Bingham Canyon copper mine, largest man-made hole in the world, Utah, USA.

The new dynamics of the global materials market

We recently attended the BMO Global Metals, Mining & Critical Minerals 2024 Conference, the premier global event for the materials sector. Materials make up 8% of the MSCI Global Small Cap Index and 10% of the MSCI EAFE Small Cap Index. Mining conferences are like no other, featuring core shack displays and political representatives from various countries. The atmosphere was notably different this year, particularly with the decline in battery material prices. There was a noticeable shift of interest from car battery to electrical grid infrastructure materials.

Supply and demand at play in commodities prices

Returns in the materials sector generally correlate with the supply-demand dynamics of various commodity prices. Inflation typically indicates an overall demand driver. However, it has not been very impactful, as China, a major commodity buyer, is experiencing modest inflation growth. Commodity supply dynamics are highly influenced by regulatory events, including environmental, social, geopolitical factors, capital availability and project risks. Recently, we have observed events that could signal mid to long-term structural changes.

Copper and aluminum: metals on the move

Copper has been performing well due to both future demand and supply side momentum. Essential to data computing, it has been rebranded as “AI copper.” Additionally, the growth in electricity demand and closure of the world’s largest copper mine are factors pushing prices to new highs.

Aluminum can substitute copper, especially in electrical transmission, as its resistivity is 0.6 times that of copper such that aluminum wire is 66% larger. The prices of both commodities tend to correlate. Currently, the price spread between the two is considered large from a historical perspective, with copper trading at $4.57 and aluminum at $1.17, making aluminum an economically viable substitution.

Our investment in Alumina

Global Alpha is exposed to aluminum through our stake in Alumina (AWC AU). Based in Australia, the company is the largest producer of alumina metal, a key precursor to aluminum. AWC shareholders have recently agreed to accept the all-share acquisition proposal by Alcoa, its long-term operating partner. With a more vertically integrated operation, Alcoa plans to reduce overall costs by 10% within a short two-year period. Aluminum is also widely used in the aerospace sector, which provides another tailwind.

Gold and copper in traditional and emerging markets

Copper is often mined alongside gold. Gold, which had been out of favour since 2011, is seeing renewed interest and positive investor sentiment, driven by purchases from central banks in China and established investor circles, with both buying the bullion at a faster pace than in the past. This trade is a win-win. If China’s economy falters compared to its US counterpart, gold becomes a safe alternative. Conversely, if China’s economy outperforms, the race to distance itself from the US dollar intensifies. Despite China’s cryptocurrency ban, there are rumours that this commodity accumulation is in preparation for a devaluation of the yuan, though time will tell. Other countries, like Turkey and Poland, have also increased their gold reserves for similar geopolitical reasons.

Globally, we produce 3,100 tons of gold annually and it estimated that there are 205,000 tons of gold in circulation – half in jewelry, 25% in investments and 15% held by central banks. In 2023, China’s government bought a record 735 tons. The private sector net imported 1,411 tons, with an impressive 228 tons coming in just January of 2024.

The golden balance of central banks and global stock

For central banks, there is room to grow for China as it ranks fifth with 2,200 tons in its vaults today compared to the US at 8,100 tons. The below-ground stock of gold reserves is currently estimated at around 50,000 tons according to the US Geological Survey.

This equates to a 15-year mine life for the world’s gold demand. As gold deposits become increasingly difficult to locate, this global gold mine life will likely diminish rapidly. In this context, gold could become a strong competitor to digital currencies in the coming years as a safety alternative.

ALS Ltd. and commodity markets

Global Alpha is exposed to gold, copper and other commodities through ALS Ltd. (ALQ.AU). ALS is the market leader in mining assay management, helping companies with their sample testing requirements. With industry-leading margins in precious metals, ALS has achieved the necessary scale in all major global mining hubs, giving it significant competitive advantage. ALS also operates in the environmental and health care sectors, where it benefit from its global reach compared to smaller competitors.

Capitalizing on commodity upswings with Osisko Gold Royalties

We also own Osisko Gold Royalties (OR.CN). The company holds gold and base metal royalties in North America. Royalties are intriguing financial instruments as they are paid in product by miners and are largely unaffected by mining costs, allowing royalty companies to benefit from rising commodity prices. Last year, the company hired a highly reputable management team and simplified its structure by exiting all direct project investments.

Gold and iron ore stability vs. disruption

In the gold market, central banks act as fringe buyers and sellers and are the price setters. Although jewelry accounts for the bulk of market demand, consuming 2,000 tons annually, its growth is relatively muted and stable.

The same concept of stability and fringe actors applies to iron ore. The world consumes two billion tons per year and China-based mills account for 50% of that. Production of 1.1 billion tons is controlled by five companies with fairly stable output. Fringe producers contribute 300 million tons, including high-cost producers in China and Southeast Asia that have benefitted from robust pricing over the years. However, the iron ore price balance is poised for disruption as 200 million tons of low-cost production is expected to enter the market in 2026 from mega projects in Guinea and Australia.

Silver and palladium redefined

Other interesting points from the conference that could orient our research include insights on silver and palladium. It takes five times more palladium to build a hybrid than a regular car. Silver has now surpassed a 50% usage rate in industrial applications, prompting a reevaluation of its classification as a precious metal.

Beyond precious – the future of metals

All of these developments invite us to rethink the boundaries of “precious” in metals and the value of agility and foresight in investing. As markets shift and new technologies demand novel materials, our approach to commodities must also adapt. This not only offers opportunities for astute investors but also challenges us to anticipate changes and position ourselves advantageously for what lies ahead.

Image alt text: Upper left: Old Town Warsaw, Poland during sunset. Lower right: Sunrise over The Blue Mosque, Istanbul, Turkey.

In March, our team embarked on a two-week trip to two of the most dynamic economies within Emerging Markets: Poland and Turkey. During our visit, we engaged with companies spanning a variety of industries – from construction and renewable energy to waste management, IT, commercial services, airlines and airport operators. Also, we gained insights into the consumer sector, meeting with leaders in production and distribution for a wide range of consumer products, including confectionery, fast food, denim, automotive, electronics, soft drinks and beer. The trip’s objective was not only to check up on existing holdings but also to identify nascent opportunities and understand the challenges these businesses face.

Poland’s optimistic outlook

It has been a year since our previous visit to Poland. During that visit, we observed consumers struggling with high inflation, wage growth continuing to decline, public concerns around the upcoming parliamentary elections and hopes for a swift resolution to the war in Ukraine, which would bring peace and vast opportunities for Polish companies.

We were happy to see a rise in optimism regarding these concerns during our latest visit. Most of our interviewees were more bullish this time around. Post the parliamentary elections, we sensed a renewed optimism as a pro-European Union (EU) coalition regained power. The new Polish government seems committed to mending relations with the EU, having successfully unblocked the first tranche of €76 billion frozen by the European Commission due to legal concerns after judicial reforms by the former government. Since joining the union, Poland has been a significant beneficiary of EU funds, receiving approximately €164 billion from 2004 to 2020. For context, Poland’s GDP was €750 billion last year. These substantial financial inflows have contributed to various crucial projects across the country, enhancing infrastructure and improving structural economic growth and overall wellbeing​. No wonder these EU funds are expected to drive economic growth for several years to come. Coming in the form of grants and low-interest loans, this financing is mainly for funding infrastructure and renewable energy projects.

Contrary to last year, this time we saw consumers in Poland enjoying strong real wage growth of around 10%, with no labour market slowdown. With inflation easing to low single digits in the first quarter of 2024, these factors create a conducive backdrop for the robust recovery of Polish consumers. Growing disposable income is likely to not only rebuild their savings but also drive rebound in consumption.

However, the road ahead may be bumpy due to potential inflation spikes in the second half of 2024 on the back of higher energy prices, a VAT hike on groceries, fulfillment of costly pre-election commitments, domestic political tensions and the potential escalation of the ongoing war in Ukraine. The war remains one of the major risks to the region and was a frequent topic in our conversations, not only with corporate executives but also with ordinary citizens. Centuries of conflict between Poland and Russia have left deep scars in the psyche of the average Polish citizen.

Turkish economic reforms and investor confidence

In Turkey, a surprising pivot to orthodox monetary policy last year reignited hopes for economic normalization, buoyed the local stock market and turned foreigners in net buyers for the first time since 2019. Committed to controlling escalating inflation, the central bank raised its key policy rate from 8.5% in June 2023 to a staggering 50% in March 2024. Moreover, the monetary authority signaled its readiness for further rate hikes if necessary. Investors welcomed the government’s adoption of market-friendly measures, which drove the Turkish stock market higher by over 30% in US-dollar terms since the first hike last summer. Simultaneously, foreign reserves have started to recover, sovereign credit spreads have tightened to multi-year lows and the current account balance is expected to get meaningful support from the tourism season starting in May.

Although the recent municipal elections marked a significant defeat for the current leadership, President Erdogan reiterated policy continuity and his commitment to an economic turnaround program in the second half of the year. With no elections for the next four years, the government has time to tackle inflation and achieve long-awaited results. However, this requires the implementation of further austerity measures, including fiscal ones. Current market expectations see inflation peaking in May above 70% before declining to 30%-40% by year-end. However, potential new rounds of minimum wage hikes, premature rate cuts and higher energy prices continue to threaten the turnaround policy and could derail efforts to reduce inflation and improve the trade balance.

Nearshoring opportunities

Despite being influenced by very different forces, Poland and Turkey share some commonalities. In the last few years, the term “nearshoring” has become strongly associated with Mexico and Vietnam. We explored the impact on the Mexican economy in a previous commentary. However, Poland and Turkey have turned out to be underappreciated beneficiaries of supply chain shifts toward near- or friendshoring as a way to reduce reliance on China. Nearshoring opportunities repeatedly came up in our discussions with corporates in both countries. We see Poland as a launching pad for opportunities into Western Europe and hard-to-access markets in the east like Hungary, Romania and Bulgaria. Similarly, Turkey offers a gateway to explore opportunities in CIS countries and less liquid frontier markets. We highlight one such opportunity below.

As bottom-up investors, we focus our macroeconomic analysis primarily on enhancing the risk management aspect of our portfolio management. When investing in highly turbulent economies, we prefer to stick to companies that we believe can succeed even when their domestic economies face challenges. Additionally, we look to benefit from a possible decline in country risk premiums in the event of macro normalization.

Investment spotlight: Coca-Cola Icecek and Mo-BRUK

Our largest position in Turkey is Coca-Cola Icecek (CCOLA TI), a coke bottler. In the last 20 years, the company has evolved from a single-country operator to the third-largest coke bottler globally, with a footprint spanning 12 countries and 600 million people. Icecek generates less than 30% of its EBITDA in Turkey, with Pakistan, Kazakhstan, Uzbekistan and another eight countries in the Middle East and Central Asia accounting for the major part of the business. Robust strategic alignment with The Coca-Cola Company, combined with Icecek’s proven record of successful integration, positions it as the preferred partner for further consolidation of Coca-Cola’s bottling operations in the region.

Bangladesh is the recent addition to Icecek’s portfolio. It is a country with over 170 million people and a heavily underpenetrated non-alcoholic beverage industry poised for double-digit volume growth over the next decade. This positions Icecek well to replicate its successful strategy of distribution network enhancement to ensure product availability, build infrastructure and enrich merchandise offerings. Leveraging its leading brand portfolio and a highly experienced management team, Icecek is set to continue capitalizing on the vast potential of its markets.

Mo-BRUK (MBR PW) is a waste management company in Poland specialized in processing hazardous waste. The founding family established the business more than 30 years ago and has built a strong franchise in an industry characterized by high entry barriers. The company does not operate landfills and focuses solely on processing waste. EU regulations on waste management create significant tailwinds for the industry in Poland, as the country must undertake considerable efforts to meet EU objectives. Due to its specialization in hazardous waste and limited competition due to entry barriers, Mo-BRUK enjoys superior business economics. High margins are driven by volume growth and technology improvements, as well as price hikes due to limited capacities in the country. In terms of growth strategy, the company is conducting several expansion projects within available permits. At the same time, it is filing for new permits. Remediation of the illegal landfills or so-called ecological bombs represents an attractive business for Mo-BRUK, but it is highly dependent on the budget allocation by municipalities. The cadence of such projects is erratic, but the company intends to participate in all tenders as they are announced. Additionally, the management team sees multiple consolidation opportunities in the country. In late-2023, Mo-BRUK acquired two independent operators that not only provided the company with scarce permits but also expanded its footprint in northern Poland.

Aerial view of a drinking water treatment plant.

One of the 17 Sustainable Development Goals (SDG 6) established by United Nations (UN) is Clean Water and Sanitation, which aims to ensure the availability and sustainable management of water and sanitation for all.

The water crisis is unprecedented

In 2022, 2.2 billion people (27% of world’s population) lacked safely managed drinking water – meaning water that is accessible at home, available and safe. Additionally, 3.5 billion people lacked safely managed sanitation – meaning access to a toilet or latrine that leads to the treatment or safe disposal of excreta. Two billion people did not have access at home to a handwashing facility with soap and water. Demand for water has outpaced population growth due to urbanization and increasing water needs from agriculture, industry and the energy sector. Climate change has exacerbated water scarcity. According to the UN, global freshwater demand is predicted to exceed supply by 40% by 2030.

Water sustainability is complex

Water is at the core of sustainable development and critical for socioeconomic development, healthy ecosystems and human survival itself. Water sustainability refers to the availability of freshwater for human consumption and use in agriculture and industrial processes.

Substantial efforts are required from all stakeholders, including legal and regulatory measures, water pricing and funding. Investments are needed for both water infrastructure and technologies that result in healthier ecosystems, climate-resilient irrigation, improved water storage and higher water reuse rates.

Water investment opportunities are enormous

According to the World Bank, to meet the SDG 6 by 2030, investments must increase sixfold from the current level. Global investment in the water sector needs to exceed $1.37 trillion.

In the US, the Bipartisan Infrastructure Law, passed in 2021, delivers more than $50 billion to the Environmental Protection Agency (EPA) to improve the nation’s drinking water, wastewater and stormwater infrastructure – the single-largest investment in water that the federal government has ever made.

 The European Investment Bank, one of the largest lenders to the global water sector, has invested more than €86 billion in over 1,700 projects, making water security and climate change adaptation a priority. In 2023 alone, it invested about €4.1 billion in the sector.

At Global Alpha, we invest in a few pure plays in water treatment and distribution.

Kurita Water Industries Ltd. (6370 JP)

Founded in 1949, Kurita Water is Japan’s largest industrial water treatment company, offering water treatment facilities, water treatment chemicals and maintenance services. It has over 20,000 customers in Japan. Overseas expansion is progressing well in the US and China, driven by favourable demand and the company’s excellent reputation.

Kurita Water is a technology-driven company with a strong intellectual property portfolio that boasts over 4,000 patents in various water treatment technologies. Core technologies include  anticorrosion, dispersion (to absorb and disperse fine crystals in water to prevent them from sticking to the water system), agglomeration (to aggregate fine dirt particles and impurities in water into larger sized particles that are easier to treat), sterilization and antibacterial, biological treatment, adsorption (using activated carbon and other materials to adsorb and remove ions, organic matter and other impurities dissolved in water), deionization, membrane separation and surface treatment (for semiconductor and LCD manufacturing).

Metawater Co. Ltd. (9551 JP)

Formed in 2008 through the merger of the water environment divisions of NGK and Fuji Electric, Metawater is a leading engineering firm in Japan for water treatment, sewage treatment and waste treatment facilities. It is the first company in Japan to integrate machinery and electricity design in the water treatment field, to achieve optimal efficiency.

Most of Metawater’s customers are public entities. A growing number of its projects are based on Public-Private Partnership (PPP). In fact, Metawater has over 40% market share in such PPP projects in Japan. Outsourcing opportunities through PPP are huge. For example, among Japan’s 4,000 public water treatment plants, only 10% are outsourced. Among 2,000 public sewage treatment plants, only about half are outsourced.

Mueller Water Products (MWA US)

Founded in 1857, Mueller Water Products is a leading manufacturer of water infrastructure, flow control, metering and leak detection products in water and gas distribution networks in North America. Its main products are valves, hydrants, pipe fittings and ductile iron pipes.

The company has one of the largest installed bases of iron gate valves and fire hydrants in the US. The entry barrier is high due to the large switching cost for municipal customers. The business is very resilient, because about two-thirds of its sales are related to utilities repair and replacement.

Primo Water Corporation (PRMW US)

Founded in 1952, Primo Water is a leading North America-focused water solutions provider that operates largely under a recurring revenue model in the large format water category (defined as three gallons or greater). Its water dispensers are sold through approximately 10,800 retail locations and online. It offers water delivery services direct to customers. Customers can also exchange empty bottles at its recycling centres or refill at self-service stations. Primo Water not only provides high-quality water, but also helps reduce landfill waste. One five-gallon Primo Water bottle is sanitized up to 40 times and then recycled, saving over 1,500 single-serve bottles.

Zurn Elkay Water (ZWS US)

Zurn Elkay Water, founded in 1892, is another brand you might be familiar with. In 2022, Zurn Water Solutions and Elkay Manufacturing merged to form Zurn Elkay Water. While Zurn is strong in providing engineered water solutions mainly for the construction market, Elkay’s drinking water solutions include water fountains and the more popular water bottle fillers seen at airports, hospitals and schools. In 2023, two billion gallons of safe, clean filtered water were delivered by its filters, equivalent to the elimination of 18 billion single-use plastic water bottles. Elkay water filters have industry-leading standards and are certified to NSF/ANSI 42, 53 and 401 for the reduction of harmful contaminants, including lead, PFOA/PFOS, microplastics, cysts and Class I particulates.

Is water the new gold?

In Turkmenistan, where 80% of its land is desert, “A Drop of Water Is a Grain of Gold” is a national holiday observed annually on the first Sunday in April. It was established in 1995 to raise awareness about the nationwide water crisis and encourage the development of long-term sustainable solutions.

We believe the water sector presents significant and long-term investment opportunities due to increasingly favourable regulations and innovative new technologies.

Upper left: Mt. Fuji and Tokyo skyline. Lower right: Panoramic skyline of Shanghai.

I recently spent six weeks in Asia, including four weeks travelling to Sapporo and Tokyo in Japan to attend two major investor conferences hosted by SMBC Nikko and Daiwa and meet with over 50 Japanese-listed companies.

My trip also included two weeks in China to celebrate the start of the Year of the Dragon, plus a week in Shanghai and nearby Jiangsu province visiting various companies and doing due diligence on existing and prospective holdings.

Japan’s investment appeal

Many may be surprised to learn that our highest country allocation is to Japan at over C$2.3 billion of our approximately C$9 billion total AUM. Across our Global, International and sustainable strategies, we own around 25 Japan-based companies in 10 different sectors, from Asics and Sega Sammy (Sonic) to Hoshino Resorts and Sakata Seed.

Year-to-date, the Nikkei Index is one of the top-performing developed market, up 13% in JPY or 3% in US$. The Nikkei recently broke its previous record set in December 1989. Yes, over 34 years ago. Was Warren Buffett onto something when he invested in Japan’s five largest trading companies back in August 2020?

Skepticism about the country due to its apparent structural weaknesses suggests that this rally is unsustainable. However, as anyone who reads our weeklies knows, we are optimistic on Japan and have made a point of visiting many times over the years. In the past year alone, five of us have travelled there for onsite company visits and conferences.

A resurgence in corporate Japan

Our January 25th weekly explored Japan’s improved corporate governance. Corporate reforms are gaining significant momentum. Since mid-January, 54% of listed companies have disclosed initiatives to reduce capital costs and enhance valuation. This topic was often on the first page of investor presentations at the two conferences I was at.

Companies announcing buybacks exceeded 1,000 in 2023 and amounted to over ¥9.6 trillion, with dividend payments also seeing notable increases to more than ¥15 trillion last fiscal year and growing. Stock splits are becoming common, cross-shareholdings are being sold and M&A is on the rise, albeit with private equity players still having a small role (less than a quarter of all transactions).

The Nippon Individual Savings Account (NISA) boost

The revamped NISA now allows for an annual contribution limit of ¥3.6 million (US$24,300) per person, up from ¥1.0 million, and a total balance of ¥18 million to be permanently tax exempt. As of June 2023, there were 19.4 million NISA accounts, a modest number given Japan’s population and that households were holding a record ¥2,115 trillion in financial assets, more than half of it in cash. Approximately 1 million NISA accounts are opened each month.

Foreign investment and demographic shifts

Japan is experiencing a considerable wealth transfer set to continue over the next decade due to its aging population, especially notable among Gen-Z (1997-2012) who are more open to equity investments compared to older generations. Foreign investors are still underweight.

Deflation forever?

Japan seems to have finally escaped deflation. Core inflation rose to 2.8% year-on-year in February and should continue to stay above 2% if the latest wage increase is an indication. In March, Japan’s union group announced its biggest wage hike in 33 years at 5.85%. We believe that higher wages will ultimately encourage consumption. Most companies we met told us that their reluctance to raise prices to their customers is no more, with many now doing just that or walking away from low-margin businesses. As an example, the country’s largest beer and beverage company, Asahi, raised its prices for the first time in 14 years in October 2022 and three times since for a total increase of around 20%.

I encourage you to re-read some our previous comments on Japan as far back as 2009:

Japan’s visa policy changes and their impact on immigration

Another was about Japan’s updated visa policy, from August 3, 2018: Japan’s new visa policy. We touched on the view that Japan was closed to immigration and that its low birth rate would lead to a significant population decrease and inexorable decline.

What struck us visiting Japan this time was how many non-Japanese people work in the hospitality industry. They hail from many countries, including China, India, Sri Lanka and Vietnam and all speak Japanese and English. Back when we wrote the comment in 2018, there were 1.3 million foreign workers in Japan, compared to 486,000 a decade earlier and the goal was to increase by 500,000 by 2025. Japan achieved this goal much sooner, with 2.1 million foreign workers there in 2023. The country is entering an era of mass immigration and half of Japan’s prefectures saw net population increases last year. According to the Japan International Cooperation Agency, Japan needs 6.8 million foreign workers by 2040 to meet its growth targets. New immigration and visa policies being introduced this year will make it much easier for foreign workers to permanently settle in Japan and eventually obtain citizenship.

Observations from China

Turning to China, we believe the negative sentiment towards the country is at an extreme. India’s market capitalization recently surpassed China’s despite having an economy a sixth of the size.

We see emerging market funds exclude China and the geopolitics are at their worst in my career as an investor.

Yet, the sentiment in China is slowly improving. I spent a month there last May when the shock of the COVID-19 lockdown was fresh in people’s memory. This February, although still subdued, sentiment seemed slightly better.

Economic indicators like the PMI Composite Index – now above 50 – are improving. CPI is still negative, but with rising commodity prices, China will likely avoid a deflationary spiral. Industrial production and exports are also on the rise and retail sales are growing faster than GDP.

The property market will probably never be an engine of growth again, but the service sector, led by healthcare and hospitality, may very well take the baton.

The negative news cycle about China that we see in North America is much different than in Asia. Japan’s relations with China are improving and China’s trade with its neighbours is increasing rapidly. Indonesia’s president-elect, Prabowo, visited China in early April, mentioning the importance of maintaining good ties with China and the US and condemning the China bashing. China is now the largest trading partner to over 120 countries, including Indonesia and also Japan, South Korea, Taiwan and Vietnam.

Despite the Western media’s negative rhetoric, China is a very important market for many large US and foreign multinational brands, including Apple, BMW, Uniqlo and Zeiss. In the past few weeks, many American CEOs have visited China and met with President Xi. Janet Yellen was also there recently and President Biden is scheduled to talk to China in the coming days. Let’s hope that they can restore the productive dialogue.

China’s green revolution

China’s spent 40% more on clean energy in 2023 compared to 2022, or $890 billion – equivalent to the GDP of Switzerland or Turkey.

Also last year, China installed 217 GW of solar power, up 55% over 2022 and more than the US has in its entire history. Total solar power capacity in China is now over 609 GW. Canada has 4.4 GW; the US, 179 GW. Wind power installation increased 21% to more than 441 GW. Canada has 19 GW and the US has 141 GW.

BYD overtook Tesla as the largest NEV car company in 2023 and Xiaomi has now reclaimed a #2 position in the Chinese smartphone market.

So, regardless of the negative news, we are generally constructive on China, have made a number of investments in the country and continue to find attractive investment ideas there.

Reflecting on a phase of resilience and renewal

Our travels through Asia reinforce an evolving narrative not just of growth but of transformation. The confluence of Japan’s market performance and its emerging immigration landscape paints a picture of a nation redefining itself. Meanwhile, China’s quiet resurgence, often obscured by geopolitical noise and prevailing sentiments, is creating an environment of untapped opportunities that invites a deeper understanding beyond surface-level perceptions. We are ready to embrace the potential of these markets to generate alpha for our clients.

Woman visiting beautiful town in Cinque Terre coast, Italy.

Despite ongoing macroeconomic uncertainties and some softness in business activity, financial results published from our holdings for 2023 reassured us. On average, both margins and earnings held up relatively well. Here are two examples of holdings that contributed positively during the first quarter of 2024.

Sopra Steria Group:

Sopra has historically managed mid-single digit organic growth in addition to consistent quality M&A to enhance topline growth. Its historical margins, however, have lagged larger peers like Accenture or CapGemini due to the acquisition of Steria in 2014 which was dilutive to margins [Steria was 350 basis points (bps) below Sopra’s margin], as well as some segments and geographies where management has somewhat sacrificed margins for growth. In 2023, despite additional margin dilution from recent acquisitions, Sopra achieved a 9.4% operating margin, its highest since 2011, and much closer to the 10% to 12% expectation for a major European IT service firm. This was driven by increased pricing, operational efficiencies and scale. We expect Sopra to reach and maintain this improved margin profile in the next couple of years, while maintaining a defensive end-market profile than peers. As such, we remain optimistic on the name.

Melia Hotels International:

After the initial collapse of travel in 2020, when Melia saw its sales drop 70% year over year, the resort hotel operator enjoyed explosive revenue growth due to what analysts coined “revenge travel.” While 2023 saw more normalized 14% topline growth after two years of high double-digit growth, there is still plenty of room for sustainable growth on both the top and bottom line. Despite reaching peak EBITDA from 2018, margins remain a full 200 bps before pre-COVID and there is no reason to believe pre-COVID margins cannot be reached again as the inflationary environment normalizes. Furthermore, the company announced earlier this year the sale of 38% of three of its hotels to Santander for €300 million, strengthening Melia’s balance sheet through deleveraging, while highlighting the bank’s confidence in Melia’s growth prospects. Overall, the company appears quite confident in its 2024 outlook. Despite concerns that inflation could impact discretionary spending including travel and lodging, Melia expects low double-digit RevPAR growth driven equally by price and occupancy, which seems supported by strong January and February data.

Over the next weeks, European companies will start publishing their Q1 revenues, and with it, their outlooks for 2024. The comparison basis with Q1 of 2023 could prove challenging, but we are still projecting companies to generate positive earnings growth for this calendar year. Here are some observations that tend to support our view that the economic improvement could continue:

Real wage growth and savings rates are supportive: After experiencing negative mid-single digit growth in 2022, the Eurozone and the UK are now back to positive real wage growth. As a result, saving rates have started to climb and the gap with the US has widen. As shown below, EU and UK gross savings rates are very supportive compared to the US. The economic activity could react positively to a scenario where households decide to shift a portion of that disposable income into consumption.

Savings rates across the US, the UK and the Eurozone

Chart 1: Line graph showing EU, UK and US gross savings rates, 2015 to 2024.
Source: Berenberg.

European optimism is growing: Business surveys and confidence indices are showing early signs of recovery, as indicated by the latest release on the German business outlook. Although it may not immediately translate into new orders, it could play an important role in how the second half of this year develops.

The housing market is stabilizing: Mortgage approvals in the UK bounced back in February to a level not seen since September 2022. A similar picture can be observed in Germany after two years of excessive contractions. Although corporate loans were still declining in the first quarter of 2024, we are starting to see credit conditions easing for mortgages, a first since 2021.

The destocking cycle is coming to an end: The destocking cycle that started in early 2023 has contributed to a very low level of stocks. Some industries might even carry too low a level of stocks in the event that pent-up demand returns in the second half. Any uplift in order intake would require a higher level of stocks, which would revitalize the manufacturing sector.

Valuation discount: The wide valuation gap that exists between Europe and Global could be narrowing as economic indicators and confidence improve. As shown by the 12-month forward earnings index below, small and mid-cap stocks are still trading at discount vis-a-vis Global. A potential rate cut, expected in June, combined with a reacceleration of demand, would likely drive small and mid-cap companies.

Forward 12-month earnings for European companies vs. the Global market

Chart 2: Line graph showing 12-month forward earnings index for Europe and Global small, mid- and large-cap indicies, 2019 to 2024.
Source: Berenberg.

In a world where the unexpected has become the norm, our holdings’ resilience through last year’s ups and downs offers a sense of stability and growth potential amid uncertainty – and an opportunity to think beyond the immediate to what could be on the horizon.

Two businessmen shaking hands in an office.

The fluctuation in mergers and acquisitions (M&A) activity in 2021 followed a typical cyclical pattern, echoing broader economic trends. The initial surge in M&A was propelled by low interest rates and a swift reopening from the COVID-19 pandemic that encouraged companies to pursue strategic acquisitions. This led to the highest M&A volumes since 2007.

However, several factors dampened the momentum in 2022-23. Aggressive interest rate hikes, rising inflation, geopolitical tensions such as the war in Europe, and an overall economic slowdown contributed to a decline in M&A activity. Additionally, decreasing confidence among C-suite executives and a wider bid-ask spread between buyers and sellers further reduced dealmaking.

As a result, total M&A volumes dropped by 18% to approximately $3 trillion in 2023, according to data from Dealogic. This marked the lowest level of M&A activity since 2013 when deal volumes were at $2.8 trillion, indicative of the challenges and uncertainties faced by global dealmakers amidst shifting economic conditions and geopolitical risks.

All of this changed when the Federal government started hinting about lowering interest rates in 2024. This week, we look at how this trend stands to benefit our portfolio.

Global M&A volumes
Global mergers and acquisitions volumes from 1998 to 2024.
Source: Bloomberg

Starting bell sounding for an upswing in M&A activity

Despite ongoing macroeconomic and geopolitical uncertainties, signs are pointing to a potential turnaround for dealmaking in 2024. Three key factors support this optimism:

  1. Financial markets have rebounded significantly since the previous year, with expectations for declining interest rates.
  2. Considerable “dry powder” is waiting on the sidelines, coupled with a rise in board confidence.
  3. There is pent-up demand for deals, alongside an ample supply, reflecting a readiness to engage in M&A activity.

Global non-financial listed companies hold $5.6 trillion in cash, while private market investors possess $2.5 trillion in dry powder, providing substantial resources for dealmaking. Additionally, depressed small cap valuations along with structural factors such as advancements in AI, the transition to clean energy, innovation in life sciences, reshoring initiatives and geographic diversification are further driving demand for M&A.

The dismal performance of 2023, marked by the lowest completed M&A volumes in a decade relative to nominal US GDP, underscore the potential for a rebound in deal activity in 2024. So, how big can it get?

We could see up to $9.5 trillion of M&A in 2024

Based on Dealogic’s data, global M&A volume has averaged around $5.5 trillion per year since 2014. With corporations potentially aiming to catch up on the $2 trillion shortfall from the last two years, M&A volumes for 2024 could range from $5.5 trillion to about $9.5 trillion. Actual figures will depend on various factors such as economic conditions, geopolitical stability and corporate strategies.

The underlying drivers are especially visible in markets like Europe that have seen a drought in M&A activity.

Western Europe M&A volumes
Mergers and acquisitions volumes in Europe from 1999 to 2024.
Source: Bloomberg

Looking at Japan, the structural shift towards greater corporate efficiency and activity is notable and expected to drive further M&A activity in the market. Despite the challenges faced by global markets, Japan has managed to maintain positive M&A volumes, demonstrating a resilience and proactive approach among Japanese companies.

Rising costs, stricter governance rules and mounting shareholder pressure are compelling companies in Japan to explore strategic options, including M&A. This trend is part of a broader effort to enhance corporate performance and unlock shareholder value.

Moreover, the potential wave of management buyout (MBO) activity in Japan is bolstered by recent reforms in the Tokyo Stock Exchange and guidelines by the Ministry of Economy, Trade and Industry (METI) for corporate takeovers. These reforms and guidelines are meant to promote shareholder earnings and increasing corporate value, aligning with the goals of enhancing efficiency and profitability.

For Japanese companies, especially those with lower capital efficiency, MBOs present an attractive way to streamline operations, improve governance and maximize shareholder returns. As a result, we can anticipate more M&A and MBO activity in Japan as companies adapt to evolving market dynamics and regulatory environments.

Japan M&A volumes
Mergers and acquisitions volumes in Japan from 1999 to 2024.
Source: Bloomberg

Many other markets like Australia, India, Korea and ASEAN are also expecting heightened M&A activity this year.

How does this impact the portfolio?

The accelerating M&A environment can be positive for smaller companies as their larger counterparts are willing to pay to acquire agile and innovative companies that can provide positive long-term growth perspectives. Furthermore, big companies seem to be diversifying by acquisition type. Larger, maturing companies can lack the same innovation capabilities as small companies to adjust, create and develop faster due to their nimble structure.

How else do we participate in the M&A cycle? 

Another way to capitalize on this trend is by investing in a M&A advisory firm. These companies provide advice on corporate mergers, acquisitions and divestitures as well as debt and equity financing, acting as intermediaries in business sale transactions for either the selling company or the buyer.

We have profited from the M&A theme via Rothschild & Co., a France-based merger and acquisition boutique firm that has generated solid returns for our clients. Also, we recently initiated a position in Evercore, a name we have owned in the past and decided to repurchase because it is poised to outperform its competitors in the M&A space.

Founded in 1995, Evercore is an independent investment bank and asset manager, ranking #1 among independent firms and #4 among all M&A boutiques, including well-known players like Goldman Sachs. The company has a strong and liquid balance sheet, making it an excellent example of an investment that should benefit from the exciting uptick in M&A activity.

Smiling woman holding mobile phone shopping in grocery store.

Food banks in Canada are expecting an 18% increase in demand in 2024 as consumers continue to face cost of living concerns. Last week, Liberal members of the House of Commons finance committee supported an NDP motion to implement an excess profits tax on large grocery retailers to address rising food prices.

Seeking efficiencies in retail

In response, grocery retailers are likely to seek new efficiencies. VusionGroup (Ticker: VU.FP and formerly called SES-imagotag), a recent addition to our portfolio, is positioned as a key player in this scenario, offering cutting-edge digital equipment and software services to help retailers digitalize and optimize their points of sale. The company offers an extensive range of IoT devices, such as electronic shelf labels, video displays, sensors, wireless shelf cameras and smart rails designed to streamline operations and reduce labour for low value-added tasks. Vusion’s in-house software solutions automate pricing and enable efficient inventory management, enhancing the shopping experience and brand marketing efforts.

The shift to electronic shelf labels (ESLs)

Switching to ESLs presents several advantages for retailers, including operational cost reduction and improved pricing flexibility, which can boost revenue and profitability. Changing paper-based labels in stores is labour-intensive and many staff are paid low or minimum wages, a sector that has seen significant raises. Prices displayed on ESLs can be automatically and quickly updated using Vusion’s software, allowing retailers to either reduce staff or reallocate them to higher value-added and customer-facing tasks.

Enhancing efficiency and the retail experience

The automatic pricing feature of ESLs offers additional benefits. Retailers can be more flexible with pricing, quickly adjusting to inflation and the competitive environment, thereby maximizing revenues and profitability. This flexibility also facilitates pricing adjustments, such as promotions on fresh produce, to limit waste. In general, fewer pricing errors improve the overall customer experience.

Another aspect of improving the customer experience is ensuring product availability on shelves. Industry experts estimate sales lost due to lack of products on shelves are around 8% of total revenues for a point of sale. By integrating ESLs and smart cameras, Vusion enables store managers to be automatically notified if a product is running low, prompting shelf replenishment from store inventory or triggering an order for more products. Optimizing inventory management maximizes cash generation at the store level.

Leveraging technology for inventory and online order efficiency

The COVID-19 pandemic accelerated online grocery sales in the US, a trend expected to grow at a rate of over 20% annually. Vusion’s products allow for efficient processing of online orders, with most being fulfilled directly from the stores. ESLs enable “pickers” to be more efficient by providing the fastest route to collect all items in an order. ESLs even flash to indicate where a product can be found, reducing the time employees spend on each order and minimizing the risk of incomplete or incorrect orders. Retailers and fast-moving consumer goods companies can also use ESLs as a marketing tool by implementing targeted promotions and offering coupons to customers.

Conclusion: Vusion’s promising long-term growth

Despite initial challenges due to concerns over battery life, technological improvements have addressed these issues and significant milestones, such as Walmart’s recent large-scale ESL deployment, signal a promising growth trajectory for the technology. Vusion’s leadership in the global ESL market suggests a strong growth outlook, with the potential for widespread ESL adoption and market penetration to the tune of 20% to 30% from approximately 7% today, or up to three billion labels by 2027. Adding replacement labels, smart camera installation opportunities, and cloud and software subscriptions only increases the potential addressable market.

With a dominant market share, a top-tier and broad product range, and strong relationships with major retailers, Vusion is an exciting long-term growth story in our view.

View of Shibuya Crossing in Tokyo, Japan, one of the busiest crosswalks in the world.

Japan’s banking sector has long been overlooked by investors. It’s considered either not essential to own or to be avoided due to the challenges posed by negative interest rates and deflation, which have consistently squeezed bank profitability. However, the recent rally in Japanese banking stocks since 2023 signals a potential return to normalcy. So, what exactly is happening within Japan’s banking sector, what factors are driving the rally and is it sustainable?

Looking back – Deflation and Japan’s ultra-loose monetary policy

Understanding the current situation entails looking back on Japan’s prolonged battle with deflation and the rationale behind introducing negative interest rates.

Japan has experienced deflation since the mid-1990s, following the collapse of its economic bubble in the early 1990s. Various economic factors, including a domestic consumption tax hike from 3% to 5% and the Asian currency crisis in 1997, put downward pressure on the Japanese economy. In response, the Bank of Japan (BOJ) gradually reduced its policy rate throughout the 1990s, eventually adopting a zero-interest rate policy in 1999. Despite briefly abandoning this policy in 2000, the BOJ introduced quantitative easing in 2001 after the bursting of the IT bubble in the US. Further challenges emerged with China’s entry into the World Trade Organization in 2001, putting deflationary pressure on Japan by supplying cheap labour. The Great Financial Crisis of 2008 intensified the issues. Exports were sluggish due to a strong yen against dollar (USD/JPY fell below the 76 level), and declining demand amid a global recession.

Change began to emerge in late 2012 with the introduction of Prime Minister Abe’s economic policies, known as Abenomics, which included quantitative and qualitative easing measures. This initially signalled a shift away from deflation. But the momentum stopped when the government hiked the consumption tax rate from 5% to 8% in April 2014. Then BOJ Governor Kuroda committed the BOJ to achieving 2% inflation, but the target was pushed further into the future.

Recognizing the need for intervention, the BOJ introduced negative interest rates in January 2016, surprising the market and causing significant disruptions. Subsequently, the BOJ introduced its yield curve control policy in September 2016, which had been in effect until it was terminated by the BOJ earlier this week.

Turning the tides by escaping deflation and normalizing interest rates

Fast forward to today, after decades of efforts to fight deflation, Japan is finally seeing signs of progress. Inflation has been consistently above the BOJ’s targets of 2% since May 2022, helped by price hikes and wage increases.

Historically, Japanese companies are reluctant to pass on higher costs to consumers or clients, fearing it may damage the relationship. Instead, they turn to cost-cutting measures internally. However, the unprecedented challenges during the pandemic forced many companies to negotiate higher prices with customers. To their surprise, most customers were cooperative and willing to accept the price increase, leading to improved margins across industries. The mindset of Japanese companies is also starting to change, where they are becoming more willing to pass on higher costs and reduce unprofitable businesses.

Additionally, Prime Minister Kishida’s government has been pushing corporates to increase wages, a key policy of its “new form of capitalism” campaign. Finally in April 2023, labour unions in Japan won the biggest pay increase in 30 years in their spring wage negotiations with management, achieving an average wage hike of 3.7%. In 2024, the union group announced an even higher raise of 5.28%. Although this largely applies to the biggest companies in Japan, smaller employers are likely to follow suit given the country’s tight labour market. With higher disposable income and improved consumer sentiment, the virtuous cycle should be able to support the sustainability of inflation. As a result, the BOJ decided to guide overnight lending rates to 0% to 0.1%, up from -0.1% to 0%, marking the first time the BOJ has raised its interest rates in 17 years.

Rallying behind banking: Equity markets and corporate governance reform

Equity markets are starting to view Japanese banking stocks as normal investment targets once again due to the end of deflation and interest rate normalization.

Another positive change is corporate governance reform. Although it has been several years since the Corporate Governance Code was established by the Tokyo Stock Exchange (TSE) in 2015, 2023 saw the most changes at Japanese publicly listed companies after the TSE called on companies’ management to be more mindful of the cost of capital and stock prices to enhance corporate value. This initiative particularly targets companies with price-to-book ratios below 1x. The vast majority of Japanese banks trade at a significant discount to their book value. Responding to this request, many banks laid out improvement plans aimed at enhancing Return on Risk-weighted Assets (RORA), Return on Equity (ROE) and shareholder returns.

Looking ahead, the prospects of Japanese banks appear promising, with sustainable inflation driven by economic growth and wage increases. In addition, the relocating of manufacturing facilities back to Japan amid the onshoring and reshoring trend, and increased loan demand, are also expected to benefit the sector. Japan is still in the very early phase of rate normalization, and Japanese banking stocks are still in the process of returning to normal compared with Japanese stocks in general. The improving financial metrics should also help J-banks to be more comparable to their global peers.

Spotlight on Concordia Financial Group

We initiated a position in Japanese regional bank Concordia Financial Group (7186 JP) in 2023. Concordia FG consists of three banks – the core is Bank of Yokohama, with over 100 years of history – and two other smaller banks, Higashi-Nippon Bank and Kanagawa Bank, which the group acquired in the past few years. As one of Japan’s largest regional banks, Concordia FG boasts efficient operations and strong loan growth, particularly in Tokyo and the Kanagawa Prefecture, which have seen the highest net migration from other areas and strong banking demand due to high concentration of corporates and SMEs.

Unlike some of the problematic regional banks in the US that rely on corporate deposits, Japanese banks have accumulated their deposits over time from loyal retail customers. In the case of Concordia FG, over 70% of deposits are from retail channels. Even after the bank run at Silicon Valley Bank (SVB) in March 2023, deposits at Concordia FG continued to grow steadily, with no obvious change in customers’ banking behaviour. The bank maintains a low securities-to-asset ratio of 12%. The same ratio was over 50% for SVB. The bank also has very tight risk controls in its lending practices, maintaining a conservative loan-to-asset ratio of 85%. The banks’ loan portfolio is well-diversified, with no exposure to the commercial real estate sector in the US.

Further prospects and technological advances

Despite Japan’s rising personnel costs, Japanese banks’ management teams remain committed to controlling costs. Recent years have seen continued downsizing efforts, including branch closures and reductions in the number of ATMs. Branch closures are not simply an effort to reduce network size, but part of a strategic shift to increase online banking usage and enhance convenience for consumers. Efforts include expanding the number of ATMs at convenience stores and providing non-branch ATMs in collaboration with other major banks.

Another Japan-based bank we invest in, Seven Bank (8410 JP), is expected to benefit from this trend. With banks seeking to streamline their ATM fleets, some have chosen to partner with Seven Bank, boasting the largest ATM network in Japan with over 27,000 ATMs. Its next-generation ATMs offer advanced features beyond simple deposits and withdrawals, including face recognition for identity verification, settlement with QR codes and the ability to open bank accounts. It also utilizes AI and IoT to predict cash demand more precisely and detect potential component failures, which helps to optimize ATM operations.

As Japan’s banking sector continues to adapt to evolving economic conditions, we remain optimistic about its long-term prospects.

A display of colorful woven fabrics from India.

One of the perks of being on the road to meet our holdings is the opportunity to see firsthand the daily challenges of running a business. It’s often said that the devil is in the details, and this holds particularly true in emerging markets, where every few kilometres bring a change in culture, customs and language. Some industries demand more from their execution strategies than others, with the microfinance sector standing out due to its complexity. While simple in concept, providing loans to underserved populations is more nuanced in practice.

The birth of microfinance

The microfinance business has its origins in Bangladesh, where Nobel Laureate Mohammed Yunus discovered that, despite their lack of resources, the impoverished were neither lacking in financial savvy nor in reliability as borrowers. In 1983, Yunus founded Grameen Bank, focusing on the strengths of his clients, including trustworthiness and creativity, rather than their lack of formal education or financial resources.

One of our holdings, CreditAccess Grameen (CREDAG IN), mirrors Grameen Bank’s business model and name. Our recent visit with CREDAG allowed us to observe its operations and engage with its customers, 99% of whom are women. As India’s largest microfinance institution, with 1,900 branches, 4.6 million clients and $2.7 billion in assets under management, CREDAG in our view exemplifies how to handle the complexities of a demanding businesses.

Ground-level insights

CREDAG’s strategy emphasizes local engagement and consistently doing the “little things” right. In a nation with 22 official languages, having branches staffed by locals who understand the regional dialect and economy are key. This local presence marks many employees’ first foray into the formal job market, fostering a strong sense of loyalty among them.


Outside a typical rural CREDAG branch in rural Bangladore.

We got to see CREDAG in action, where morning efforts focus on collections and afternoons on new client acquisition. The company’s investment in employee wellbeing, evidenced by providing kitchen spaces, covering grocery costs and reimbursing fuel expenses, further translates to high employee loyalty.

Relationship building – more than just transactions

The local economy in the villages we toured is driven by dairy and silk farming. In fact, the district is India’s largest cocoon silk producer.


A CREDAG client with her home silkworm business. The silkworms are feeding on mulberry leaves.

 


Silkworm cocoons in a bamboo tray for the local wholesale market.

Building customer relationships

Our participation in collection meetings highlighted the importance of CREDAG’s joint lending model.


A CREDAG collection meeting outside the village temple.

Meetings start and end with pledges, underscoring the powerful psychology of positive reinforcement to change borrowers’ behaviour for the better.

Leadership within borrower groups streamlines the payment process, allowing for relationship building, educational and sales opportunities. With most of its customers having no credit history or verifiable income, local connections (and intelligence) become crucial parts of good underwriting.

We also had the chance to see an income-generation loan being paid out to a dairy farmer.


Receipt for a 2-year, Rs 50,000 loan for buying a cow to be repaid in 104 installments.

Customized innovation: tradition meets tech

CREDAG leads in integrating technology, reducing client onboarding times and introducing new products rapidly. Its core banking solution caters to remote areas. Even with no internet connection, loan applications can be processed offline and then bulk uploaded when access is available. This allows CREDAG to offer flexible repayment options that align with its customers’ income cycle and new products like gold loans to reduce product time to market.

We also saw its technology in action. CREDAG offers cash emergency loans of up to RS 1000 as a complimentary service to creditworthy customers. This is especially beneficial to those in far-flung areas with no nearby bank branch. Customers can scan their biometric details to pull up their account information on the loan officer’s tablet. Once account details are verified, cash is disbursed on the spot. The whole exercise takes less than five minutes!


A CREDAG customer getting her biometrics scanned for account verification.

Details, details, details

Our visit with CREDAG reinforced how small details matter in building loyalty and maintaining operational efficiency. In the case of CREDAG, it translates to a best-in-class cost structure and customer retention ratio. While we recognize the inherent cyclicality of the microfinance sector, our visit helped us appreciate the need for rigorous execution and a deep understanding of the local context to achieve operational excellence.

Sunset view of high voltage electricity towers on the shoreline of San Francisco bay area; California.

It’s no secret that the US electrical grid is in a dire state now more than ever. Most of the infrastructure we see today was built in the 1960s and 1970s, with over 70% being more than 25 years old. Marked by significant and consistent underinvestment, the US grid continues to experience increasing supply disruptions, blackouts and fire incidents. Maintenance and repair are perpetual needs. A notable example of maintenance disrepair happened last year with the Hawaiian Electric fire. In August 2023, Maui County sued Hawaiian Electric, the state’s largest supplier of electricity, accusing the utility of negligence in what became the deadliest US fire in over a century resulting in thousands of acres burned and over 100 fatalities.

The push for electrification

Additionally, with rising population levels and the ongoing push for electrification, the grid is ill-equipped to manage the volume of electricity being transmitted through existing power lines. Electricity demand in the US is expected to increase by 18% by 2030 and 38% by 2035. This increased electricity transmission will be driven by the transition to electric vehicles as well as the build out of carbon-neutral energy sources, namely renewables.

Facing the future: investment and innovation

To meet the rising demand and supply of electricity, significant augmentation and expansion of the current grid, with substantial resources invested, will be necessary. Several states have already announced massive investment projects to address these needs. Notably, in October 2023, the Biden-Harris administration announced a USD$3.5 billion funding initiative for 58 projects across 44 states for grid infrastructure, signalling the beginning of extensive future investments. The International Energy Agency estimates that, by the end of the decade, over $600 billion a year will need to be invested globally to ensure a resilient supply of clean and reliable electricity. In fact, from 2020 to 2023, global grid investments have grown from USD$285 billion to over USD$310 billion.

Bar chart showing growth of energy transition investment, 2004 to 2023.

Source: BNEF

These developments make the grid infrastructure trend one we are closely watching as we seek to identify companies poised to benefit from this theme.

Nexans: a catalyst for change

One such company is Nexans (NEX FP), a recent addition to our portfolio that stands to gain from escalating investment in US grid infrastructure over the next decade. A France-based cable manufacturer with a significant presence in the US, Nexans specializes in producing high, medium and low voltage transmission cables and serves a variety of end markets.

Several years ago, recognizing the global trend towards electrification, Nexans decided to realign its portfolio to become a pure electrification player by 2024, committing to divest from three divisions unrelated to this goal, namely telecom, auto harness and a portfolio of small unrelated segments.

2023 marked a transition year for the company as it intensified its refocus efforts. This was met by some volatility in its stock price due to a challenging market environment that made divestment difficult along with uncertainties in offshore wind markets. However, the company has recently shown significant progress and is delivering on its portfolio transition ahead of schedule. Moreover, offshore wind markets in the US are experiencing renewed positive sentiment, evidenced by strong auction prices that de-risked them last week. Nexans’ stock price has rebounded from a multiyear low in October 2023 to a multiyear high and we remain optimistic about the company’s future prospects and its successful transition to full electrification.