Close-up trading monitor with stock market candle chart

Several major global indices fell into bear market territories in the past weeks. Investor behavior has shifted from ‘buy the dip’ during the pandemic to ‘sell the rally’, fearing of a potential recession. A wave of layoffs has swept across businesses, especially in the tech sector in the United States (U.S.) in the first half of 2022. The University of Michigan Consumer Sentiment Index fell sharply to a record low of 50.2 in June of 2022, well below market forecasts of 58, mostly attributable to the soaring inflation, which is at a 40-year high.

To combat the inflation, the Federal Reserve (Fed) has accelerated the pace of its interest rate hike, lifting interest rates by 75 basis points in June. This represents the third hike in 2022, and the largest since 1994. Historically, recessions start a median of 25 months after the Fed begins a tightening cycle, although there have been three cases (in 1963, 1994, and 2015) when a recession did not follow.

The best scenario for the markets would be a so-called soft landing, where the Fed could bring inflation under control without causing a recession. An ideal outcome would be similar to 1994, when the Fed hiked interest rates seven times in 13 months, almost doubling the rate from 3.05% to 6.05%, while avoiding a recession. However, the annual inflation was only 2.7% in 1994, while the latest inflation rate accelerated to 8.6% in May of this year. The unemployment rate was also higher in 1994, at 5.5%, versus 3.6% in May 2022, indicating a tighter labour market and higher labour cost today. These factors suggest it will be more challenging for the central bank to tame the inflation this time around. It is more likely than not that we are going to have a recession as early as next year, as predicted by leading economists.

How long does a recession last?

Based on data provided by the National Bureau of Economic Research, since 1945, the U.S. has experienced 13 recessions, including the short one in 2020. The average length of a growing economy is 5.3 years, and the average recession lasts for 10 months. A full economic cycle is around 6.3 years.

What about the stock market? In the same time period, the S&P 500 experienced 11 bear markets, six of which were accompanied by a recession, according to data compiled by Invesco. Bear markets on average have taken about one year to go from peak to trough, and 2.3 years to return to break-even. The S&P 500 index plunged an average of 33% during bear markets in that period, with the biggest decline occurring between 2007 and 2009, when the S&P 500 dropped 56%.

What does small cap do historically in bear markets or recessions?

History indicates that small caps tend to outperform larger caps after a bear market, and small caps have outperformed large coming out of nine of the last 10 recessions since World War II, according to the Jefferies Equity Research report published on April 8, 2020, JEF’s SMID-Cap Strategy – Thoughts & Observations.

Small cap vs. inflation

Small caps have historically outperformed and have shown better pricing power during most of the previous high inflation regimes, including the early 1960s, and the 1970s. Margins of small cap companies have declined less than large caps when inflation goes up, and in some cases, small cap margins go up with inflation, according to the BofA report by Jim Carey Hall, Small cap primer: the big guide to small stocks, published on May 31, 2022. Companies we invest in at Global Alpha are leaders in their niche markets, which gives them the pricing power to pass on higher costs to clients, hence maintain a healthy margin in an inflationary environment. 

Small cap vs. high interest rates

Two types of companies are most likely to suffer from higher interest rates. From the valuation perspective, expensive stocks are more likely to get hurt; from the operation point of view, heavily leveraged companies are likely to suffer. The valuation of small caps looks particularly attractive today, as small caps were expensive vs. large leading into almost every other Fed tightening cycle since the 1980s. Today, small caps trade at discount to large caps, as noted in the BofA’s report, Small cap primer: the big guide to small stocks. Companies we invest in at Global Alpha are high-quality companies trading at reasonable prices. Approximately one third of the companies in our portfolios have a net cash position.

Expansion and recession are a natural part of the economic cycle. It is important to be diversified, and stick to quality names that benefit from secular trends. It is during the down markets that more investment opportunities will emerge. The Global Alpha team has identified many great companies that are trading at attractive valuations, and we will introduce these names in future commentaries.

People walking through airport, silhouette (focus on aeroplane)

As the first official day of the summer approaches, it finally feels like the world is getting back to normal. Many countries are now dropping Covid requirements and restrictions, such as testing, masking and quarantining. Tourists are definitely itching to get their holiday plans back on track. In fact, travel is forecasted to reach pre-pandemic levels this year in many regions of the world. In the last two years, countries around the world have lost billions of dollars due to the lack of tourists and many are launching campaigns to attract foreigners back to their favourite holiday destinations.

Earlier this week, the United States (U.S.) announced a five-year strategy to revive national travel and tourism, which is aimed at promoting the U.S. as a premier vacation destination. According to the Bloomberg article, US launches plan to bring back foreign tourists, before the pandemic, travel contributed about $240 billion to the U.S. economy, benefiting companies operating restaurants, hotels, attractions, shopping and more. Despite a lull in international travel, demand in the U.S. has picked up quite rapidly. Over the last five months, travellers have contributed to a trade surplus in the country, signalling an improving appetite for travel. Demand is likely to continue increasing over the summer as international tourists have yet to reach their pre-Covid numbers.

Pent-up demand has been seen across Europe as well. If April travel data is any indication of what’s to come, Europe is in for a busy summer. In April, popular tourist destinations have seen tourist numbers increase anywhere from two to tenfold. Travellers are also spending a lot during their holidays. In France, for instance, foreign travel spending was up 201%, compared to 2021, and up 477%, compared to 2020, as noted in the Bloomberg article, France Foreign Travel Spending Up 201% in April Y/Y. Another Bloomberg article, Number of tourists visiting Spain in April up nearly tenfold YoY, notes that in Spain, the 6.1 million tourists who visited the country in April spent close to what 7.14 million tourists spent back in 2019. It seems that higher prices for hotel rooms and plane tickets are not dissuading tourists from packing their bags, enjoying their holidays and doing some shopping and eating out too.

Japan has taken a more cautionary approach to its reopening plans. As of Friday, June 10th, the country will be accepting visa applications and allowing tourists to come into the country, but only if they are part of a guided tour and continue masking. They have been allowing up to 20,000 arrivals a day since June 1, and this daily cap includes business travellers, foreign students, and Japanese nationals. It will also include the newly allowed tourist arrivals. It will be interesting to see how many tourists will book holidays to Japan on these organized tours. One factor that could boost the attractiveness is the weak Japanese Yen. It is currently trading at a 20-year low, which could incentivize travellers to take advantage of lower than usual prices within the country.

China remains in an uncertain state. The country has been looking to ease border restrictions, especially after the two-month lockdown in Shanghai. While they loosened restrictions, parts of Beijing and Shanghai are already back in lockdown for a mass testing exercise, given the country’s zero Covid policy. We will be keeping a close eye as the situation emerges, although it remains unclear as to how things will progress over the summer.

Despite the Organisation for Economic Co-operation and Development (OECD) lowering its global growth outlook to 3% in 2022, down from the previous 4.5% forecast, summer travel does not seem to be a casualty of the slowdown. We believe that travel-exposed names could really benefit from the summer vacation tailwinds and keep performance on track despite the general economic slowdown.

Samsonite (SMSEY)

Samsonite has been one name that has benefitted from the global travel recovery and could further benefit from the reopening of the Asian regions. Sales for 2022 are on track to reach 80% of pre-Covid levels. The company is a well-established travel and lifestyle bag and luggage company with several brands under its umbrella. Some of these brands include Samsonite, Tumi, American Tourister, Gregory, and Lipault. The company’s exposure to different segments within the travel industry, as well as different geographies, makes it particularly attractive. In terms of business and leisure travel, which has been on the rise, they own Tumi and Samsonite, which cater to the more frequent, long-haul travellers. Gregory and High Sierra on the other hand, cater to the short-distance, outdoor-casual travellers who are looking to buy new gear for their road trips and backpacking adventures. As a result of these trends, sales in North America have been growing at a strong pace this year.

Asia is their second most important region in terms of revenues, accounting for about 34% of sales, just behind the Americas at 40%. However, the company’s sales in the Asian regions have been lagging, given the harsh lockdown measures that were in place over the last few months. Although more recently, news coming from Japan about the loosening of border restrictions for tourists and the slow reopening of several regions in China have given their Asian regional sales a boost. As China opened its inter-province travelling, sales have been improving, and with the broader reopening of the region, we remain confident that the company will be able to deliver strong sales in 2022 despite the slow start to the year.

L’Occitane (LCCTF)

Another one of our holdings that could benefit from tourists opening their wallets abroad is L’Occitane. The company owns many different brands in the cosmetics and beauty industry that appeal to diverse demographics. Their three top markets are China, the U.S., and Japan. Although there are still some uncertainties about the reopening situation in China, we expect the U.S., Japan and the rest of their geographies to make up for the slower growth in China. The company not only operates independently-owned boutiques, but it also has its products in major airports around the world at duty-free shops while also having a strong B2B distribution channel through which the company sells to airlines and hotels. With the global travel rebound, the company is looking to benefit not only from individual consumers’ spending during their trips but also from its B2B segment in which airlines and hotel chains will need to replenish their inventories to welcome travellers.

On the cost side, like most companies, L’Occitane has also been facing some expenditure inflation. However, the company has been able to swiftly manage its increased input costs. The pricing pressure that L’Occitane has been facing mainly stems from logistics and raw material costs. The group raised prices in all geographies during the month of April by 4-5%. This has been its largest price increase to date and the company expects it to be sufficient to maintain margins this year.

A person checking stock market data on a mobile device.

“Intuition is linear; our imaginations are weak. Even the brightest of us only extrapolate from what we know now; for the most part, we’re afraid to really stretch.” – Ray Kurzweil

When it comes to investing, similar to technology, vision and imagination play a big role in achieving outsized outcomes. Ray Kurzweil was referring to the human imagination – or the lack of it – when we extrapolate linearly into a future with infinite possibilities. While human beings sometimes have difficulty grasping exponential change, there are also instances where we blindly extrapolate and exaggerate a recent trend indefinitely into the future. It’s easy to forget sometimes that the more things change, the more they stay the same.

It wasn’t that long ago that we were confined to the four walls of our homes, completely reliant on the internet economy to feed, clothe and entertain us. Much was made of the internet adoption of the future being fast forwarded back into the present. We were quick to pronounce the end of the brick and mortar economy. Turns out we were a bit too premature with this conclusion.

To understand why, we need to take a look at why the digital takeover did not quite live up to its promise. First, the pandemic led to large scale disruptions to a supply chain that is finely tuned to the needs of just-in-time inventory. It is no longer cheap to get your product from its factory in China to a warehouse/store near you. The cost to ship a container from China sky rocketed from a few thousand dollars pre pandemic to close to $15,000 today.

Second, the soaring cost of digital ads means the barriers to entry for a digital only brand/venture to succeed is much higher now. Many brands in the early 2010s were built on the back of cheap digital advertising. The cost of acquiring customers now is much higher and digital ads don’t quite make the impact they used to with their poor targeting and lower click through rates.

For example, the cost to advertise on Facebook has tripled in the last two years. At the same time, Apple’s latest privacy update has forced apps to comply with the Ad Tracking Transparency (ATT) framework, which requires advertisers to seek permission to track user activity. This makes it harder to track ad performance, leading companies to spend more for sub optimal results.

What this means is that a lot of digital-only brands and startups looking for new tricks to achieve growth have settled for an old trick – brick and mortar stores. It helps that the pandemic has led to plenty of empty store fronts to choose from. Landlords are now open to shorter leases and better terms, allowing digital native brands to experiment with a brick and mortar presence.

A classic example of a digital native brand thriving in this new world is Warby Parker. While Warby Parker is not new to physical stores, their big bet on brick and mortar is an admission of the fact that the adoption of online purchase of glasses has not fully lived up to expectations. Currently, their brick and mortar stores are more profitable than their website and the company expects most of the growth in 2022 to be driven by retail stores.

This trend has borne out in the larger economy. In 2021, U.S. brick and mortar sales overtook e-commerce for the first time ever. It remains to be seen if this is a sustainable trend, but clearly, brick and mortar is far from dead. At Global Alpha, we are cognizant of the fact that trends tend to get exaggerated to the extremes. The goal is to be mindful of these extreme swings and to look for mispriced opportunities when they arise.

Clicks Group (CLICKS SJ)

One of the brick and mortar champions within the emerging market universe is the Clicks Group based in South Africa. Clicks operates the largest retail pharmacy chain in South Africa, along with a health and beauty retail business. It also operates a wholesale distribution business and runs the Body Shop and GNC franchises in South Africa.

In a difficult environment marked by Covid and social unrest, Clicks continues to invest in its brick and mortar operations by opening close to 40+ stores every year. In spite of pandemic-led restrictions, its 800 stores have driven both top and bottom line growth.

Clicks interestingly uses the online channel as a more defensive strategy, letting them add and experiment with new categories and private label products. Our conversation with management informed us that South Africans prefer to go to shopping centres where most of the Clicks stores are located rather than shop online. They also value the privacy of shopping in a pharmacy rather than having items delivered home. Clicks illustrates how traditional retail and e-commerce can complement each other to drive sustainable growth. Irrespective of headlines, we continue to keep our ears to the ground to find great businesses.

Elevated view of Makati, the business district of Metro Manila.

Since 2010, the Philippines has been growing at a rate of 6%, with controlled inflation (except in 2018 due to rice inventories) and reasonable macro indicators. From 2010 to 2016, President Benigno Aquino implemented some pro-market reforms, increasing the space for growth and spending, reducing corruption, and implying an increase in investment and foreign flows. In the period of the Aquino presidency, the most pro-market policies caused FDI inflows in most years (which had only been seen in the period between 2003 and 2007). The Philippines received its investment-grade in 2012, after which the country continued growing nicely, and with good macro indicators, it was mostly market friendly.

In 2016, Rodrigo Duterte assumed the presidency of the country. Although the Build! Build! Build! infrastructure program was an interesting initiative, there was no significant progress, and the handling of the contracts led to doubts among investors. The Public-Private Partnerships (PPP) investment initiatives created by President Aquino were better accepted by the foreign investor community.

The Duterte government was faced with a strong fight against drugs, problems surrounding international relations (especially with the U.S. in its first half), and faced increasing internal protests. All of the above caused foreign investors to divest from local stocks almost every year. According to the CLSA report, BBM is it, more than USD$5 billion was divested from the Philippines market in 2016-2021, causing foreign ownership of the index to drop from around 30% in 2012 to nearly 20% currently.

Although the macro indicators continued to show good dynamism and controlled inflation, there was a certain crisis of confidence in the Duterte administration, along with a series of track records of policies missteps, troublesome relationships with some western countries, and better opportunities in other markets. The Philippines has essentially been forgotten by the foreign investment community for the last six years.

In the recent presidential election, Ferdinand “Bongbong” Marcos was elected. There is a logical execution risk for his new term. Nevertheless, its comparable base is very low. With foreign investments mostly out of the country, there is plenty of room to improve international relations. However, the huge infrastructure gap in relation to other countries remains. Bongbong Marcos wants to continue with the Build! Build! Build! Program, but may frame it differently.

Although it is too early to say, he doesn’t seem as conflictive as the former president was with some local groups. Duterte had some conflicts with leading economic groups, one example being the shutdown of ABS-CBN, the country’s leading broadcaster. In short, Bongbong Marcos has to avoid internal conflict and taking sides in international relations (as Duterte did with China). In that scenario, considering its vast growth potential (the Philippines should continue growing around by 6% in the coming years), foreign investors should regain some confidence in the country.

Of course, the transition is not easy. Investors will be keen to see some initiatives that will lower the deficit/GDP ratio from levels of -8.6% in 2021 to at least normal levels of -3% during his mandate. There are also ongoing discussions for a tax reform. Although there is no official proposal yet, the reform is not intended to harm a particular sector or corporations. It is more of a blended tax increase among different products (for example, liquor, cigarettes, removal of some exemptions in VAT). If done properly, the probable tax increases should be seen positively by investors and present organized measures to reduce the current deficit.

All in all, if the country is able to promote more FDI, it will benefit its deficit and debt ratios. Likewise, one of the best ways to grow the economy without compromising debt indicators is with more foreign and domestic investments. This could be a catalyst to regain a better sentiment towards the country. Investors need a clear roadmap. In 2017, we saw a rally in the stock market when the Duterte administration was elaborating a tax reform in order to reduce the deficit.

Together with a roadmap to reduce the deficit and create a sound monetary policy, investors are expecting Macros to appoint credible cabinet members. The President recently announced that Central Bank Governor Benjamin E. Diokno would serve as the new finance minister, which is good news for the market. Moreover, he is expected to make sound economic pronouncements and pursue pro-business policies. In his campaign, he mentioned several market-friendly initiatives, such as:

  • Continue the Build-Build-Build initiative of the former administration and increase digital infrastructure.
  • Increase attention on the agricultural sector (although many former politicians have mentioned the same thing and few improvements have been made).
  • Increase investments in healthcare (sound opportunity as consumption).
  • Increase funding for tourism (could be a relevant catalyst for the mid-term, as explained before).

One of the themes that we often take into account in emerging markets is the consumption of the emerging middle class. We feel that in a mid-long term scenario, opportunities are massively driven by the increasing purchasing power of the emerging middle class, as well as people climbing the corporate ladder, therefore accessing better opportunities and quality of life.

While it will take time, the transformation of the Philippines is possible; take Chile for example. In the 2000s, the country had a GDP/capita of close to 11,000 USD, and in 2019, it was close to 25,000 USD. Indonesia is another example, with a population of nearly 250 million, the country enjoys great opportunities to increase the purchasing power of the emerging middle class, fostering its current 4,500 GDP/Capita. In order to be able to upgrade and increase consumption patterns, a stable and open macroeconomic scenario, certainty and foreign investments are required. Indonesia has undergone several transformations aimed at achieving better investor confidence.

As for the Philippines, hopefully this new government will be able to boost investors’ confidence. We feel the country should follow a similar pattern as Indonesia, with some lag. The mining sector is very relevant in Indonesia, but has been quiet in the Philippines. Although the country has one of the highest worldwide resources in gold and copper, a lack of investments and politics have clouded its development. Last year, the Duterte administration lifted a nine-year ban on new mines, which is likely to slightly improve the scenario, but foreign capital is needed. The country can enjoy relevant opportunities in the mining sector if things are managed correctly, following a similar path that Indonesia is currently developing.

In terms of drivers of growth, the Philippines is one of the world’s biggest suppliers of labour. Remittances are around USD$35 billion per year, accounting for close to 8% of the GDP, as per the CLSA report, Back on the Road. Revenues have been growing at a rate of 4-5% per year, and they are expected to continue doing so. Moreover, the country enjoys the world’s second position in business process outsourcing (after India), accounting for USD$25-30 billion per year, around 7% of the GDP, growing at similar levels to remittances.

Tourism is another source of revenue the country must increase. Rich in natural beauty, tourism in the Philippines represents only 2-3% of GDP, a far cry from what tourism represents for nearby Thailand and Malaysia. If things are done well, the country could be another reopening player. In the first quarter of 2022 GDP increased by 8.3%, and the banking sector loan growth continues to pick up according to Bloomberg data. In February and March 2022, they were up 8.9% and 8.8% year-over-year, respectively. There are many catalysts for the Philippines to perform well. In the last six years, the country hasn’t driven foreign investor attention, remaining an undiscovered country with plenty of potential to unlock value.

We are currently overweight in the Philippines. Our investment in the country is in Puregold Price Club Inc. (Puregold)

Puregold Price Club Inc. (PGOLD PM)

Puregold is a multi-format consumer retailer in the Philippines. The company operates under the two phimain brands: Puregold and S&R. Puregold includes hypermarkets and supermarket discounters, mainly serving lower income classes, with the average ticket size of PHP 0.9k. S&R operates 20 warehouse stores based on annual membership fees and primarily targets customers in the middle to upper income classes, with an average ticket size of PHP 4.1k.

The top three formal grocery retailers account for 40-45% of the market. S&M Retail (owned by the country’s richest family, Sy) holds 20% of the market share and is also the leading mall operator. Puregold is the second=largest grocery retailer, with a 15% market share. Robinsons Retail accounts for 5-10% of the grocery market and is also engaged in department and specialty stores, hardware stores, and malls. Puregold is the only pure grocery operator among the largest players. The grocery industry is expected to grow in line with the nominal GDP, at 9-11% annually.

The company enjoys many strengths. Their multi-format strategy provides more flexibility and optionality. Covering all income segments makes Puregold a more defensive retail player and enables the company to benefit from improvements in the spending power of all income groups. Puregold has a strong balance sheet, generating plenty of free cash flow with almost no debt. Their stores have strong unit economics. Additionally, Puregold is a well-recognized brand with a perception of the best value among consumers, coupled with a large loyalty program that enhances customer loyalty.

In terms of opportunities, the company is well-positioned for the Philippines’ growth due to its lower-priced merchandise. The consolidation of mom-and-pop stores and small chains is also a driver for growth considering its strong track record of integrating acquired grocery chains. Moreover, a rise in the private label mix has an ongoing positive contribution to margin expansion (from <1% currently to at least 10-20% in the medium term).

Colleagues discussing new business strategies in the office

After growing at 9% compound annual growth rate (CAGR) for the last decade, there is still much to get excited about regarding the long-term prospects of the video game industry. New marketable technologies, streaming that provides exposure to lesser-known games, and new phone owners becoming potential gamers, are only a few of the reasons to believe that the industry will be able to maintain this growth over the next decade.

Despite these positive secular trends, video game developers and publishers have been facing a difficult start to the year. Two years of COVID has brought production delays that had initially been offset by significantly increased consumer engagement from various lockdowns across the world. With the reopening now well underway, these “non-core” consumers are going back to their pre-COVID lifestyle. This obviously creates difficult comps for companies that saw record growth for the last two years and are still often facing production delays, with many big names, such as Activision, Nintendo and Ubisoft posting negative year-over-year (YoY) revenue growth in 2022. Although, the delays were initially blamed on the work from home situation, where collaboration was more difficult and productivity was inconsistent. It is now the talent retention that seems to be at fault.

Indeed, game designers and engineers have a long history of being underpaid, compared to their peers in other fields, often trading higher salaries in exchange for working for companies that create games they are passionate about. listed the median video game designer salary at $66,452 versus software developers at $73,177 for 2021. Wage inflation is now rampant across virtually the entire economy. Additionally, many employees are reluctant to go back to the office, meaning that designers, developers, and game engineers are receiving multiple offers from competitors from within but also outside the video game industry. Video game development requires substantially more collaboration than many other software developer jobs. Management teams face a difficult choice between maintaining the perks of working from home to retain talent and bringing everyone back to the office to meet production timelines without requiring more resources.

It is not all negative for game developers and publishers though; 2022 is already the biggest year on record for mergers and acquisitions (M&A) in the video game industry. Microsoft acquiring Activision Blizzard for $68 billion is on its own the biggest video game company acquisition of all time. Other recent deal announcements, such as Sony acquiring Bungie and Take-Two Interactive acquiring Zynga, have shown that there is still demand for Intellectual Property (IP) and that the studio consolidation trend is well and alive. The top 10 gaming companies already represent over 65% of the market and that share is set to grow over the next decade. Increased M&A also tend to be beneficial for small-cap as their acquisitions are usually at a premium to their market value.

So how is Global Alpha positioning itself? We currently own Sega Sammy Holdings.

Sega Sammy Holdings (6460 JP)

Established through the integration of game publisher SEGA Corporation and pachinko machine manufacturer Sammy Corporation in 2004, it has historically also been involved in amusement centres and theme parks. A defensive name in our portfolio, the company owns strong and long-lasting franchises, such as Total War and Sonic, which they have a solid history of monetizing. The company has been divesting from its arcade business in recent years to reinvest in its gaming segment, which will allow them to more aggressively acquire studios and IPs, as well as facilitate the distribution of games worldwide.

The company differentiates itself from western game publishers through its diversification in the pachinko and pachislot business, which provides them with a more consistent cash flow than its video game business. Furthermore, their Pachinko and Pachislot business benefits from the economic reopening play where the video game segment would usually suffer. Another differentiator is the labour market in Japan, which is not facing the same wage pressure as seen in the west and therefore did not see the same challenges in retaining talent.

SWOT analysis


  • Owns popular IPs and strong brand moat
  • Diversified complementary revenue stream


  • Margins weaker than peers as it is not a pure play


  • Margin expansion from divestment
  • Deployment of cash for acquisition


  • Regulatory risk in their Pachinko business
  • Fail to produce or obtain exciting new titles/IP

Global Alpha is excited about the long-term growth prospects of the video game industry, and we believe the recent negative sentiment seen in markets worldwide offers good investment opportunities to stock pickers.

Warehouse worker wearing face mask and protective workwear checking products using digital tablet.

China accounts for about 12% of global trade. Covid restrictions have idled many factories and warehouses, and it could prove to have a great impact on local and global businesses. United States (U.S.) and European ports are already swamped from the present supply crisis, leaving them vulnerable to additional shocks.

China’s top exports are broadcasting equipment ($223 billion), computers ($156 billion) and integrated circuits ($120 billion). Top imports include crude petroleum ($150 billion), integrated circuits ($144 billion), and iron ore ($99 billion).

In the short run, the pile-ups will mean more costly headaches for the $22 trillion global merchandise trade. In the mid-term, investments in China will slow as cross-border travel will remain difficult. To give a sense of implications, there are more than 70,000 foreign-invested companies in Shanghai alone.

Chinese Covid restrictions will only accelerate the need to onshore, a theme that has been developing in the last couple of years. For a company, the risk factor of buying key components from foreign countries has become an important consideration among managers on a daily basis. The availability of goods has become critical in competitive landscapes. And, as the saying goes, the downfall of some will be the fortunes of others.

As investors, we certainly look to profit from these disruptions and seek to identify the companies who will gain market share from supply chain disruption or abrupt changes in market conditions, such as changes in tariff regulations.

Lesson learned, in 2017, Global Alpha invested in Solaredge Technologies, a small, sub $1 billion market cap technology firm providing high-quality inverters to the solar industry. At the time, Huawei was to enter the US market and compete heavily on price. The story unfolded where Huawei could not compete technically, and, deterred to enter the U.S. by international trade tariffs, Solaredge has a $12 billion market cap today. We have since exited the position.

Global Alpha believes that the China lockdown and the accelerated onshoring could provide more Solaredge-type opportunities.

Caesarstone (CSTE:US)

Caesarstone is a concept and lifestyle-driven company with a customer-centred approach to designing, developing, and producing high-end engineered surfaces used in residential and commercial buildings globally. The company has two main manufacturing facilities: one in Israel and the other in the U.S.

The company provides high-quality countertops for the professional network of architects and home designers. With time, it has expanded its offering to big box outlets, such as Home Depot, Lowes and IKEA. Its markets are global, with concentrated sales in the U.S., Canada, Australia and Israel.

In the last few years, competition from Chinese countertop manufacturers has put pressure on company margins, as well as demonstrated a deeper need to innovate from quartz to ceramics materials.

Recently, Caesarstone has shown revenue growth, both from the rebound of U.S. construction, as well as a strong focus on its product mix, both in the professional and big-box segments. With a strong presence in the southeastern United States, Caesarstone is also in a good position to benefit from a fast-growing market.

The supply shortages occurring in China could affect Ceasarstone’s competition as Chinese countertops lack availability. We would expect the company to take full advantage of this situation. Long term, non-Asian distributors could increase their relationships with Caesarstone as they implement deeper onshoring strategies.

De’Longhi (DLG:IM)

De’Longhi is an Italian manufacturer and distributor of small domestic appliances worldwide, with operations in the espresso coffee makers, food preparation, comfort and home care segments. The group’s brand portfolio comprises De’Longhi, Kenwood, Braun and Ariete.

The company competes against French company Group SEB and Australian company Breville in many home-destined consumer products. The competition in the high-end coffee maker segment has been notable with Hollywood-level advertising and De’Longhi using Brad Pitt to fend off George Clooney’s success with Nespresso.

With a strong manufacturing base in Treviso, Italy, the company may be able to navigate the Chinese supply issues with some ease. Its competitor Groupe SEB is four times the size of De’Longhi, but mostly because it has global dominance in cookware. As Groupe SEB ferociously competed with the Chinese in cookware, they moved most of their production to China. Today, De’Longhi is in a position to take the market share because of its favoured local production. 

The onshoring theme is providing many strong tailwinds in certain industries. As an example, Taiwan chip manufacturer TSMC is investing heavily in Japan in an effort to diversify from China. In fact, Japan could become a major beneficiary of moving production out of China from its industrial technology leadership, proximity to Asian markets and developed market status.

Kurita Water (6370 JP)

Global Alpha recently purchased Kurita Water in Japan. Founded in 1949, Kurita Water manufactures and sells water treatment equipment and chemicals. Revenue mix by region is Japan at 60%, Asia 18%, and the rest of the world at 22%. Water treatment equipment represents 61%, while chemical sales are 39%, a strong recurring revenue source. The main industry focus of Kurita is the electronics industry, at 63% of revenues.

Water treatment in electronic manufacturing is of high technical standard supporting Kurita’s expertise and leadership in water treatment.

Kurita Water has always been on our watch list for the quality of its products and long history. During the last eight years, it participated in a highly competitive Chinese market. The diversification decision by its clients, such as TSMC to develop chip manufacturing in Japan, should support company growth over several periods.

Close up of unrecognizable male person opening glass door to enter the office. There are people in the background.

Globally, inflation has been a main topic of conversation among investors this year, as well as the Fed’s ability to handle it. In the last few commentaries, we shared our views on the ongoing inflationary pressures and why we think the target of 2% is hardly achievable in the near future. Aside from an unprecedented monetary and fiscal stimulus, spiking energy prices and supply chain disruptions caused by Covid and the war in Ukraine, the main driving forces of current inflation include labour shortages and rising wages.

Indeed, it’s what we are currently experiencing and what some experts in the U.S. are calling the tightest labour market in 70 years. During a panel in Washington hosted by the International Monetary Fund, Fed Chair Jerome Powell described the current state of the U.S. labour market as unsustainably hot.[1] According to the U.S. Labor Department’s Job Openings and Labor Turnover Survey, in March 2022, the number of job openings increased to 11.5 million, from 11.3 million in February. Moreover, there were almost two vacancies for every unemployed person, pointing to an intensifying tightness and further wage pressure.[2] These trends are supported anecdotally while businesses from different sectors report difficulties hiring talent and surging labour costs. When we talk to companies in our emerging markets (EM) universe, we get similar feedback with a slightly varying magnitude in different regions.

As much as one wants to credit purely Covid, the fundamental reasons underlying labour tightness started to surface before the pandemic. Demographics, immigration policy and de-globalization trends have sowed the seeds of the current environment. Covid and the fiscal response to it only added fuel to the fire. The working-age population has slowed in many Organisation for Economic Co-operation and Development (OECD) countries since early 2000.[3] Short-sighted immigration policies in some countries have contributed to that slowdown. A tremendous cost advantage that China enjoyed for years winded down by 2015-2016 due to wage growth and demographics. During the Covid pandemic, many governments found themselves navigating through unchartered territory. Some of those responded with massive fiscal stimulus, which created an unprecedented demand for goods and services, and eventually labour.

There is also a social component to the set-up as the relationship between capital and labour undergoes a fundamental transformation. For example, in the U.S., the population has higher savings, and as a result, this means an improved bargaining power over employers. In many instances, employees can dictate working conditions by pushing for more remote work. Low minimum wages became a major political issue a long time ago. Every year, a larger percentage of people of different ages are reported to be suffering from various mental health issues. Covid was an accelerator of many burnouts that happened in the last two years. And it’s far from being an issue only in developed markets.

For instance, the majority of office workers in India are reportedly suffering from enormous pressure because their colleagues are quitting.[4] The pandemic has radically changed how people work and what the job means to them. As a result, it has contributed to “the Great Resignation”. These factors are reshaping how managers think about their employees, as well as their mental health and wellness. CEOs acknowledge that human capital is the most important asset in any business. Engaging in the current wars for talent, employers have no choice but to pay up. Shorter work weeks could become more common as companies across the world are experimenting with a four-day work week. Additionally, a strong corporate culture and Diversity and Inclusion (D&I) policy have become an important differentiator of successful businesses.

We believe the current labour market issues will persist and become the major drivers of inflation. So, how do we position our EM portfolio from this perspective?

  • We prioritize companies that exercise a superior level of pricing power, have a strong culture and a track record of attracting and retaining talent, have a solid D&I policy, and are relatively less labour intensive. An analysis of social aspects is an integral part of the comprehensive ESG due diligence that we make on every candidate for inclusion in our portfolio.
  • We prefer companies with strong balance sheets and industry-leading margin profiles. As labour shortages limit capacity to grow, companies have to gain efficiencies. An economy with excessive demands creates enough incentives for businesses to invest in productivity improvement. Although we acknowledge a time lag between investments made and productivity improvements, we believe that our holdings should come out as winners in the medium to long term.
  • We look for businesses that can capitalize on this environment, especially those in the automation space.

E Ink Holdings Inc. (8069 TT)

E Ink, based in Taiwan, is the global leader in Electronic Paper Display (EPD) technology. Also known as ePaper, it allows devices to mimic the appearance of ordinary ink on paper and is widely adopted in several end applications, including Electronic Shelf Labels (ESL), eReaders and various IoT solutions.

Unlike LCD and OLED, EPD does not require power to hold an image and consumes energy only when the content is being changed, has no backlight, uses ambient light from the environment and is easy on the eyes. It’s also thinner, flexible and rugged. ESL attaches to the shelves with EPD that show price, sales promotions, and other product information and replaces conventional paper price tags.

Due to wireless data transmission capability, the solution allows for real-time information updates. ESL not only reduces the labour cost associated with a manual replacement of price tags but also minimizes the likelihood of pricing errors and enables stores to quickly improve their efficiency in a highly competitive market. Implementation of in-store technologies and the increasing adoption of smart shelves are driving the continued growth in demand for ESL. The current penetration rate in retail markets is only 4-5%, suggesting plenty of room to grow for E Ink as it commands virtually 100% of the market share in the ESL upstream material supply. The global ESL market is expected to grow at a CAGR of over 18% during 2022-2032 and will exceed US $5 billion by 2032.[5] We like E Ink’s monopoly-like position in a niche market, with strong IP protection, vertical integration, solid R&D capabilities, and placing it in a unique stance to benefit from the rapid industry growth driven by increasing the adoption of ESL, new colour ePaper products, and wider IoT penetration.

Estun Automation Co. Ltd. (002747 CH)

Estun is one of the leading Chinese industrial robot manufacturers, with strong product competitiveness and diversified end-market exposure, including lithium batteries, solar, construction, automotive and consumer electronics. We believe the company is set to benefit from a rising demand for industrial robots in China, given labour tightness and surging wages in that country. After peaking in 2015, the labour force in China has since been on a consistent decline,[6] likely falling victim to the former one-child policy. Moreover, we believe that labour shortages in the manufacturing industry will get only worse due to competition from the new economy companies that lure talent with higher wages and other benefits. Although fighting input cost inflation and supply chain issues in the near term, we believe Estun will be among the winners in the factory automation space, enjoying favourable demographic trends and government policy tailwinds.

Guangzhou KDT Machinery Co. Ltd. (002833 CH)

Based in China, KDT Machinery is a global leader in the production of automated equipment for panel-type furniture, with significant market share growth potential. We like its solid technological know-how, strong cost competitiveness, scale and manufacturing capabilities. As furniture producers globally chase efficiency improvements, automation solutions are expected to enjoy a robust demand in the long term. KDT Machinery not only facilitates the shift from labour to automation in the furniture manufacturing industry, which has been historically high labour intensive, but also contributes to forest protection and CO2 emissions reduction on the back of panel-type furniture replacing solid wood.







Aerial view of Tokyo cityscape with Fuji mountain in Japan.

When most countries are wrestling with rising inflation, Japan is the outlier.

In March 2022, Japan’s consumer price index (CPI) growth was only 1.2% year-over-year, versus 8.5% in the United States (U.S.). Japan’s CPI has risen only 5.5% over the past 20 years, compared to 60% in the U.S.

Inflation rate in Japan (%)[1]

This chart highlights inflation rates in Japan over the past 20 years.

In theory, it is due to a long-term demand-deficient feedback loop.

  1. Expectations built up through decades of low inflation or deflation
  2. Weak consumer spending caused by aging population
  3. Firms’ caution on wage and price increases
  4. Stagnant wage growth constrains consumer spending

In reality, for many years, the story goes like this: Anyone under 40 years old in Japan has never really experienced rising inflation. If prices go up, consumers will spend less. Therefore, firms are reluctant to increase prices. To keep costs in control, firms keep wages stable, which does not stimulate consumer demand.

However, since September 2021, the inflation rate has been increasing, from -0.4% in August, 0.2% in September, to 1.2% in March, all due to high commodity prices. On April 26, the Bank of Japan (BOJ) reiterated its commitment to low-interest rates despite rising inflation, saying: “It is most important to support economic recovery by patiently continuing monetary easing.”

At Global Alpha, we are supportive of the BOJ’s policy. Rising inflation in Japan this year is inevitable but desirable. Looked at another way, the present inflationary trend could be an opportunity for Japan to finally escape from deflation.

All our Japanese holdings said they had raised their prices in the past year. According to the Teikoku Databank Ltd survey of 1,855 companies conducted in early April[2], 43.2% of the firms said they raised prices in April or plan to do so by the end of March 2023. When combined with the firms that have already raised prices between October and March, the percentage reaches 64.7% of the total.

The key for Japan to fight deflation is wage increases. According to data by the Organization for Economic Co-operation and Development (OECD), the average annual wage in Japan increased until 1997 to $38,395 and then flattened out. In 2020, the average Japanese workers made $38,515.

In November 2021, Japan’s new Prime Minister, Fumio Kishida, made it clear that raising wages is one of the top priorities for his economic agenda. He urged firms whose earnings have recovered to pre-pandemic levels to increase wages by 3% or more at their labour talks this spring. Prime Minister Kishida also pledged to raise the incomes of welfare workers, such as childcare workers, nurses and caregivers, by 3%, continuously.

Of course, a policy does not lead to easy solutions, considering Japan’s rigid employment culture, the large presence of part-time and contract workers, and a weak yen. The progress is yet to be seen.

Japan has been a very important market for our investments. Despite low inflation pressure and limited geopolitical risk, Japanese stocks are currently trading at an attractive valuation compared to other markets.

Forward Price/Earnings

This chart depicts that Japanese stocks are currently trading at an attractive valuation compared to other markets. Source: Datastream, IBES, Morgan Stanley Research.

This year, JPY against USD has weakened by over 10%. The 130 milestone was the highest in two decades. We believe the rate should revert to 100 – 110 in the coming years. Meanwhile, a weak yen benefits exporters and encourages inbound travel. As Japan reopens, we foresee “revenge spending” from in-bound travellers. In 2019, almost 32 million foreign tourists spent 4.8 trillion yen.

[1] Japan Inflation Rate – April 2022 Data – 1958-2021 Historical – May Forecast (

[2] Get ready to pay more: Over 40% of Japanese firms to raise prices within a year: survey – Japan Today

Blue Globe viewing from space at night with connections between cities. World Map Courtesy of NASA.

Higher input prices are having an adverse impact on household sentiment. European sentiment indicator turned negative in March, while UK consumer confidence fell close to an all-time low in April. Surprisingly, U.S. consumer sentiment unexpectedly rose to a three-month high in early April. Although consumers have accumulated savings through the pandemic, we believe that consumers may prioritize leisure spending over discretionary goods in the months ahead.[1]

Not all product categories performed equally in this context of high inflation. Companies that emerged as winners during the height of the pandemic have fallen back since. The streaming giant Netflix reported a loss of 200,000 members in the first quarter, with a forecasted drop of 2 million this quarter. The company blames the password-sharing business for the loss in subscribers. Netflix, which is already the most expensive streaming platform, has recently increased its pricing in some Latin American countries for sharing accounts between households.[2] With an increased offering of streaming platforms at the same time as consumers are shifting their dollar spending elsewhere, it will be interesting to see how loyal subscribers are.

There are still areas in the economy where demand for goods remains robust. Companies associated with recreational and outdoor activities seem to report strong trading updates. Companies like POOLCORP, Tractor Supply Co and Gardena have benefited during their latest publications compared to last year.[3],[4] In general, we feel like the big ticket items could experience a growing trend going forward. On the other hand, food, health, and some services linked to the post-pandemic reopening might still experience robust growth.

There are some interesting data points that suggest strong spending patterns in service-related categories:

  • OpenTable data suggests that consumer demand for restaurants continued its upward trajectory as of April 19, 2022. The Dining Out index, which tracks restaurant reservation data for approximately 20,000 restaurants across seven countries, shows that so far in 2022, the number of seated diners increased by 24% in the UK, 17% in the U.S. and 45% in Germany. Historically, higher gas prices have negatively impacted restaurant consumption as consumers change their eating habits, but this time around, consumers seems to be holding on to that spending category.
  • Airlines and hotels have also seen an important surge in demand. Delta Air Lines returned to profitability during March, thanks to a passenger revenue that is back to 75% of pre-Covid levels. According to a survey conducted by the World Travel & Tourism Council, travellers are currently planning on spending more on travel leisure than they have in the past five years. [5],[6]

As the economy and consumer behaviours turn more towards services over goods, the exposure to small caps could provide investors with some upside.[7] Small caps, which tend to be more domestic, seem to have a stronger representation of services as opposed to goods. According to the Bank of America, the S&P 500 index derives around half of its earnings from spending on goods, whereas the Russell 2000 index generates only a quarter of its earnings from spending on goods.

Small-cap indices have a better representation of leisure services when comparing it with the S&P500. The weight in the leisure industry services is approximately 1% for the S&P 500 index, as opposed to 3% for the Russell 2000 index.

Some companies we own should benefit from that spending pattern:

Autogrill is the global leader by revenue in the F&B concessions market in airports, motorways, and railway stations. Autogrill and its subsidiary, HMSHost, manage a portfolio of about 300 owned and licensed brands in over 30 countries, including proprietary brands (Spizzico, Puro Gusto, etc.) and third-party franchises with a particular emphasis on global brands (Burger King, Starbucks, etc.).

Meliá is one of the leading European hotel groups; it owns and manages more than 326 hotels and resorts in 33 countries, mainly in America and Europe. Now that the majority of travel restrictions have been lifted, Meliá is seeing an uptick in demand for its leisure hotels. The Easter holiday was strong, and booking trends for the upcoming summer look firm. Although wider concerns around consumer softness are unlikely to completely fade at this stage, investors are likely to focus on mix shifts and changes in demand across product categories. Companies that have continued to invest and managed to enlarge their market positioning should be in a better position to offset the broader market slowdown.








Aerial view of a Tractor fertilizing a cultivated agricultural field.

In 2013, the investment world was introduced to the term FANG by CNBC’s Mad Money host. Of course, we all know the tech giants represented by this acronym: Facebook, Amazon, Netflix, and Google.

Almost a decade later, the term FANG is back in the news. But this time around, the almighty tech companies have been dethroned by four of the most traditional, old school industries in the world. We’re talking about Fuel, Agriculture, Natural Resources, and Gold.

Historically every time this group took the lead in the last century (1939, 1972, 2000), we have seen inflation skyrocket for years to come, leading to political unrest around the world and major corrections in financial markets. We are set to see history repeat itself once again.

In today’s weekly we focus on agriculture, which is heading into a super cycle.

Time and time again, the agriculture industry has weathered economic uncertainty. No wonder it’s one of the oldest, most reliable asset classes. It is also one of the best inflation hedges as food prices are closely linked to inflationary trends.

How big is the agriculture industry?

American farms alone contributed $124 billion in United States (U.S.) gross domestic product in 2020. Farmland is still an unknown asset for many, and the largest farmland owner in the U.S. is not even a farmer. It’s Bill Gates, who currently owns 242,000 acres of land. Isn’t it ironic that one of the world’s biggest tech company founders sees more value in dirt? Clearly this is an indicator that land is about to get a lot more valuable.

Globally, agriculture is a large and growing industry worth over $10 trillion in 2020. It is expected to increase to $12 trillion in the coming years.

The drivers for this growth are simple:

  • an ever-expanding global population,
  • urbanization, and
  • transition towards regenerative sustainable farming.

Russia/Ukraine impact on global Agriculture

The war in Ukraine has delivered a shock to global energy markets. Now the planet is facing a deeper crisis: a shortage of food. Since the invasion last month, wheat, barley and fertilizers have seen prices increase over 20 percent.

With a cultivation of about 32 million hectares of land, Russia and Ukraine supply a quarter of the world’s wheat and half of its sunflower products.

Ukraine is known as the “breadbasket of Europe” thanks to its perfect climate and ideal geology for agriculture. Over 70 percent of the landscape consists of fertile plains with deep rich soils. Ukraine has warm summers, cold winters, and plenty of rain, providing excellent conditions for plant growth, and disease and pest prevention.

An unstable Ukraine = Another Arab Spring?

Ukraine is the world’s fifth-largest producer of corn (maize), and the eighth-largest producer of wheat. Approximately 12% of Ukrainian corn is sold to Egypt. It accounts for 80% of Lebanon’s and 25% of Egypt’s wheat imports, and is a leading supplier for countries like Somalia, Syria and Libya. It should come as no surprise that the current conflict will push up commodity prices even further.

Most Middle East countries use the Black Sea for trade. However, due to the war in Ukraine agriculture supplies (and all other products) have to travel a different route – which given current fuel prices will only increase the freight cost. Supply shortage and an expensive freight will further compound price inflation in the Middle East.

When we look back to 2009/10, food prices were one of the main triggers of the Arab Spring uprisings in the Middle East. Back then, social unrest started in Tunisia, which saw its authoritarian government fall in less than two weeks. Then the crisis hit countries like Egypt, Yemen, Libya, Syria, and Saudi Arabia. In the chart below we can see that food prices have already exceeded levels last seen in 2011. We could be looking at another round of instability in the middle east.

Source: Bloomberg

Portfolio impact

Our portfolio is extremely well positioned to benefit from both high inflation and opportunities in the fast growing agriculture industry. 

When it comes to inflation, smaller companies generally outperform their larger peers. From January 1979 to July 1983, the Russell 2000 Index outperformed the S&P 500 Index by 81% (see chart below). During this time, inflation rose to as high as 13% and the economy suffered a double-dip recession in 1980 and 1981-82, before staging an extremely strong recovery in 1983 with growth rates as high as 8.5%.

Source: Bloomberg

In the agriculture industry, we own the following names which we believe will grow faster than the industry and deliver superior earnings.

Limoneira (LMNR)

Founded in Ventura County, California in 1893, Limoneira is one of the largest growers and marketers of lemons in the U.S. It is also the largest grower of avocados in the U.S. Besides the steadily growing agribusiness, Limoneira’s strategy is to unlock the value of over 10,000 acres of agricultural land, real estate development opportunities and water rights mainly in Southern California.

Titan Machinery (TITN)

Titan Machinery is the largest Case New Holland dealer in the U.S. with 75 stores, mainly in the Midwest, and some in Eastern Europe. According to the U.S. Department of Agriculture (USDA), net farm income is 26% higher than the 10-year average. Farm income is forecasted to reach its highest level since 2013. This bodes well for equipment upgrade cycles in general. Also, drought in South America is causing a shortage of soybeans and corn. U.S. farmers are now focusing on these crops and should see higher incomes well into 2023.

Lindsay Corporation (LNN)

Based in Omaha, from its humble beginnings as a small operation in rural American Midwest, Lindsay has become a global leader in irrigation and infrastructure. Their irrigation and water management solution should see strong take rates by farmers.

Farmland Partners (FPI)

Farmland Partners is a real estate company that owns approximately 160,000 acres of high-quality farmland in 17 states. Their land is being farmed by over 100 tenants who grow 26 major commercial crops. Farmland should benefit not only from increased rent, but also some profit share agreements on certain properties.

Bucher Industries AG (BUCN) 

Bucher is an internationally operating Swiss engineering group. Bucher’s divisions are focused on specialized agricultural machinery, municipal vehicles, hydraulic components, manufacturing equipment for the glass container industry, as well as equipment for processing of beverages.

Sakata Seed (1377)

Based in Yokohama, Sakata is a leading seed company in Japan. Sakata ranks in the top three for vegetable and flower seeds in Japan, and number six in the world. They have a product lineup of 1700 flower varieties of 100 species and 400 vegetable varieties (mainly broccoli, cabbage, carrot).

Meanwhile, Global Alpha is back on the road again. In less than a month, we will be visiting holdings like Limoneira and Farmland Partners to evaluate their operations and performance. We have also begun visiting trade shows and have recently returned from the 43rd Annual Institutional Investors Raymond James conference in Orlando. We look forward to keeping you posted on new trends, opportunities, and ways we are generating alpha for our clients.