. Its broad, high-quality broad portfolio includes Samsonite, Tumi, American Tourister, Gregory, High Sierra, Kamiliant, eBags, Lipault and Hartmann, collectively sold in over 100 countries through more than 1200 company-owned stores. Samsonite’s business model is centered on brand management, product design, and marketing, with 95% of its manufacturing outsourced to a global network of around 1,500 third-party facilities.

Samsonite’s asset-light structure allows them to prioritize brand building and innovation, reflected in their eco-friendly collections and omnichannel expansion, including a fast-growing e-commerce segment. The company is well positioned compared to its peers thanks to its scale-driven brand power and global presence resulting in a strong 17% market share of a roughly $22 billion luggage market. Additionally, their focus on cost control and supply-chain diversification reduces tariff risk and further supports margins, strengthening their position to achieve sustainable long-term growth.

Peter Muldowney, Senior Vice President and Head of Institutional and Multi-Asset Strategy speaks to Benefits and Pension Monitor. In the article entitled “The leading players in global equities,” Peter reminds readers that regardless of the asset class, diversification is key when trying to reach the intended result.

Read the full article

Brazil, the largest economy in Latin America, faced a mixed economic outlook in 2024. With low population growth, inflationary pressures and government overspending, the country navigated through significant challenges. However, certain sectors such as agriculture exhibited resilience, and the government, under President Luiz Inácio Lula da Silva (commonly known as “Lula”), worked on implementing policies to manage inflation and drive economic recovery.

In this recap, we will review Brazil’s economic performance, inflation dynamics, the effects on various sectors and explore potential opportunities for 2025.

Population growth and demographic trends

As Brazil’s population growth slows and the proportion of older individuals rises, the country will face a shrinking working-age population. This poses a significant challenge for the labour market as fewer people will be available to fill jobs and contribute to the economy.

2024 performance

Brazil went through a tough year in 2024 with a yearly performance of -29.47% (USD) (MSCI Brazil Index). Consumer discretionary performed the worst out of all sectors with -44.23% (USD). The main driver of the weak performance was linked to a weak Brazilian real. Brazil was one of the first countries to start reducing rates back in August 2023, while the United States had just finished increasing rates back in July 2023.

The currency performance against the USD was nearly -22%, and the currency remains under pressure, reflecting investor skepticism over Lula’s ability to address Brazil’s ballooning budget deficit, reaching a high of 10% of GDP in July 2024. The country faced false hopes when attempting to contain inflation as it reversed back in April 2024. Between January and April, inflation decreased by almost 80 bps, only to shoot up by 110 bps (April to December 2024), ending the year at 4.83% as per the Central Bank of Brazil.

MSCS Brazil sector performance

Sector weights
Sectors	01/31/202401/31 2024	12/31/202412/31 2024	2024 Return (USD)
MSCI Brazil Index	100.0%	100.0%	-29.47%
Finance	27.4%	35.3%	-38.40%
Energy	22.4%	18.8%	-27.20%
Materials	17.0%	14.4%	-38.60%
Industrials	9.9%	9.9%	-24.30%
Utilities	8.0%	9.2%	-30.47%
Consumer staples	7.7%	7.1%	-32.06%
Healthcare	2.4%	2.0%	-41.51%
Communications	2.6%	1.6%	-32.18%
Consumer discretionary	1.9%	0.9%	-44.23%
Information technology	0.9%	0.8%	-37.53%

Source: Bloomberg

Despite signs of inflation increasing, it took the Central Bank of Brazil until September to increase the Selic rate by 25 bps, followed by 50 bps in November and a final increase of 100 bps in December. Starting the year off with a sentiment of rates reducing to a swift change of aggressive increase caught investors by surprise.

MSCI Brazil Index sector weights (2024 – present)

Source: Bloomberg

A company we like in Brazil: Vivara Participações S.A. (VIVA3.SA)

Vivara is Brazil’s number one jewelry retailer with around 435 stores and approximately 21% market share. Vivara was launched in 1962, with new segments such as Life by Vivara, watches, accessories and fragrances completing the product range. Vivara enjoys high returns and strong consumer brand recognition.

During 2024 the company suffered a performance of -46.3% (USD). The performance was attributed to a weak consumer and unexpected management changes. The company is reorganizing the selling space (optimizing the stores) and improving customer experience. It also changed the inventory level in order to support the same-store sales growth acceleration seen in recent quarters (Q3 +13.5%, Q2 +11.6%, Q1 +9.4%) and to reduce stockouts.

SWOT analysis
Strengths Market leader, benefiting from scale Brand recognition with over 60 years in the industry Close to 80% of vertical product integration (lower cost)	Weakness Cannibalization of stores between Life and Vivara brands
Threats Macro and political instability High exposure to gold and silver prices	Opportunities Expanding outside Brazil (Latam countries) Rapid adaptability of life brand Store expansion (aiming for 70 in 2025)

SWOT analysis

Strengths

Market leader, benefiting from scale
Brand recognition with over 60 years in the industry
Close to 80% of vertical product integration (lower cost)

Weakness

Cannibalization of stores between Life and Vivara brands

Threats

Macro and political instability
High exposure to gold and silver prices

Opportunities

Expanding outside Brazil (Latam countries)
Rapid adaptability of life brand
Store expansion (aiming for 70 in 2025)

MENA equity markets finished the fourth quarter with returns of 0.7% (S&P Pan Arabian Index Total Return), significantly outperforming the MSCI Emerging Markets Index, which was down 8.0% in the same period. For the full year of 2024, MENA equity markets ended up 6.3%, a slight underperformance relative to the MSCI EM Index which was up 7.5%. Through to the end of 2024, MENA markets outperformed the MSCI EM Index by 43.4% and 17.3% over the last five and three years respectively.

Annual return dispersion among the major MENA markets (at the index level) continued to be high this year. The performance differential between the best (Dubai) and the worst (Qatar) market was 29% in 2024. Interestingly, this has also been the quantum range of returns between best and worst in 2023 and 2022. This high level of dispersion is a particularly desirable feature of investing in the region and one we believe is likely to remain given the composition of listed securities in each market (providing different earnings-factor sensitivities), the presence of domestic capital pools dedicated to each market and, more generally, the relatively low levels of foreign ownership in the region.

MENA equities were put to the test this year as they grappled with an escalation in political risk, lower oil price, high interest rates and incremental supply of shares from initial public and secondary offerings. Our view on this was articulated in our fourth quarter letter of 2023 wherein we described our approach to the Saudi market in particular:

“Since the end of the first quarter of 2023, we have become more vocal about our concern on valuation levels in Saudi. During this period, we’ve seen an increase in geopolitical risk, persistently high interest rates, and lower oil prices. None of those factors seem (for the time being) to temper local and regional investor enthusiasm for Saudi stocks, particularly mid-caps and IPOs. We believe it is prudent to avoid being overly exposed to situations where, by our estimates, investor positioning and expectations are excessively high. While we remain constructive on the quality of the Saudi-based businesses we own and the country’s structural growth story…we enter 2024 with lower exposure to these stocks. The Saudi market is highly dynamic, and we expect there will be opportunities to rebuild our exposure to those stocks throughout year.”

In the same letter, we cited a preference for owning the UAE:

“We are relatively more bullish on the UAE, focusing primarily on banks and quasi-monopoly businesses like utilities and infrastructure. Benign liquidity conditions and strong economic growth favour UAE banks with a solid deposit franchise and strong lending opportunities in 2024.”

Fortunately, that view has largely played out in 2024 (with some exceptions of course), and we now find ourselves in a situation where our relative preference has reversed in favour of Saudi as valuations appear more reasonable. We spoke about this more constructive stance on Saudi in our third quarter letter last year following our trip there in October 2024:

“There are three factors working for the strategy at the moment. Firstly, there are growing profit pools resulting from reforms and demographics which is critical to our investing style – growth. Secondly, in the last two months, the market has begun the long-awaited process of recalibrating its expectations of earnings to levels that we deem realistic and interesting – reasonable valuations. Lastly, the strategy has already begun shifting the portfolio to areas where there is a healthy combination of growth, risk-reward and low investor positioning.”

In other markets, we continue to favour Morocco in the portfolio as it represents one of the best structural economic development and equity stories in emerging markets and certainly the region. While the portfolio in Morocco has experienced some turnover in 2024 (primarily due to an exit of a long-held position in the retail sector), we remain committed to our long-term holding in technology and have expanded the portfolio to include companies in healthcare and financial services.

In Qatar and Kuwait, our statement from last year’s letter remains largely relevant today:

“We remain selective, with growth remaining constrained, though we see potential in Qatar’s liquified natural gas value chain and are more optimistic about Kuwait following the appointment of a reformist royal as the new Emir in late 2023.”

While our optimism on Kuwait may have proven pre-mature, we believe the direction of travel is positive and have continued to build selective exposure over the year, primarily in banks and financial services.

As for Egypt, we expressed an openness to increasing our small ownership last year, subject to the devaluation of currency and a correction of the imbalances in the country’s trade and capital positions.

“Egypt remains a wildcard, with an imminent devaluation likely to be the first step in a long journey towards rebuilding policy credibility with investors. That said, we remain open to increasing our ownership in our preferred Egyptian healthcare and technology businesses if opportunities arise later this year.”

The Central Bank and the government of Egypt did eventually capitulate and devalued the currency from just above 30/USD to 50/USD. The devaluation came two weeks after the government sealed a mega property deal with one of Abu Dhabi’s sovereign wealth funds. As a result, we felt more comfortable with the medium-term outlook for US dollar returns on Egyptian assets and stepped up our exposure to our technology company by way of a discounted block transaction in June last year that so far has proven rewarding for the portfolio.

In conclusion, the region passed a particularly testing year in 2024. The structural story for the region remains sound and we are confident it will underpin a powerful combination of a multi-year growth in earnings and a low equity risk premium relative to emerging markets. While it is too early to determine what happens in 2025, a strong US dollar, stable oil price and a Trump presidency all bode well for MENA equities.

We wish you a prosperous 2025 and look forward to sharing updates on our strategy with you.

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 in 2024 and share observations on the portfolio and the markets.

Internet and technology portfolio

The portfolio’s investments in the internet and technology sector propelled returns in 2024. This was driven by FPT Corporation (FPT), the Vietnamese IT services company, which established a relatively early mover advantage in the AI consultancy space. This placed the company firmly in the AI winner camp in 2024 and led to a re-rating of its shares. FPT also benefited from continued IT capex recovery from its traditional markets in the APAC region as well as strong execution in the US and Europe, which drove a ~30% growth in the company’s global IT services revenue in the nine-month period ending September.

The sector also saw strong contribution from Kenya due to improvement in the macroeconomic environment there. This was reflected in a strong appreciation of the Kenyan Shilling and a lower cost of equity that transmitted favourably into the valuation of Safaricom PLC (SCOM) (which we own primarily for its fintech asset, M-Pesa). We took advantage of the macro-induced rally and reduced our exposure to Safaricom in the first half of 2024.

We were also fortunate to have the opportunity to participate in discounted share sales by the private equity owners of Baltic Classifieds Group PLC (BCG), the leading online classifieds group in the Baltics. This helped the strategy increase its investment in the company at attractive prices. BCG continued to flex its market leadership in auto and real estate classifieds through calculated price increases and the introduction of value-added services which translated to an 18% growth in operating profits in the six-month period ending October.

We experienced a drag in returns from our investment in Allegro.eu S.A. (ALE), the leading Polish online marketplace. Allegro’s management provided relatively downbeat commentary in their guidance with their nine-month report which it attributed primarily to competition from Chinese players (mainly Temu). The stock had already come under pressure from the unexpected resignation of Roy Perticucci from his CEO role, and so the incremental negative news on competition put extra pressure on the stock. Fortunately, we decided to reduce exposure to Allegro following the news of the departure of the CEO but the strategy still experienced a drawdown from the stock’s reaction post the nine-month results. We still have a small position in Allegro as we believe it will weather the current competitive pressures given its dominant position in the Polish online marketplace.

While we made changes to our internet and technology portfolio during the year to reflect relative valuation preferences and make room for new ideas, the sector remains the largest bet in the portfolio entering 2025 (the end-of-year exposure to the sector is equal to the average exposure in the year). The combination of improving macro, evolving consumer habits, benign regulatory environment and strong management execution is likely to drive another year of strong earnings growth in 2025.

Retail portfolio

Retail was the second major contributor to returns in 2024, but contribution was top heavy, with the shares of Philippine Seven Corp (SEVN) and Mr D.I.Y. Group (M) Berhad (MRDIY) in Malaysia generating nearly all the returns. With Seven, the resumption of dividend payments (via a special dividend) after a three-year hiatus proved to be a powerful catalyst that woke the market up to the company’s strong fundamentals and growth prospects (14% growth in EPS in the nine-month period ending September 2024 and one of the fastest growing 7-11 convenience store networks in the region).

Mr D.I.Y. Group’s shares benefited from the anticipation of a recovery in demand from the B40 group of Malaysian households (B40 refers to the bottom 40% income group) and the entry of the company in a 49% joint venture with Chinese retailer KKV, as well as a supportive equity market environment in Malaysia last year.

We took decisive action to reduce exposure to this sector in the second half of last year, emboldened by what we deemed to be full valuations following the rally in our core holdings above, and better opportunities emerging inside and outside the sector.

We also saw some pressure on consumer wallets and increased competitive intensity in some areas of the retail portfolio including in the home improvement and grocery categories which we deemed to be persistent and as such triggered selling of underperformers in the portfolio. One such example is Wilcon Depot Inc. (WLCON), the Philippine’s largest home improvement retailer, which is experiencing significant pressure on sales densities as demand for home renovations appear to have stalled after the post-Covid demand pull.

We also exited our long-held investment in Moroccan grocery retailer Label Vie S.A. (LBV) on a combination of slowing growth and concerns on capital allocation decisions that we deemed would be dilutive to minority shareholders.

While we end the year with exposure that is well below the average exposure in the year for the sector, we are bullish on some of the additions we made to the portfolio in the year in UAE grocery retailing and Indonesian variety retail which we hope we can share more information on in 2025.

Fast moving consumer goods portfolio

Consumer goods were the third largest contributor to returns this year, driven by long-term holdings Philippines’ Century Pacific Food Inc. (CNPF) and Indonesia’s Industri Jamu dan Farmasi Sido Muncul Tbk PT (SIDO), or Sido Muncul. Century Pacific’s consistency in delivering on their guidance of low- to mid-teens yearly growth proved to be extremely valuable this year as most other Philippine consumer companies experienced significant headwinds from lower disposable incomes and commodity price pressures. The consistency in delivering is the result of a diversified portfolio of consumer products (mainly canned seafood and meat, and dairy), an exposure to institutional demand from developed markets (mainly canned marine and coconut water) and the large consumer market in the Philippines. This creates natural hedges in the company’s cost structure and foreign currency exposure.

Sido, the herbal medicine company that we have discussed extensively in the past, emerged from a difficult 2023 with operating income growth of ~29% in the nine months ending September. Sentiment on the shares also benefited from a transaction in which the controlling shareholder Irwan family bought out the full 17% stake of Affinity Equity Partners, a private equity investor that had come to the end of its investment cycle in the company. The transaction was done at a 30% premium to the three-month average price, signalling confidence from the family in the prospects of the business, and removing the overhang on the shares that typically arises with late-stage private equity ownership of public companies in our markets.

We remain highly selective in this sector and continue to see pressure on profit pools due to increasing competitive pressures, changing consumer behaviour, and the rise of new distribution channels that are disrupting the competitive advantage that many leading companies have historically enjoyed.

Healthcare portfolio

Healthcare was the fourth largest contributor to returns in the year driven mainly by Morocco’s Aktidal S.A. (AKT) and Turkey’s Medical Parks – MLP Care (MPARK).

Aktidal listed its shares on the Casablanca stock exchange at the end of 2022 and came back to the market for a follow-on offering (USD100 million) last year as growth exceeded the company’s initial expectations. Management at Aktidal expects its bed capacity to increase 2.5x between 2023 and 2026 as it capitalises on the structural undercapacity in the market and a supportive regulatory environment for private healthcare investments that is leading to quick utilisation ramp-ups and strong unit economics.

We invested in MLP early in 2024 as we started seeing encouraging signals from the Turkish government on its intent to reverse course and pursue market-friendly economic policies. MLP benefited from improving sentiment toward Turkish assets as the country received its first credit rating upgrade in over a decade from Moody’s in July. Fundamentally, MLP has established itself as the market leader with a 40% share in the lucrative top-up insurance segment which is the fastest growing payor group in the Turkish healthcare market. MLP has also been making sensible single-site acquisitions which it is successfully integrating into the network.

We experienced some drag in returns from the sector from investments in Indonesia and Thailand where weak equity market sentiment and pressure on payors (insurers and medical tourists in the case of Thailand) led to a de-rating of our stocks at the end of the year. That being said, our position size in that region is relatively small and we are oriented to be buyers of this weakness as growth drivers around demographics and regulations remain intact.

Outlook

We are constructive on the strategy’s positioning in 2025. While the global market environment is uncertain, we believe earnings visibility from our portfolio companies is relatively high in the next two years. As in every year, we reduced valuation risk when appropriate (reducing exposure to areas where share prices ran ahead of fundamentals), and exited underperforming positions where fundamentals are likely to worsen. Positively, we found many areas to invest in and, as a result, find ourselves with low levels of cash relative to the history of the strategy.

We look forward to updating you on the strategy over the rest of the year.

Amid the overall pessimism toward European economies, one of the reasons provided most often for the underperformance relative to the United States is a lack of innovation and entrepreneurship. Many data points tend to confirm this:

Over three times as many patents are filed in the United States annually than the entirety of Europe.
Research and development (R&D) is 2.8% of GDP in the United States vs. only 2.2% for Europe.
Average time to go through filings to start a business is 3-5 days in the United States and up to multiple weeks in Europe.
The United States attracts the lion’s share of global venture capital (VC) investment; over three times of the $50 billion attracted by Europe in 2023.

It is worth noting, however, that Europe has one large outlier when it comes to innovation: Sweden. Within Europe, Sweden easily stands out as one of the most entrepreneurial and innovative countries, raising questions from its neighbours as to how their success can be replicated. While entrepreneurship metrics have, by some measures, declined in the United States over the past 30 years, Sweden has seen the opposite trend.

So, what differentiates Sweden from its neighbours, and can it be replicated?

There is a case to be made that part of it stems from a cultural aspect. Swedish demographics have historically been described as high on social trust and cohesiveness, driven by a small historical level of immigration, similar to Japan or South Korea, but it is probably only part of the overall picture. Other likely factors include:

Entrepreneurship training in Sweden being taught in high school since 1980, with over 30% of students today participating in such programs. Other Nordic countries, on the other hand, started this type of program only in the mid-1990s and on a much smaller scale than Sweden did.
Risk-taking being socially encouraged and celebrated, with a common perception that opportunities are plentiful. Social safety nets also allow for failure and risk-taking.

Possibly as a result of this, Sweden’s VC market is more vibrant than other Nordic countries and has contributed directly to building Sweden’s reputation as a hub for technological innovation through its higher focus on early-stage investments. Furthermore, VC investment is well supported by the government through tax-incentives, grants and funding programs. Consequently, Sweden has the largest private equity capital raised as a share of GDP in Europe, trailing only Luxembourg. On its own, Swedish VC is estimated to have contributed 1.5% of total GDP growth on its own and has had a direct impact on creating more highly skilled, specialized jobs than its neighbouring countries.

It is therefore no surprise that Global Alpha is quite positive on Sweden’s long-term prospects and has had no trouble finding quality names for our portfolios. We profile two such names here.

Sdiptech AB (SDIPB SS) is a so-called industrial “serial acquirer,” a unique Sweden-based business model that consists of growth mostly through small, niche acquisitions without necessarily seeking material synergies or trying to integrate with the existing businesses. It acts as a forever-owner of companies where the founder is looking to sell their business, make sure their employees are well taken care of and don’t want to sell to private equity. Sdiptech focuses on acquiring businesses that are already cash-flow generative, as it finances its acquisitions purely through debt and not equity dilution. Its acquired companies operate along one of the four segments of its reporting structure: supply chain & transportation, water & bioeconomy, safety & security and energy & electrification. Most of its sales are aligned with the UN societal development goals. The company also differentiates itself from other serial acquirers through its comparatively strong organic growth profile (in addition to consistent M&As) and its lower leverage than peers, resulting from its smaller scale and more focused end-markets.

Another company we own in Sweden is Biogaia AB (BIOGB SS), a producer of probiotic supplements founded in 1990 by Peter Rothschild and that is present in over 100 markets. Probiotics is a USD71 billion global market with an expected CAGR of 8% over the next five years, driven by higher health awareness and shifting preference toward preventive healthcare. Biogaia differentiates itself from peers on two aspects: its global reach and its science-driven, innovative approach to product development. Biogaia is the only probiotic provider that continuously collaborates with universities globally on research to maintain its differentiated product from more generic peers who usually spend less than 1% of their sales on R&D, allowing it to sell at a premium with less discounting than its competitors.

It is probably an overstatement to say that Sweden is better today at fostering innovation than its North American counterpart. Nonetheless, it is noteworthy that Sweden has been trending more toward a dynamic bottom-up approach to innovating whereas observers tend to agree that the US economy has evolved into an environment that tends to favour incumbents over new entrants, thanks to softer regulations around lobbying and a higher rate of regulatory capture. We remain globally diversified and are optimistic on the growth prospects of both the United States and Sweden going into this new year.

2024 marked another landmark year for Banyan Capital Partners. We continued on our journey of strategic growth, adding new investments and delivering long-term value to our investors.

New to Banyan and recent promotions

David Beaumont to Director	Marat Altinbaev to Partner	Scott Morrison to Principal
Igor Verechaka to Vice President	Gordon Yee to Associate	Miranda Li to Associate
Alizeh Haider has joined as Senior Analyst	Alex Gelmych has joined as Analyst	Kye Johnston has joined as Accountant

These promotions and additions reflect our culture of professional growth and recognizing the contributions of our team members. Our team’s development is integral to our ongoing success and capacity for identifying and nurturing promising investment opportunities and growing our investment portfolio.

Learn more about our team and their roles.

New platform investment

Stagevision

Founded in 1984, Stagevision provides a range of services in professional audiovisual production and management, including the assembly of sets and soft goods products, short-term rental of audiovisual equipment, and simultaneous interpretation services to businesses and related agencies across both Canada and the United States.

We’ve partnered with the Company’s CEO, Scott Tomlinson, who has served in this role since 2021, to execute on the business’s next phase of both organic and M&A-driven growth.

Portfolio spotlight

Oakcreek

In November 2024, Oakcreek was pleased to announce the promotion of Patrick Nolan to President and CEO. Patrick was formerly CFO of the business and will be succeeding Barrie Carpenter who will serve as Chairman of the Board of Directors.

Second Nature Designs

In January 2024, Second Nature was pleased to announce the appointment of Guido Romagnoli to the position of President and CEO. Guido was formerly COO of Hunter Amenities International, a global manufacturer of health and beauty products.

Learn more about our current investment portfolio.

Looking ahead

As we move into 2025, our focus remains on identifying new investments in middle-market businesses across North America while maintaining our commitment to long-term value creation. We will continue to leverage our expertise and network to foster strategic partnerships, ensuring sustainable success for our portfolio companies and investors.

New investments

We continue to actively seek to invest in businesses with EBITDA of at least $5 million.

Do you have an opportunity in mind? Explore our investment criteria or connect with us today.