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.

The reporting season of our international holdings gets underway in the weeks ahead. After a particularly strong Q1 reporting season, forward earnings per share estimates for the STOXX 600 have been flat since June. Some sectors, like in travel and leisure have observed an increase in their earnings revision while others, like in luxury or in construction and materials have obtained a lower-than-expected earnings revision. On the revenue side, we saw a weaker forward sales revision lately, a potential signal that the macroeconomic trends might remain complicated for the second half of 2024. On a sector basis, consumers and technology seems to be experiencing a soft patch. When not impacted by delay, new order intakes seem to be coming through but the cadence in manufacturing is progressing at a slow pace.

Political risk is back

Index performance rebased to 100 (USD)

Source: Bloomberg, MSCI.

Volatility spiked last month due to a political risk resurgence in Europe. The French election caught investors off guard and prompted many to de-risk and reallocate elsewhere. French bond yield has narrowed since the end of June, but equity hasn’t recovered much. French equities have suffered and have trailed other benchmarks since early June.

The left-wing alliance unexpectedly won the election, beating both the presidential and far-right party. Now, attention turns to the election of a new President of the National Assembly in July. The balance of power seems to have shifted towards the center-left alliance and this could be the best-case scenario for markets. The formation of a technocracy cannot be ruled out either.

The first real test for the new government will probably be to vote on the upcoming preliminary budget that needs to be submitted to the European Commission by mid-October. Last month the European Commission signaled that France should be put under excessive deficit procedure. If that proposition is adopted by the European Council, France will have to meet the requirement of the European Union’s (EU) fiscal rules. The incoming government will have little room to maneuver from a fiscal point of view. Considering that the last time France recorded a surplus was in 2001, the challenge is colossal.

Political uncertainty adversely affects the decision-making processes of companies. It will be interesting to track how companies intend to reallocate capital in the upcoming months.

Investors positioning

Fund flows are trending towards bonds and money market funds. US equity fund inflows remain high but have slowed, reflecting cautious investor sentiment. In Europe, equity funds are experiencing outflows, while Asia ex-Japan sees significant inflows, particularly in China and India. Technology remains the top sector, while materials and consumer sectors show muted interest. Shares of small caps in the US have recently surged, with the Russell 2000 Index hitting a 2024 high, fueled by optimism regarding the federal reserve’s advancements in combating inflation and the increased likelihood of interest rate cuts.

Fund Flows (last 4 weeks, % of assets)

Source: Deutsche Bank.

Cumulative equity flows (last 12m, weekly, $bn)

Source: Deutsche Bank.

Small caps is a key beneficiary of the expected lower rates, and given they continue to trade at a 20-year low valuation versus their larger counterparts, we believe now is an interesting time to own small caps.

Five longstanding ESG themes that predate responsible investing.

Environmental, Social and Governance (ESG) factors can be seen as idealistic in investing and at odds with business performance and measurable results. However, this view overlooks their financial implications for businesses and investors, with global small caps being no exception. ESG considerations, from board independence to community relations and environmental risks, can be useful to help assess financial stability, risk management and competitive advantage.

This week’s commentary will explore five themes that show how ESG factors can be important to sustainable financial success.

1. Board member independence

Good governance has long been an investor focus. Board independence helps ensure strategic guidance free from internal influences, reducing conflicts of interests. Independent directors provide unbiased oversight on risk management, which can help to avert crises and challenge management assumptions, leading to a more thorough analysis of strategic options and their implications. Independent boards often see higher profitability and navigate risks better, reflected in their market valuation and investor confidence.

An example is our holding Kurita Water Industries, which has 50% board independence, above the average in Japan. Its independent directors bring diverse perspectives, valuable in global expansion, and help Kurita maintain a solid financial position and sustainable growth in a competitive environment.

2. Product quality and safety

High product quality and safety standards fulfill regulatory requirements and boost consumer trust and brand reputation. They can reduce the risk of costly recalls and legal issues, directly impacting sales volume and the bottom line.

For instance, our holding Menicon, Japan’s first and largest contact lens manufacturer, has international quality standard certifications for medical devices, including ISO 13485/EN ISO 13485. Each of its subsidiaries maintains its own quality management system, with general managers in development, pharmaceutics and sales overseeing safety management. There have been no regulatory recalls of Menicon’s products in recent years.

3. Community relations

Strong community relations are vital for a company to obtain a license to operate, potentially increasing project approvals. Community ties can also provide supportive networks during crises and facilitate local cooperation. Conversely, community opposition can lead to project delays, increased costs and even cessation, affecting expected returns.

An example of a company holding that benefits from its community investment is Advantage Energy, from Western Canada. Although community issues are common in the natural gas sector, the company strives to be an active community member, attending monthly meetings to facilitate communication and cooperation regarding energy developments. It has faced no project opposition or delays and operates smoothly.

4. Physical risks of climate events on company assets

Climate change heightens extreme weather events and natural disasters, increasing the risk of damaging company assets, disrupting supply chains and increasing operational costs. These risks can also affect insurance premiums and lead to regulatory penalties, straining financial resources. Companies that mitigate these risks can protect assets and maintain profitability.

For example, our Arena REIT holding in Australia, with 272 social infrastructure properties, faces bushfire and extreme weather risks, leading to potential property damage, operational disruptions and higher insurance costs for tenants. Arena REIT maintains a geographically diversified portfolio and conducts thorough due diligence on bushfire zones and flood overlays during acquisitions. It also ensures adequate disaster insurance for repairs and reinstatement across its properties.

5. Employee relations

High employee morale and fair labour practices create a positive work environment, enhanced job satisfaction and reduced turnover. This boosts productivity and innovation, benefitting a company’s financial health. Conversely, poor employee relations can result in high turnover rates, lost productivity, strikes and reputational damage, negatively impacting financial health.

Our Vital Farms holding exemplifies good employee relations. The company produces and sells eggs, butter and ghee from pasture-raised hens. Certified as a B Corp, one of the highest standards of good corporate practices, Vital Farms has best-in-class initiatives for workers’ wellbeing, such as the ReVITAlize remote crew retreat, inclusive farmer open houses, comprehensive onboarding and an annual employee engagement survey.

The financial imperatives of ESG

These examples highlight how ESG integration can be used in financial decisions. As global small-cap managers, our commitment to incorporating ESG considerations into our investment decisions is one of the inputs for achieving sustainable financial success and aligning with our fiduciary duty to act in our clients’ best interests.

Disclaimer: ESG integration at Global Alpha is driven by taking into account material sustainability and/or ESG risks that could impact investment returns, rather than being driven by specific ethical principles or norms. The investment professionals may still invest in securities that present sustainability and/or ESG risks, including where the portfolio managers believe the potential compensation outweighs the risks identified.

Some of our recent commentaries (December 7, 2023 and February 8, 2024) cover the 2024 election landscape. One of the biggest surprises so far was the decision of UK Prime Minister Rishi Sunak to call a general election for July 4. In this commentary, we look at the UK economy and markets as we approach this election.

Sunak’s decision caught everyone off guard and, on the face of it, the timing seems strange. A summer election during peak holiday season usually entails poor turn outs. The general thinking behind the decision is that momentum would be strongest after a stronger-than-expected GDP print in Q1 and inflation almost back to normal. A slowdown in growth is expected, and while the drop in inflation was welcomed, it was due to a decline in home energy bills and the base effect. Consensus estimates expected a larger fall, and as such, expectations for the first interest rate cut from the Bank of England have been pushed back to September from June, keeping mortgage costs higher for longer.

Labour’s lead and Conservative struggles

At the time of writing, the Labour Party has a 21-point lead, and the incumbent Conservatives are falling into a battle with Reform UK to be the official opposition party. The election campaign is well under way and Labour seem set for an overwhelming majority. This means they should be able to implement their policies, so let’s look at their manifesto and see what is likely to impact the economy and capital markets.

Labour’s strategic plans: No EU return, but stronger ties

First and foremost, there is no return to the EU on the cards, but Labour will continue to work on EU trade and investment relationships. The main points concern economic stability, defence, housing, infrastructure and clean energy. With geopolitical tensions continuing to run high, Labour will kick off their first year in government with a Strategic Defense Review, setting out a plan to increase defence spending to 2.5% of GDP.

Push for affordable housing

As expected, housing is at the forefront. Labour would like to build 1.5 million new homes over their term with an emphasis on increasing social and affordable housing. Brownfield development is the priority and approval of sites will be fast-tracked. New developments will be obligated to ensure more affordable homes.

No tax increases, but closing loopholes

For personal taxes, Labour has pledged to freeze National Insurance, the basic, higher, or additional rates of Income Tax, and VAT. There are some changes around the fringes that will be a source of income – ending the use of offshore trusts and closing some other loopholes to tackle tax avoidance. Corporate tax will also be unchanged for the term, keeping it at 25%, which is the lowest rate of the G7, and a promise to act if tax changes elsewhere hinder UK competitiveness.

Building for the future

Infrastructure investment has been low, so public investment will be used to support and attract additional private investment, whether domestic or foreign. An overhaul of the planning system would help here. In parallel to the usual spending on roads, railways and other important national infrastructure, investments will go into upgrading ports and improving the supply chain, new gigafactories to help the automotive industry, rebuilding the steel industry, accelerating the deployment of carbon capture and supporting green hydrogen manufacturing.

Wind, solar and job creation

The UK has some natural advantages that should help the transition to clean energy – a long coastline, high winds, shallow waters and access to a skilled workforce with extensive offshore and engineering capabilities. The Green Prosperity Plan aims to double onshore wind, triple solar power and quadruple offshore wind by 2030 while creating jobs. Labour does not intend to issue new licenses to explore new oil and gas fields in the North Sea. The same applies to new coal licenses and fracking will also be banned. Labour remains committed to the EV transition by restoring the phase-out date of 2030 for new cars with internal combustion engines and will accelerate the roll out of charge points.

Financial services as a boost for innovation and investment

There was some positive language around financial services, an undoubted strength of the UK economy. Labour wants to support innovation and growth in the sector, talking about a pro-innovation regulatory framework. Also concerning financial services is the ambition to increase investment from pension funds in UK markets. Domestic pension funds are mature and have reduced equity allocations in general and even more so UK equity allocations. The UK Office for National Statistics shows that domestic pension funds own 1.6% of the UK equity market from over 30% in the 1990s, low compared to similar developed markets. Theoretically this number could go lower, but with some new incentives, arguably risk is skewed to the upside, especially if a minimum level of UK equity exposure within pension portfolios is mandated. Increased demand could see a re-rating for UK equities.

UK equities poised for growth

The party in charge is ultimately not the most important factor. The last Labour government coincided with the Great Financial Crisis in 2008, and the Labour government before that (Tony Blair) was impacted by the dot-com bubble bursting and the subsequent recovery. What has been consistent over the past 60 years has been an average 10% gain for the FTSE All-Share index in the first year of an election when a change of power occurs.

The UK market looks attractive. Valuations are depressed and the discount is broad, having seen a pickup in bids from overseas competitors and private equity acquirers opportunistically seeking assets and market positions. Losing listed companies to M&A, a slow environment for IPOs and UK-based companies choosing a primary listing overseas means UK equities are in short supply. Finding solutions for the structural challenges facing the UK economy is essential to kickstarting growth and attracting investors. If execution is successful, UK equities could gain favour the way Japanese stocks have lately.

When one thinks of high-return investments, the waste management sector rarely comes to mind. It’s not as exciting as tech or biotechnology companies. Yet, the waste services industry has captured the attention of some of the world’s most sophisticated investors. For instance, the Gates Foundation owns over 35 million shares of Waste Management, the largest waste service company in the United States, making it one of the foundation’s top holdings. Private equity funds also have a keen interest in this sector, with those specializing in environmental services amassing more than $1.3 trillion globally, according to PitchBook.

Global dry powder: private equity funds seeking investments in environmental services (in billions)
Source: PitchBook.

So, what makes the waste management business so attractive to some investors?

The sheer size and growth potential of the market. Globally, more than two billion tons of municipal solid waste are generated annually. To visualize this, if packed into standard shipping containers and placed end-to-end, this waste would circle the Earth 25 times, or to the moon and back. On top of municipal waste, human activity generates significant amounts of agricultural, construction, industrial and healthcare waste. The global waste management market was valued at $1.3 trillion in 2022 and is expected to grow at a compound annual growth rate (CAGR) of 5.4% until 2030, reaching $1.96 trillion.

Recession-resilient business model and high entry barrier. Waste management is a fundamental service in modern society. Every day, millions of tons of waste are generated, requiring efficient collection, treatment and disposal. This ongoing need makes waste management companies indispensable, ensuring a stable demand regardless of economic conditions. These companies typically generate strong cash flows, high margins and significant return on capital. Long-term contracts with municipalities and businesses provide predictable revenue streams. Moreover, high entry barriers associated with sizable upfront investment and stringent regulations deter newcomers, giving existing players pricing power and reducing competitive pressures. This stability translates into reliable revenue streams, making the sector attractive for long-term investors.

At Global Alpha, we have identified numerous promising investment opportunities within the waste services sector over the years. Here are some examples:

• Casella Waste Systems (CWST US) is a regional player providing integrated waste services, with a strong focus on the US Northeast and Mid-Atlantic regions. The company benefits from its strategic positioning in the capacity-constrained Northeast market, allowing it to capitalize on pricing power and opportunities for growth through M&A. The company also emphasizes operational optimization to enhance margins and efficiency.
• Befesa (BFSA GY) is the world’s leading recycler for steel dust and aluminum, with recycling facilities across Europe, Asia and North America. The company has over 50% market share in Europe and is a first mover in China for steel-dust recycling. With increasing regulatory mandates requiring decarbonizing steel production, Befesa is well-positioned to capture the volume growth with a well-defined capacity plan.
• Daiseki (9793 JP) is Japan’s largest liquid waste processor, including waste oil, wastewater and sludge. Its recycling technologies can treat waste oil to produce recycled lubricating oil, heavy oil and supplemental fuels. Demand for recycled oil is rising as Daiseki’s clients seek to reduce their carbon footprint.
• ARE Holdings (5857 JP) is the world’s largest precious metals refiner. The company collects, recycles and refines precious metals, including gold, silver, platinum and palladium from dental, electronics and jewelry materials. The carbon footprint of recycled silver is roughly one-third of mined silver. Recycling gold emits less than 1% of emissions than mining new gold. Many industry players, such as Prada, Tiffany, Cartier and Pandora, now use recycled metals.
• TRE Holdings (9427 JP) is one of the leading waste treatment and recycling companies in Japan, specializing in handling construction waste and waste metals from automobile, home appliances and industrial sectors. It has over 20% market share in the construction industry and recycling schemes with auto makers and home appliance manufacturers. The company also has renewable energy businesses that use recycled wood from its own operations as fuel for biomass power generation.

When it comes to waste management, Japan is known for its rigorous waste sorting and disposal practices. The country faces a challenge with limited landfill capacity. Existing landfill sites have remaining capacity of 96.66 million cubic meters, projected to reach full capacity in 23 years, so Japan tries to minimize garbage through efficient sorting and processing. That explains why Japan has such low landfill waste per capital compared to other economies.

Global landfill waste generated per capita 2022, by select countries (in kilograms)
Source: Statista.

Daiei Kankyo (9336 JP), a name added in our portfolios in a recent quarter, is a Kansai-based waste disposal company that offers one-stop services from collection, transport and intermediate processing, to final disposal. The company has top share in the final disposal market among private-sector players, accounting for approximately 11% of Japan’s total landfill capacity. The final disposal business is extremely difficult for new players to enter because of the strengthened regulatory processes and environmental concerns by local communities. Only companies with a strong track record and reputation can possibly get a permit and expand their capacity. Additionally, it takes six to seven years to open a new facility. This lengthy process further increases the barriers to entry, ensuring stable volume growth and strong pricing power for incumbents. That’s why Daiei Kankyo boasts the highest margin among its waste management peers in Japan. Over the years, the company has diversified into recycling, soil remediation and electricity generation businesses to provide a total solution to its clients.

In contrast to other markets, Japan’s waste management industry is more fragmented, with the four players accounting for only 4.2% of the market, compared to 40% to 50% of the US market, which allows ample M&A opportunities. Daiei Kankyo has acquired over 20 companies since its founding in 1979, typically at EV/EBITDA multiples of 3x to 5x. M&A will remain a growth driver in the coming years.

Another driver for the company is public-private partnerships (PPP). Many Japanese local municipalities struggle with handling household waste due to a declining population and labour shortages and have started working with private players. Daiei Kankyo pioneered PPP contracts where the plant will be built, owned and operated by Daiei Kankyo, and municipalities will pay waste treatment fees once operational. So far, the company has won three orders and expects to win 12 by 2030.

Turning waste into wealth

While only a small portion of waste is recycled, global innovators and industry leaders are finding new ways to turn waste into sustainable materials or fuels. The potential for these innovations to convert waste streams – currently incinerated or buried – into valuable resources is promising for the future.

 

Next time you experience an internet outage, don’t blame the weather. Blame the thieves who took a big bite out of your internet line instead. According to Bloomberg, telecom companies are sitting on 800,000 tonnes of copper worth $7 billion at today’s prices in the form of old copper wiring. A surge in copper thefts is usually correlated with two things: a rise in copper prices and a rise in unemployment. We have seen a clear upward trend with the former and copper thefts could be a leading indicator of the latter.

There is a good chance we will be hearing more on cable-cutting thievery in the future. Copper traded around $3.89 per pound at the beginning of the year and recently crossed $5 per pound. So, what is going on with the price of copper?

Net zero targets come at a cost

First, it’s important to understand why copper is so central to our lives. Apart from silver, it’s the most efficient conductor of electricity. Copper is everywhere, from small appliances like toasters, to cars, which have an average of 29 kilograms of copper built into them. Electric cars need at least double the copper.

To meet ambitious net zero targets, it’s not just about electrifying means of transport. It also means generating and sourcing clean energy from far-flung wind farms and solar parks that need millions more feet of copper wiring to connect greater distances. According to S&P Global, annual copper demand is expected to double to 50 million tonnes by 2035 to achieve net zero targets.

Power-hungry AI search

Your Google search consumes around 0.0003 kilowatt-hours of energy. Ask the same question on, say, ChatGPT4 and energy consumption jumps to 0.01 kilowatt-hours. That’s around 15 times more energy consumption. Extrapolate this to the exponential growth in AI searches we see on the horizon (ChatGPT had 100 million monthly active users at the end of 2023) and you get the scale of energy required to sustain this trend. According to Trafigura, copper demand related to AI and data centres could add up to a million tonnes by 2030. That’s on top of the expected four to five million tonne deficit gap expected for reasons other than AI.

Structural deficits

While demand could explode on the back of AI and ambitious net zero goals, supply is not expected to keep pace for two reasons. First, the 10 biggest copper mines are around 95 years old on average. With every passing year, it gets more expensive to go deeper into the ground to extract lower grades of ore. Most of the big mines are located in Chile and Peru, politically volatile jurisdictions with recurring water shortages. That leaves existing mines producing a dwindling supply of expensive copper.

When it comes to new mines, there is not much incentive to put dollars to work on known deposits. Copper prices would need to be much higher to incentivize mining companies to invest billions of dollars. With politics, red tape and tougher environmental regulations, it takes close to a decade to fully operationalize a mine. This explains the flurry of activity in recent months (Glencore & Teck, Newmont & NewCrest, BHP & Anglo) to buy and consolidate existing mining assets. However, without exploration for new assets, it’s unlikely this will make a dent in the current demand-supply equation. The last copper mega deposit was found in Southern Mongolia (Oyu Tolgoi mine) 20 years ago. After pouring $7 billion into it, it has yet to reach peak production.

One of our holdings is Capstone Copper (CS CN), a mid-tier copper producer with mines in Chile, Mexico and Arizona. Capstone’s growth is driven by its assets in Chile, which make up two thirds of its net asset value. As a mid-tier producer, Capstone is not blessed with scale or the most unique grade of ore. However, what we like about the company is its ability to find and manage high IRR assets stewarded by a CEO with over 30 years of experience in the mining space.

In 2023, the company produced 164 kilotonnes of copper; however, the ramp up of its two Chilean mines is projected to bring production to 350 kilotonnes by 2028. This production increase means cash costs could come down from $2.88 per pound today to $1.50 per pound in the future. Should copper prices remain elevated, this would make for a very profitable operation.

Twenty years ago, copper saw a five-time increase in price driven by underinvestment in the 90s and China’s rapid industrialization. Could the simultaneous confluence of AI, the green energy transition and supply shortages make history repeat itself?

As we approach the start of summer, the need for cooling adds additional pressure to the grid, especially at peak hours. The Electricity Reliability Council of Texas (ERCOT) recently warned that reserve margins will be squeezed as temperatures are expected to rise. Last year, ERCOT asked customers multiple times throughout the summer to reduce their power consumption to limit the risks of blackouts. Many other states across the US face similar situations, and there are ways for individuals and corporations to alleviate the stress of heightened energy demand on the grid, namely through energy efficiency retrofits. Energy efficiency is often referred to as the low-hanging fruit of the energy transition and is a theme we are paying attention to.

The role of energy efficiency

Energy efficiency is the act of using less energy to perform the same function, such as heating a home or running a dishwasher. Reducing energy demand not only allows the grid to run more smoothly but also enables cost savings for consumers. To promote the quicker adoption of energy efficiency retrofits, the US has been taking both a carrot and stick approach through incentives along with regulations. To date, there are over 1,072 rebate programs in place in the US for both individuals and corporations to take advantage of. Over the next few years, it is expected that the investment in energy-efficient buildings and initiatives will double, providing many interesting investment opportunities.

HVAC: A major energy savings opportunity

One way that we are exposed to the energy efficiency theme is through commercial and industrial HVAC (heating, ventilation and air conditioning) solutions and equipment. Within a home or a building, heating and cooling uses the most energy. Typically, by upgrading equipment to state-of-the-art models, energy savings can be anywhere from 20% to 50%. Every year in the US, over $14 billion is spent on HVAC equipment either through new installations or repair and replacement. In April 2024, the Department of Energy (DOE) announced four consensus-based efficiency standards that are expected to save Americans billions on utility bills. A recent addition to the portfolio is poised to benefit from the stricter standards.

AAON’s commitment to innovation

While decarbonization and energy transition are secular trends that have gained popularity in the last few years, our holding AAON (AAON US) has been delivering HVAC equipment since 1988. Since then, AAON has focused on providing commercial and industrial customers with the highest quality equipment, saving them both energy and dollars. As the DOE released updated guidance on spec requirements for HVAC equipment, AAON was not required to update any of its equipment as it already met all the minimum requirements. Innovation and R&D have always been at the heart of company, which have led it to develop some of the most efficient and best-performing equipment on the market. Compared to peers, AAON spends the highest percentage as a proportion of sales on R&D, which we believe is an important piece of the company’s competitive advantage.

Efficiency today, savings tomorrow

Investing in energy efficiency brings multiple benefits. By adopting HVAC solutions and other retrofits, we can reduce the strain on the grid, lower costs and contribute to a more sustainable future. We believe making these changes now can lead to long-term gains for both individuals and businesses.

It’s springtime and, although most Global Alpha employees are close to putting Q1 earnings season behind them, some of us are getting ready to start dealing with allergy season. Trying to make the most of our situation, we tried to see if we could profit from this annual annoyance.

What’s the problem with allergies?

For most people who suffer from allergies, this only implies a runny nose and watery eyes, but it also impacts millions of people more significantly through sleepless nights, shortness of breath and asthma. A recent European survey found that 80% of respondents suffering from allergies mentioned the condition affecting their daily activities considerably. Additionally, untreated or poorly treated allergies can lead to serious health complications.

The ramifications of allergies are amplified by the fact that it affects children disproportionately, impacting sleep schedules and consequently school performance. Multiple studies have found that children who are allergic to pollen can see their grades drop an entire level if their condition strikes during exams. There is also a clear, although not properly explained, positive correlation between higher GDP per capita and the proportion of population with some form of allergy. This suggests that its effects on society are likely to get worse over time if nothing is done to address it.

Allergies as an investment opportunity

Given all this, it makes sense why allergy treatment is getting more attention and resources from pharmaceutical companies. The global allergy treatment market was $20.8 billion in 2022, with expectations to reach $38.9 billion in 2032. The Asia-Pacific region is expected to experience the fastest growth given its quickly growing middle class and increasing awareness of treatment options.

According to the WHO, allergies are now the fourth-largest pathological condition after cancer, AIDS and cardiovascular diseases. Over 500 million people globally have some form of allergy, with the majority self-treating with over-the-counter medicine without seeing a medical professional. This has driven massive investments in allergy treatments among virtually every major pharma company.

Curing allergies with a simple tablet?

In comes one of our holdings: ALK-Abello (ALKB DC). It is the world’s largest provider of allergy immunotherapy solutions with more than 35% market share. It provides its products in three different formats: injections, sublingual drops and tablets (the latest addition to the product line and largest opportunity). Most of its revenue is from Europe, with the rest coming more or less evenly from North America and APAC. Its market share in Japan is 97%, but adoption has yet to catchup to Europe standards.

Immunotherapy is one of the most exciting treatment methods for allergies, as it attempts to rebalance the immune system to avoid triggering the undesired reaction and thus provides a more permanent solution than alternatives. ALK’s products treat the five most common respiratory allergies (dust mites, grass, trees, ragweed, Japanese cedar), which together account for close to 80% of allergy cases in the world. The company differentiates itself from peers with its unique clinical data sets that not only assist in developing new products, but also help increase penetration by providing evidence-based insights to prospects and customers.

Where will the growth come from?

• Obtaining full approvals for its tablet portfolio for young patients, especially the pediatric segment.
• An ongoing trial for peanut allergy treatment opens the opportunity for a new business segment.
• Increasing awareness of treatments for allergies in various geographies.
• New partnerships for distribution.

Given the trend towards increasing deglobalization, friend-shoring, diversity and the acceleration of these themes post-pandemic, the focus on efficient and robust supply chains has intensified. Moving manufacturing plants to reduce risk, India is one of the main beneficiaries of the China+1 strategy.

The bottleneck of logistics infrastructure

India’s main issues are its logistic infrastructure and overall spending as a percentage of GDP. Currently, India spends approximately US$400 billion, 15% of GDP, compared to around 10% for the US/Europe and 9% for China. The logistics sector has a major impact on India’s cost, efficiency and manufacturing and exporting capacity. India is a major exporter of agricultural products, pharmaceuticals and textiles.

Government interventions

One of the major steps was the introduction of the Goods and Service Tax (GST) across India in July 2017. This moved the unorganized market to the organized market (an ongoing process), helping to reduce tax evasion and increase the traceability of merchandise from origin to destination. Today, a GST-registered operator cannot transport goods in a vehicle whose value exceeds Rs.50,000 without an eWay bill.

Revolutionizing toll payments with FASTag

Wait times between states were a major bottleneck due to the collection of taxes, verification and bribes. To solve the problem, the National Highway Authority of India (NHAI) implemented an electronic toll system called FASTag that enables drivers to pass through toll plazas without stopping for transactions. Using RFID technology, toll payments are made directly from the prepaid account linked to the toll owner. In 2016, 70% of tolls had the technology implemented; however, only 4.8% of total payments were collected via FASTag. To increase adoption, NHAI increased the non FASTag cost to 200%, which pushed users to adopt it to reduce costs. As of 2022, 96% of total payments were made through FASTag, increasing efficiency across the logistics industry.

Multi-modal transportation meeting diverse needs

The demand for logistics services in India is witnessing growth across various modes of transportation, including rail, road, air and sea. Rail freight, facilitated by initiatives like Dedicated Freight Corridors (DFC), is gaining traction due to its cost-effectiveness and reliability. Similarly, trucking remains a dominant mode for last-mile connectivity, driven by the e-commerce boom and expanding retail networks. Furthermore, the emergence of e-commerce giants has propelled demand for air and sea freight, necessitating efficient cargo handling and multimodal connectivity.

Several industries in India are heavily reliant on efficient logistics operations to sustain their growth momentum. E-commerce, retail, FMCG, automotive and pharmaceutical sectors are among the key beneficiaries, leveraging logistics to streamline supply chains, reduce lead times and enhance customer satisfaction. Additionally, the rapid expansion of cold chain logistics is enabling the seamless distribution of perishable goods, catering to evolving consumer preferences and market dynamics.

Ambitious growth plans for national infrastructure pipeline

In 2020, the Union Minister for Finance & Corporate Affairs released the Task Force’s Final Report on National Infrastructure Pipeline (NIP) for FY 20-25, with a target investment of US$1.4 trillion. Infrastructure projects are expected to be completed by 2025, with 21% from the private sector. Given that most transportation is done on the surface, India’s roads and highways have been a main focus, increasing from 6,061 kms in 2016 to 10,457 kms constructed in 2022.

With all these investments, the government estimates that India’s transportation and logistics sector is poised to grow at a compounded annual growth rate (CAGR) of around 4.5% from 2022 to 2050.

Major plans for Indian transport infrastructure

Source: Building the future: Infrastructure investment opportunities in India by EY Parthenon.

TCI Express: A logistic player benefiting from government spending

TCI Express provides delivery solutions in India and internationally. Most of the transportation is surface-related, although the company does offer air express. TCIEXP is one of the few companies that can deliver to every pin code in India due to its extensive network of sorting/delivery centres.

Capitalizing on the express segment boom

TCIEXP is part of the express segment of logistics, which has a CAGR of 12% and 18% for air and ground, respectively, during the last 10 years (Source: B&K Securities). The industry is dominated by the unorganized space, which represents 80%, where individuals own one to five trucks in their fleet, offering highly competitive services.

The organized space represents 20% of the industry and within it, 75% is owned by large competitors and 25% by SMEs. TCIEXP benefits from government interventions by being the lowest-cost producer within express logistics, allowing it to capture market share from those moving from unorganized to organized.

Asset-light model driving high returns

Operating as an asset-light business, the company doesn’t own its fleet; it outsources distribution to a third party, resulting in over 20+% ROIC. It retains loyalty by offering favourable terms such as return loads, creating loyalty amongst drivers. The company launched its first automated centre in India in 2023 and plans to open another four within the next two years, resulting in lower trucking wait times and increased inventory turnover for clients.

Is India’s logistics revolution a global turning point?

As the country invests heavily in infrastructure and embraces technology, it stands on the brink of transforming its supply chain capabilities. For businesses and policymakers alike, the challenge and opportunity lie in navigating these changes to foster growth and efficiency. How will India leverage this chance to become a leading hub for global trade? The world is watching, and the stakes are high.