Earnings remain resilient, but growth is concentrated, macro risks are building and selectivity is becoming critical.

Resilience in a tense environment

The Q1 reporting season underscores a growing divergence in global earnings. While US earnings growth remains robust, it is increasingly concentrated in AI-related industries. In contrast, Europe remains in a low-growth, late-cycle environment, while Japan continues to benefit from structural tailwinds. At the same time, a gap is emerging between the AI narrative and broader earnings. While AI-related sectors are seeing strong growth, the benefits have yet to spread across the wider economy.

The conflict in Iran has driven a sharp rise in oil prices and renewed volatility across equities and bonds, reflecting concerns around inflation and energy supply disruptions. It has also led markets to reassess the path of interest rates, with higher energy costs reducing the likelihood of near-term policy easing. This could test the resilience of corporate earnings through 2026.

So far, corporate earnings in developed markets have been more resilient than expected, despite successive macro shocks. Part of this resilience reflects lessons learned over the past five years. The pandemic period, in particular, has led to improved inventory management, stronger cost discipline and a greater willingness to implement cost optimization programs. More broadly, companies appear better equipped to manage their cost base, and in some cases, have demonstrated persistent pricing power. This has been particularly evident in industrials and technology, where contract structures and product differentiation have enabled effective price pass-through. These factors have helped preserve margins even as demand has plateaued or softened.

However, without a swift resolution to the conflict in Iran, global growth could decelerate further, exposing more vulnerable areas of the market. Discretionary spending, manufacturing and energy-intensive sectors such as transportation and logistics are likely to be most at risk. Rate-sensitive sectors, including residential real estate and REITs, could also face valuation pressure.

Looking at the broad small-cap market, balance sheets are structurally more fragile today than they were a decade ago when companies were deleveraging following the Global Financial Crisis. In the current environment, smaller companies are more exposed to rising interest costs and refinancing risk, particularly at the lower end of the quality spectrum.

Positioning for resilience

In this environment, a quality-focused approach centred on sustainable EPS growth remains critical. Our strategy continues to prioritize companies with strong balance sheets and high returns on equity.

As illustrated by our portfolio characteristics, our Global and International Small Cap strategies exhibit the following attributes:

Source: IDA, Bloomberg, MSCI

The lower leverage of these strategies points to less balance-sheet risk and better ability to navigate higher-for-longer rates. At the same time, the higher operating margins and stronger ROE, alongside faster forward EPS growth, are indicative of higher-quality businesses with more durable profitability and earnings power than the benchmark.

In addition, we continue to focus on companies exposed to structural growth drivers. Themes such as electrification, automation, health-care innovation, defence and reshoring offer improved visibility over the medium term. These areas can provide both defensive characteristics in a slowdown and operating leverage in a recovery.

Eurozone core inflation is lower than in the US, labour market indicators softer, money growth slower and credit conditions weaker. The UK resembles the Eurozone in most of these respects.

Last week’s ECB bank lending survey signalled tighter credit standards and notably weaker loan demand – see previous post and chart 1. The corresponding Fed survey this week, by contrast, shows little change from last quarter – chart 2. (Note that the Fed survey asks about current conditions, while the ECB survey additionally canvasses expectations.)

Chart 1

Chart 2

The last Bank of England credit conditions survey, released on 9 April, was benign but partly pre-dated Gulf hostilities.

US annual broad money growth – as measured by “M2+”* – was 5.9% in March versus an increase of 3.3% in both Eurozone non-financial M3 and UK non-financial M4 – chart 3.

Chart 3

US annual core PCE inflation rose to 3.2% in March versus a Eurozone core CPI increase of 2.2% in both March and April. UK core CPI inflation was 3.1% in March but the number still incorporates a boost from large rises in water bills and vehicle excise duty last April – the policy-adjusted measure calculated here was 2.7%.

The US trimmed mean PCE inflation measure preferred by incoming Fed Chair Warsh was 2.4% in March but there are no Eurozone / UK numbers for comparison. The calculation excludes 31% and 24% respectively of the top and bottom “tails” of the distribution, i.e. included items have a combined weight of only 45%.

Labour demand is weaker in the Eurozone / UK than the US, with Indeed job postings making new lows versus US stability – chart 4.

Chart 4

Unemployment expectations have picked up in the EU Commission consumer survey, suggesting a rise in the official jobless rate – chart 5.

Chart 5

The Fed model used here predicts policy direction based on current and lagged values of annual core PCE inflation, the unemployment rate and the ISM manufacturing delivery delays index. A rise in the latter has pushed the model estimate further into the tightening zone – chart 6.

Chart 6

*M2+ adds large time deposits at commercial banks and institutional money funds to the official M2 measure.

The March fall from a four-plus-year high in January / February was due to a pick-up in six-month consumer price momentum, with nominal money expansion unchanged – see chart 1.

Chart 1

Commodity price strength implies a further increase in CPI momentum through May, at least – chart 2. So the slowdown in real money growth will extend unless nominal expansion accelerates – unlikely given recent upward pressure on rates.

Chart 2

The earlier rise in real money growth has been reflected in a pick-up in global industrial momentum, with April manufacturing PMI new orders also the highest for four-plus years – chart 3. Orders have received an additional boost from precautionary stockpiling triggered by Gulf War III.

Chart 3

The lead time between turning points in real money momentum and PMI new orders has recently been running at seven months, suggesting a PMI reversal from September. The stockbuilding boost may have accelerated strength, however, implying an earlier peak.

The March fall in global six-month real narrow money growth was driven by the G7 component, with E7 expansion tracking sideways – chart 4.

Chart 4

US growth fell in March but remains higher than in the rest of the G7 – chart 5.

Chart 5

The March fall in global six-month real narrow money growth is estimated to have been accompanied by a similar slowdown in industrial output expansion, implying a continued small lead for the former – chart 6. The suggestion of “excess” money support for markets is consistent with recent equity market resilience.

Chart 6

The expected further fall in real money growth, however, and near-term support for output from full order books, could result in the series converging or crossing soon.

A previous post suggested that the Gulf War III shock would interact with concerns about private credit exposure to cause banks to tighten lending standards. April Fed and ECB lending surveys were flagged as important markers.

The ECB survey confirms the thesis, showing significant rises in reported and expected credit tightening balances across loan categories – see chart 1. (The Fed survey is expected next week.)

Chart 1

The shock, however, appears to have had an even greater negative impact on the risk appetite of borrowers. An average of expected demand balances fell to a level historically consistent with GDP contraction – chart 2.

Chart 2

With both supply and demand weakening, loan growth may slow sharply, in turn threatening a fall in meagre broad money expansion. Non-financial M3 rose by only 3.3% in the year to March.

Prospective monetary weakness argues for pre-emptive policy loosening but the ECB, following new Keynesian convention, is focused on upside risk to inflation expectations. Expectations measures, unlike money trends, failed to give timely warning of the 2021-22 inflation surge, contributing to policies remaining excessively loose. An opposite mistake may be brewing.

Driven by years of underinvestment, rapid urbanization and the need to adapt to a power-driven, technology-led world, infrastructure spending is a key tool governments use to stimulate economic growth. Regardless of what drives the allocation, civil infrastructure – the systems that underpin essential societal functions – remains a foundational focus of government spending.

The US government’s current focus on infrastructure

The 2021 Infrastructure Investment and Jobs Act (IIJA) is in full swing and will last until 2030 and beyond. The approximately USD1.2 trillion US expenditure bill is allocated to roads, bridges, transport safety, transit, freight, chargers, power and broadband.

Spending on US highways and streets is currently at historic highs, reaching a seasonally adjusted annual rate of approximately $149.5 billion in January 2026. This sector remains a primary driver of public infrastructure growth, bolstered by long-term federal funding. But despite high spending, the American Society of Civil Engineers (ASCE) estimates a $684 billion funding gap for roads over the next decade (2025–2035).

The business cycle is such that architecture and engineering firms gain from the bulk of the work at the onset, executing on planning and design. Then come the bids and proposals on work and equipment, which ultimately fill the backlogs of suppliers and contractors.

The right tools for the job

Based in Downers Grove, Illinois, Federal Signal Corporation (FSS US) manufactures specialized equipment for infrastructure maintenance, public safety and environmental cleaning. The company operates between 24 to 27 principal manufacturing facilities worldwide and directly manages over 40 service centres. Already within our portfolio, the company is one that may be positioned to benefit from infrastructure spending by providing the necessary equipment and technology to support civil infrastructure projects.

Federal Signal’s diversified business groups offer products that serve multiple infrastructure subsectors. The Environmental Solutions Group is the largest manufacturer of dump trucks in the United States. They also manufacture street sweepers, sewer cleaners and industrial vacuum loaders, safe-digging and road-marking equipment. The Safety and Security Systems Group provides technology and systems used by first responders and industrial facilities to protect lives and property.

Federal Signal delivers a comprehensive suite of equipment designed to support a wide range of IIJA-funded project areas, as highlighted in the table below.

Cementing a provider of construction materials

Large scale infrastructure projects such as bridges and transit require longer planning and often are fully realized toward the tail end of the spending period. Global Alpha is positioned through Eagle Materials Inc. (EXP US), an important producer of cement, to strategically capture the roughly USD550 billion allocated for new construction materials.

Eagle Materials possesses regional market dominance: The company’s 70+ facilities are concentrated in the US Heartland, Sun Belt and Mountain West. These inland markets are protected by high transportation costs, which limit competition from cheaper foreign imports.

Between 2024–2025, Eagle invested heavily in modernizing plants like the Laramie, Wyoming facility, increasing cement output by 50% specifically to meet the rise in IIJA-funded municipal projects. Within the same time frame, Eagle converted nearly 100% of its cement capacity to Portland Limestone Cement (or PLC). This low-carbon product is increasingly required for government-funded projects that prioritize environmental sustainability.

Strategically, the company shifted its sales mix toward non-residential and public infrastructure, sectors projected to grow by roughly 5% in 2026, to offset recent softening in the residential housing market.

Global phenomena

Civil infrastructure is being accelerated on a global basis; China spent USD550 billion on transport infrastructure in 2025 alone. Japan just began a USD140 billion mid-term plan for the implementation of national resilience. Global Alpha is exposed to global civil infrastructure buildout through Sany Heavy Equipment International Holdings Co. Ltd. (631 HK).

Hong Kong-listed Sany is the world’s third-largest heavy equipment manufacturer. Their equipment is designed with a focus on being « easy to own, easy to operate and easy to service, » prioritizing essential functionality over excessive technical complexity. The company is also a global leader in concrete machinery, especially after acquiring the legendary German brand Putzmeister. Products include truck-mounted pumps, stationary pumps and concrete mixers. Large-scale engineering contractors account for approximately 45% of Sany’s revenue.

That demand is increasingly coming from outside China: overseas markets now contribute 64% of revenue, led by Africa, where sales surged 55% on the back of infrastructure buildouts. To capitalize on this momentum, Sany has shifted its mix toward infrastructure-heavy “civil works” applications, helping drive a 41% increase in net profit in 2025.

Keeping assets clean, clear and operational

Global Alpha also holds Bucher Industries AG (BUCN SW), a Swiss industrial group that provides specialized machinery and components for essential infrastructure, specifically through its Bucher Municipal and Bucher Hydraulics divisions. Unlike heavy civil construction firms, Bucher focuses on the maintenance, cleaning and operational safety of existing civil assets.

Bucher’s connection to civil infrastructure is primarily functional, ensuring that public and commercial traffic areas remain operational and safe. For sewer and drainage infrastructure, Bucher produces specialized sewer cleaning and water recycling units essential for managing urban water networks and preventing flash flooding on major roadways. Bucher also provides construction site support through its heavy-duty sweepers, specifically engineered to handle the abrasive materials (e.g., aggregate, spoil) found on large-scale infrastructure construction sites.

Civil infrastructure is more than a standalone spending category – it is the operating backbone that enables other critical buildouts, from power and water management to digital connectivity. For Global Alpha, this creates diversified, real-economy exposure to long-duration public investment, spanning both new construction and the ongoing maintenance that keeps cities functioning.

The stockbuilding cycle is a repeating fluctuation in the demand for production inputs and goods for final sale caused by inventories periodically over- and undershooting the level desired by manufacturers and distributors.

The approach here is to monitor the cycle using measures of the rate of change of G7 stockbuilding from national accounts data and business surveys.

The national accounts measure places the last cycle low in Q1 2023, implying that the current cycle is well-advanced – see chart 1.

Chart 1

The business survey measure is more timely and recently crossed below zero, consistent with the cycle moving into a downswing.

The original research on the cycle – by Joseph Kitchin, published in 1923 – used data on commodity prices, bank clearings and interest rates. Kitchin attributed the cycle to “psychological causes”, making no explicit link with inventory behaviour.

The cycle is evident in commodity prices because changes in demand for production inputs affect their price as well as volumes – chart 2.

Chart 2

Tech investors often dismiss the cycle as an “old economy” phenomenon but electronic components are a key production input subject to the same inventory-related demand swings as traditional industrial commodities.

There is no single price index capturing the changing nature of electronic components. However, export prices of key supplier economies are a rough proxy. Chart 3 shows that the annual rate of change of an average of Taiwanese and Korean export prices in US dollars tracks the national accounts-based measure of G7 stockbuilding changes.

Chart 3

Chart 4 overlays the annual rate of change of an average of 12-month forward earnings estimates, showing a similarly significant correlation.

Chart 4

Based on the cycle assessment here, the implication is that momentum of component prices and earnings should be at or close to a peak.

Why could this prove wrong? One possibility is that the current stockbuilding cycle will extend. This cycle is judged to be the last of a set of five constituting the current housing cycle (which began in 2009). Final cycles tend to be longer than the 3.5-year average, with one recent example (1986-91) reaching 4.5 years. The next low, therefore, could be delayed until H2 2027, in turn suggesting a later start to the downswing.

Another counter-argument is that strong demand for components is being driven by an ongoing upswing in the business investment cycle – narrowly focused on AI-related spending in the current cycle – as well as peak stockbuilding. This cycle last bottomed in 2020 and has ranged between 7 and 11 years historically, so the upswing could – in theory – continue for several more years. The thinking here is that the current cycle is more likely to be short, reflecting a long prior cycle (11 years) and a drag from the expected stockbuilding downswing.

L’infrastructure numérique est un sujet de plus en plus souvent abordé dans les discussions sur l’investissement institutionnel. Dans un récent article de Benefits and Pensions Monitor, « Is it time to embrace digital infrastructure? », les directeurs généraux Kaitlin Blainey et Andrew Parkes ont été interviewés dans le but d’exposer la façon dont les investisseurs abordent ce segment en croissance rapide et son incidence sur la construction de portefeuille.

La façon dont l’infrastructure numérique se pose comme complément, et non comme remplacement, des portefeuilles d’infrastructure traditionnels est mise en évidence. À mesure que la demande des investisseurs pour des actifs essentiels de longue durée augmente, l’infrastructure numérique s’harmonise de plus en plus aux caractéristiques défensives et axées sur le revenu longtemps associées à une plus vaste catégorie d’actifs.

L’article reflète également l’importance croissante de l’expertise au-delà de la seule sélection des actifs. L’infrastructure numérique peut jouer un rôle stratégique au sein de portefeuilles institutionnels diversifiés, en particulier lorsque les investisseurs soupèsent les considérations relatives à l’adaptabilité, à la résilience et au déploiement de capitaux à long terme.

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« Le monde est en perpétuel changement. » – Sir John Templeton

Peu de domaines illustrent mieux cette réalité que l’investissement institutionnel. Il y a près de trois décennies, j’ai quitté le Royaume-Uni pour m’établir au Canada. Au fil du temps, j’ai été témoin privilégié d’une transformation remarquable du paysage canadien de l’investissement, couvrant les régimes à prestations déterminées (RPD), les fonds publics, les fonds de dotation et les fondations, ainsi que, de plus en plus, les régimes à cotisations déterminées (RCD).

Cette réflexion personnelle ne porte pas uniquement sur ce qui a changé, mais surtout sur ce qui compte réellement : les enseignements que les investisseurs institutionnels devraient retenir.

Investisseurs canadiens en RPD, fonds publics, dotations et fondations

La gouvernance détermine les résultats

Les résultats de placement s’améliorent de façon significative lorsque la prise de décision est protégée des influences politiques ou des promoteurs de régime. L’expérience canadienne en constitue un exemple probant.

En 1997, la création de l’Office d’investissement du Régime de pensions du Canada (aujourd’hui Investissements RPC), en tant qu’entité indépendante opérant à distance des pouvoirs publics, a marqué un tournant déterminant en matière de gouvernance.

Avant cette réforme, le RPC fonctionnait principalement selon un modèle de répartition avec des réserves limitées. La transition a été progressive, initialement financée par les cotisations annuelles et investie surtout dans des actions publiques passives. Toutefois, l’instauration d’une gouvernance indépendante a profondément modifié la trajectoire du fonds, permettant une diversification accrue, une transparence renforcée et une viabilité financière à long terme.

L’élimination des contraintes favorise de meilleurs résultats

En 1996, les investisseurs institutionnels canadiens étaient soumis à la règle du contenu étranger, limitant à 20 % les investissements étrangers dans les comptes à imposition différée. Malgré certaines solutions de contournement, cette contrainte entraînait une concentration excessive dans les actifs canadiens.

Cela exposait les portefeuilles à un risque domestique accru et faisait en sorte que la réglementation, plutôt que les principes de la théorie moderne du portefeuille, dictait les décisions d’allocation d’actifs.

L’abolition complète de cette règle en 2005 a marqué un tournant majeur en permettant une diversification mondiale accrue.

Le risque finit toujours par se matérialiser

Les 30 dernières années ont été marquées par de nombreux chocs : éclatement de la bulle technologique, crise financière mondiale, pandémie de COVID-19, hausses rapides des taux d’intérêt en 2022 et tensions géopolitiques persistantes.

Chaque épisode a confirmé une réalité constante : le risque peut demeurer latent pendant de longues périodes, mais il finit toujours par émerger.

Ces événements ont notamment entraîné :

• une adoption accrue de stratégies axées sur le passif dans les RPD;
• une diversification vers les placements non traditionnels;
• une attention accrue au risque de liquidité;
• une importance grandissante de la gestion tactique et du rééquilibrage.

Gérer le risque, et non seulement l’allocation d’actifs

Les crises successives ont démontré que les problèmes proviennent du risque mal géré, et non d’une allocation d’actifs imparfaite.

Les risques les plus importants sont souvent invisibles dans les cadres traditionnels d’allocation :

Figure 1 : Risques cachés au-delà des catégories d’actif

Cette réalité a favorisé l’émergence de l’approche globale de portefeuille (total portfolio approach), qui considère le portefeuille comme un système intégré plutôt que comme une juxtaposition de catégories d’actif.

L’essor des structures d’investissement déléguées

La pandémie a mis en évidence les limites des ressources internes et la complexité croissante des portefeuilles.

En réponse, plusieurs institutions ont adopté des modèles délégués, notamment le modèle de chef des placements externalisé (OCIO), afin d’améliorer :

• la gouvernance,
• la rapidité décisionnelle,
• l’exécution des stratégies.

Ces plateformes permettent aux investisseurs de se concentrer sur leurs objectifs stratégiques à long terme.

L’investissement responsable s’impose

L’investissement responsable est désormais un élément central des pratiques institutionnelles. Les facteurs environnementaux, sociaux et de gouvernance (ESG) sont reconnus comme financièrement significatifs et intégrés aux processus de placement.

Cette évolution, largement impulsée par les investisseurs, reflète l’importance d’une gestion rigoureuse des risques et de la création de valeur à long terme.

Le trio gagnant : gouvernance, flexibilité et gestion du risque

Au cours de trois décennies marquées par des chocs de marché, des changements réglementaires et des transformations structurelles, le message à l’intention des investisseurs institutionnels est demeuré constant : le succès n’a pas reposé sur une capacité à prévoir parfaitement les marchés ou à optimiser finement la répartition de l’actif, mais plutôt sur la mise en place de cadres de gouvernance capables de reconnaître les risques tôt, d’y répondre avec fermeté et de résister aux périodes de tension.

Lorsque la gouvernance a été solide, que les contraintes ont été levées et que les responsabilités clairement établies, les résultats se sont améliorés. À l’inverse, lorsque les risques ont été ignorés, dissimulés ou reportés, ils ont inévitablement refait surface, souvent au pire moment possible.

Le défi fondamental auquel les investisseurs font face aujourd’hui n’est pas la complexité, mais la responsabilité. La délégation, la diversification et l’investissement responsable sont des outils, non des substituts au jugement et à la surveillance. La gestion du risque exige une vision intégrée du portefeuille, une compréhension des interactions entre les décisions et la capacité de faire évoluer les structures au rythme des marchés.

Les investisseurs ne sont pas récompensés pour leurs intentions, mais pour la qualité de leur gouvernance. Ceux qui priorisent le suivi et la gestion rigoureuse des risques seront les mieux positionnés pour offrir des résultats résilients au cours des prochains cycles de marché et des décennies à venir.

Investisseurs canadiens en RCD

Le coût caché de la simplicité

Dans les années 1990, de nombreux employeurs ont fermé leurs régimes PD aux nouveaux participants, transférant ainsi le risque vers les individus.

Les premiers RCD proposaient des choix simples, mais peu encadrés.

Le risque est bien réel pour les RCD

La bulle technologique a révélé une faiblesse fondamentale : les pertes sont directement assumées par les participants.

Les comportements amplifient souvent le risque :

• désengagement en période normale,
• réactions excessives en période de stress.

Options par défaut et éducation : des éléments essentiels

Les fonds à date cible et les stratégies cycle de vie ont été introduits pour encadrer les décisions et réduire les biais comportementaux.

Le décaissement : la véritable mesure du succès

Les régimes à cotisations déterminées ne réussissent pas parce que les participants prennent leur retraite avec des soldes élevés. Ils réussissent lorsque ces soldes se traduisent par un revenu fiable à vie. Or, les efforts de conception des RCD s’arrêtent souvent à la phase d’accumulation.

Les fonds à date cible sont principalement optimisés pour la croissance des actifs, et non pour la gestion de la transition plus fragile vers la retraite. À mesure que les participants approchent de la retraite, ce déséquilibre devient le risque central.

Contrairement aux régimes à prestations déterminées, les RCD transfèrent aux individus la responsabilité de gérer les risques de longévité, de marché, d’inflation et de séquencement des rendements. Cela rend les années immédiatement avant et après la retraite particulièrement critiques, au moment où les soldes individuels atteignent leur niveau le plus élevé.

En l’absence d’une stratégie de décaissement délibérée, même une épargne disciplinée peut mener à des résultats de retraite décevants. Le décaissement constitue la phase déterminante d’un RCD et représente une responsabilité de gouvernance croissante pour les promoteurs. La manière dont l’épargne est convertie en revenu, ainsi que la durée de ce revenu, détermine ultimement si les participants bénéficient d’une sécurité financière à la retraite.

Des progrès, mais encore du chemin à parcourir

Le marché canadien des RCD est passé d’un simple substitut à faible coût des régimes à prestations déterminées à un système de retraite plus sophistiqué, mais encore incomplet, dans lequel la conception du régime, les solutions par défaut et le décaissement peuvent avoir plus d’importance que le choix individuel.

L’histoire a rendu une leçon incontestable : le risque ne disparaît pas simplement parce qu’il est individualisé. Lorsque les RCD privilégient la simplicité sans cadre structurant, ou le choix sans accompagnement, ils ne donnent pas plus de pouvoir aux participants, ils les exposent davantage.

La véritable responsabilité de la conception moderne des RCD n’est pas de maximiser les options offertes, mais de gérer les risques susceptibles de compromettre les résultats de retraite : les erreurs comportementales, le mauvais moment des décisions et une transition vers la retraite mal encadrée.

Les solutions par défaut, l’éducation réfléchie et des cadres de décaissement délibérés sont les mécanismes qui permettent de transformer l’épargne en sécurité financière à la retraite. En définitive, les RCD ne seront pas jugés en fonction des soldes de compte au moment de la retraite, mais selon le revenu qu’ils procurent par la suite.

Positive for emerging markets

Source: Bloomberg, as at April 10, 2026

Learn fast and adjust

In last month’s commentary, we discussed our approach to forecasting and portfolio management in times of market stress with reference to the OODA (Observe, Orient, Decide, Act) Loop below.

To quickly recap:

Through periods of high uncertainty and violent market moves like what we have currently, we lean heavily into this OODA Loop. This involves a constant testing and re-testing of our macro views and investment hypotheses, and tweaking of the portfolio as conditions change.

We thought this thematic would be worth unpacking further, as these markets provide a great illustration of how a robust process can help navigate periods of high volatility and uncertainty.
 

Sweating the capital

This approach helps us to remain disciplined, learn fast as new information arrives and make small, frequent adjustments to ensure there is tight alignment between evolving beliefs and portfolio risk.

We call this “sweating the capital,” with the aim being to:

1. Limit the size and persistence of errors without dulling upside capture; and
2. Maximise risk-adjusted returns over the long run.

In a volatile quarter, the portfolio outperformed thanks to a balance of investments in focused, volatile, risk-on names across niches in the AI supply chain in Taiwan and South Korea, alongside more defensive holdings including oil producers, Asian financials and Brazilian water utilities. The former outperformed through January and February, while the latter helped us hold on to relative gains through a risk-off period in March.

Achieving the right balance of risk across the portfolio is the output a rigorous process based on a set of long held beliefs (the impact of liquidity in driving prices, importance of macro sensitivity in EM and peer review to guard against behavioural error), all of which is all geared to matching the capital in the portfolio with the conviction of the team.

It sounds very simple, but it is a demanding process, requiring tight collaboration across a team of experienced and opinionated investors, as well as the discipline and energy to continually update beliefs, capital and conviction as conditions change.

That discipline is especially important for navigating times of high uncertainty and market volatility.
 

Process under pressure

The testing and re-testing of investment beliefs in our process takes place formally through weekly investment policy meetings, along with monthly country and stock meetings. This structure helps us orient ourselves and debate how best to move ahead while documenting everything as we go.

Gulf War III is a powerful example of how volatile markets expose habits and test investment beliefs. These periods throw so much information at investors that it can be paralysing to a team without well-established and repeatable decision-making routines.

For us, disciplined preparation, structured collaboration and strong behavioural standards are key tools for us to maintain emotional control and remain focused on execution.
 

Calm, clear and deliberate decision making

One example of how structure and routine help aid our decision making is through the team stock meeting. Here we discuss any portfolio companies whose stock has moved up or down by a certain threshold amount in relative terms. In either case, this involves the team re-testing the investment hypothesis for a given name to assess whether it remains intact.

We do not rely on static forecasts from the original stock research notes on companies to guide us through an uncertain period like this. Instead, the review trigger – a fairly modest relative stock move – forces us to re-underwrite our forecasts and adjust conviction accordingly.

The result is that we can quickly identify winning ideas and scale them up, as the meeting and team discussion help us cut through the market noise and identify improving fundamentals earlier, even when uncertainty is high. Equally, it allows us to cut losers faster when new information invalidates an investment thesis, helping to avoid thesis drift and subsequent drawdowns.

This process has been crucial for operating in whipsawing markets like this.

It has provided opportunities to tilt the portfolio towards areas where attractive long-term prospects remain intact, and are also more insulated from the energy shock. Below are two examples.
 

AI memory bottleneck

“High bandwidth memory is the single biggest bottleneck to scaling AI systems today.”
— Dylan Patel (SemiAnalysis), as discussed in an interview on the Dwarkesh podcast, March 2026

As we wrote back in early 2024, the difficulties in scaling up high bandwidth memory supply amid explosive demand to support AI GPU clusters is driving a cycle of unusually strong margins, cash generation and earnings visibility for DRAM giants SK Hynix and Samsung Electronics.
 

Historically significant – this cashflow is off the scale

Source: KB Securities, March 2026

 
However, our level of exposure is tempered by caution over risks of US hyperscalers pulling back AI investment, the emergence of circular financing arrangements and increasing reliance on debt.
 

Necessity is the mother of invention – cheap energy is China’s answer to US compute edge

Source: Bernstein, March 2026

China playing catch-up through more (and less efficient) chips and bigger data centres
 

Source: Bernstein, March 2026

 
Last year, China added an enormous 500 GW of power capacity to its grid, more than the rest of the world combined. Much of this comes from rapid growth of solar energy, by some measures now cheaper than coal power in China.

The battery and power management technology supplied by portfolio company CATL is crucial to this revolution.

Lime and limestone are materials that have shaped human civilization for thousands of years. Limestone is a common sedimentary rock formed mostly from calcium carbonate. It develops over millions of years from either marine organisms (shells, coral, plankton, etc.) or chemical precipitation in oceans and lakes.

Limestone is converted into lime by burning (calcining) it in a kiln at 1000ºC. Lime can then be mixed with water (hydrated) to form hydrated lime. Finished lime then absorbs CO2 and slowly transforms back to calcium carbonate (i.e., limestone). The lime cycle is one of the oldest known chemical cycles used by humans

Limestone been used as building material for centuries, from pyramids to great cathedrals of Europe, including Notre Dame, Westminster Abbey and St Peter’s Basilica. More commonly it is used as an ingredient in cement and concrete, and in building roads. It is also a widely used industrial mineral, either unprocessed or transformed into a lime derivative.

Limestone is estimated to account for 15% of surface rock on Earth, but high-purity limestone valued in industrial, construction, environmental and agricultural applications is much rarer as are deposits of scale that can be commercially exploited.

Applications across industries

SigmaRoc PLC (SRC LN), a recent addition to the portfolio, is a lime and minerals group targeting quarried materials assets in the UK and Northern Europe. The business is asset backed with over 2.7 billion tonnes of mineral reserves and resources, the equivalent of over 100 years of resources.

SigmaRoc has exposure to the construction, industrial and environmental end markets with applications such as:

Construction

• Quarried limestone and granite materials are used in both infrastructure and residential applications such as the construction of roads, railways, bridges, ports, airports and buildings. The main products include aggregates, asphalt, ready mix concrete, pre-cast concrete and dimension stone.

Industrial

• Lime is used as a flux in steel and copper production to remove impurities and control melt chemistry.
• Quicklime is involved in pulp and paper production.
• Limestone powder is used as a filler in paints and adhesives.

Environmental

• Quicklime, slaked lime and limestone powder remove acidic compounds from flue gas.
• Lime treats drinking water by raising pH, and wastewater by reducing toxicity.
• In soil treatment, lime raises soil pH.

Quarries and their locations

SigmaRoc has an advantage in that it owns quarries. In countries where it does not own quarries (the UK and Poland), it has on-site kilns and long-term supply agreements with the quarry owner. Owning the quarry means fixed costs are manageable and ensures both the quantity and quality of supply.

Having quarries located close to customers has key logistical advantages. Firstly, the weight of the product means it is not feasible to ship long distances. Lime products are dangerous to transport due to lime’s high chemical reactivity. It is classified as corrosive under transport regulations and producers need regulatory compliance to ship. Quicklime degrades over time, meaning shipping long distances is unfeasible, reducing the threat of imports.

Integration, growth and megatrends

The three main lime producers in Europe are SigmaRoc and two privately owned Belgian companies. After those, the market is fragmented and the SigmaRoc has a “buy-and-build” growth model. The strategy is to acquire assets (quarries, lime and limestone businesses, related infrastructure) in fragmented local markets, then integrate them to extract synergies, scale and efficiency.

SigmaRoc has cyclical recovery potential and is poised to benefit from megatrends that support long-term growth. If macro conditions improve – supported by infrastructure spending, lower rates and renewed housing policy – SigmaRoc’s scale and flexibility could drive outperformance. Its diversified presence across geographies also helps smooth region-specific cycles.

Future growth is also supported by the ongoing electrification of economy. This creates a huge increase in demand for batteries, and lime is required in the mining and refining of lithium. European steel – and especially green steel – should also benefit from electrification, so long as the industry is protected from high carbon inputs, potentially reduced import quotas and higher tariffs. Beyond electrification, flue gas scrubbing creates an environmental market for lime, a process that addresses shipping emissions.

Limestone and lime are attractive markets due to high barriers to entry, the irreplaceable nature of product and the lack of material import flow into Europe. With an M&A track record as the foundation for future growth, we believe that makes SigmaRoc a compelling investment in the materials sector.