Who doesn’t love the smell of freshly brewed coffee in the morning? Coffee is an essential part of the morning routine for many millions of people worldwide.

With over 437 million posts on TikTok related to coffee, it’s no surprise that coffee demand has been soaring over the last couple of years. According to the National Coffee Association, 67% of Americans consumed a cup of coffee every day; this is more than any other beverage of choice. Much of the growth is driven by younger generations who have embraced coffee as part of their daily routines. As these generations enter the workforce – specifically Gen Zers – they are estimated to hold USD360 billion of disposable income and coffee companies around the world have been harnessing their spending power. Some of the key elements that differentiate the winners and losers in the coffee market is product innovation, creativity and connecting with consumers.

Both Europe and North America are big consumers of coffee – in fact, Finland is the country that consumes the most coffee globally. The average Finn consumes about 12 kg of coffee per year, which is the equivalent of 4 cups of coffee a day. In the United States, the average American consumes about 4.2 kg of coffee per year. Global coffee production in 2023 reached a staggering 178 million 60 kg bags. These production volumes cumulate to USD473 billion.

De’Longhi

One of Global Alpha’s holdings, De’Longhi S.p.A. (DLG MI), is significantly benefiting from the latest growth in the coffee market. A well-known Italian manufacturer and distributor of small domestic appliances, De’Longhi primarily sells all kinds of coffee machines for personal use. In addition to capitalizing on the at-home coffee market generating over 50% of their revenue from this segment, De’Longhi recently acquired two additional companies that specialize in the professional markets: La Marzocco and Eversys. This will allow the company to also benefit from coffee consumption outside of the home too.

The company saw an acceleration in sales in 2024, with organic revenue growth up 14% versus the previous year. The mid-teen growth in sales was mostly driven by at-home coffee machines. Its professional segment will be an interesting growth driver for many years ahead.

To maintain a competitive edge, the company has a strong track record of fostering innovation and driving new product development. De’Longhi spends 2.4% on average* of sales on R&D annually. This commitment not only enhances De’Longhi’s market position, but it also enables it to respond effectively to evolving customer needs and industry trends. The most recent example would be the launch of its Rivelia automatic coffee machine which features a cold coffee extraction feature to cater to the growing popularity of cold coffee beverages. As the company navigates the continuously changing landscape of the industry, its dedication to product innovation will undoubtedly lead to sustained growth and solidify its position as a leader in the market.

*Geoffrey D’Halluin, “What’s brewing?’’, BNP Paribas, 19 September 2024.

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

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

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

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

ASEAN-6: GDP growth

Source: Oxford Economics

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

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

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

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

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

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

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

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

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

Young affluents show stronger appetite for travel post-pandemic

Source: Understanding affluent travel behaviors and aspirations

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

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


Source: Travel Trends 2024: Breaking Boundaries

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

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

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

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

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

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

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

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

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

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

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

Population growth and demographic trends

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

2024 performance

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

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

MSCS Brazil sector performance

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

Source: Bloomberg

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

MSCI Brazil Index sector weights (2024 – present)

Source: Bloomberg

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As we turn the page on another year, the investment landscape is poised for transformative shifts. Despite the narratives suggesting a retreat, Environmental, Social and Governance (ESG) considerations remain at the forefront of corporate and investor agendas. These factors are not just influencing how businesses operate, but are also reshaping how capital flows, decisions are made and risks are assessed globally.

In this commentary, we highlight five ESG trends set to shape the year ahead, revealing both challenges and opportunities for investors and businesses alike.

1. Enhanced regulatory frameworks and mandatory reporting

The era of voluntary ESG reporting is coming to an end. Governments and regulatory bodies worldwide are tightening disclosure requirements, aiming for greater transparency and accountability. For instance, over 50,000 companies globally will start publishing reports in line with the EU’s Corporate Sustainability Reporting Directive (CSRD), effective as of the 2024 financial year. In the United States, despite the polarization of ESG, the California climate disclosure laws will impose strict climate-related reporting obligations for businesses to report climate-related information, while Canada’s Sustainability Standards Board (CSSB) has just published the first sustainability disclosure standards, signaling a move towards harmonized ESG standards.

These regulatory shifts demand readiness from companies to avoid fines and maintain competitiveness, offering investors richer datasets to assess ESG risks and opportunities.

2. The energy security and decarbonization nexus

Geopolitical instability and growing energy demands have elevated energy security to a strategic priority. At the same time, the global race to decarbonize continues to accelerate. Renewable energy investments, energy storage solutions and the deployment of innovative carbon capture technologies are central themes driving this dual agenda.

Many of our holdings are benefiting from this trend. One such example is Landis+Gyr Group AG (LAND SE), a leader in smart metering, grid edge intelligence and smart infrastructure technology, who is helping companies decarbonize their operations. In 2023 alone, Landis+Gyr’s smart metering technology helped to enable a reduction of 8.9 million tons of direct CO2 emissions among customers, while contributing to the company’s growth.

3. Climate adaptation finance continues gaining momentum

While decarbonization remains critical, the rising frequency of climate-induced disasters has underscored the need for climate adaptation strategies. 2024 saw insurance companies suffer $10.6 billion of climate-attributed losses, according to Insure our Future. Investments in climate-resilient infrastructure, disaster recovery, ecosystem restoration and sustainable agriculture are gaining prominence as businesses recognize the economic benefits of adaptation alongside mitigation.

Companies that proactively address physical risks and implement strategies to safeguard operations are becoming more attractive to investors, as they represent opportunities for long-term sustainable growth and stability. Such an example is our holding Installed Building Products Inc. (IBP US), an insulation and building products company whose portfolio includes sustainable insultation, waterproofing, fire-stopping and fireproofing products. In addition to helping companies adapt to physical risks, IBP is aiming to reduce its carbon producing electricity usage by 50% from 2020 by 2030.

4. ESG integration into core business strategies

ESG as a standalone acronym may be fading, but its principles are permeating every aspect of corporate strategy. Businesses are embedding ESG considerations into supply chains, workforce management and product innovation, aligning with stakeholder expectations while mitigating risks.

For example, procurement strategies now emphasize circularity and resource efficiency, while governance practices are evolving to enhance transparency and build investor trust. This shift from a compliance-driven approach to a strategic imperative positions companies with robust ESG frameworks as long-term winners in the eyes of investors.

5. Digital infrastructure and resilience

In an increasingly interconnected world, digital infrastructure has become the backbone of economic and societal resilience. The rapid shift towards digitalization, coupled with the rising frequency of cyberattacks and natural disasters, underscores the need for robust and adaptive digital systems. Investments in secure data centers, resilient cloud services, and advanced cybersecurity measures are gaining momentum as businesses and governments prioritize safeguarding critical digital assets.

Furthermore, integrating digital infrastructure with renewable energy sources and smart grids enhances both energy efficiency and reliability. Companies advancing in digital resilience – those equipped to withstand and recover from disruptions – are increasingly attractive to investors seeking stability and innovation in the face of growing uncertainties.

Conclusion

The ESG trends shaping the new year highlight the dynamic intersection of sustainability and business resilience. For investors and companies alike, staying ahead of these trends is not just about compliance but about seizing opportunities for growth, innovation and competitive advantage in a rapidly transforming world.

As we look back on 2024, we saw the equity market prove itself to be a testament to resilience, and a return to speculative activity last seen since before the pandemic.

Below is a selection of charts that our team found to be particularly impactful, highlighting the environment we witnessed in 2024 and, more importantly, why we’re excited for 2025.

Speculation

This year has been the year of the US equity markets, particularly the mega cap Magnificent Seven, up over 60% in 2024. The speculative fervour that gripped the United States has reached fever pitch. The best way to measure it may actually not be Bitcoin – even though it has more than tripled this year to trade above $100,000.

Have you heard of Fartcoin? Yes, you read that correctly. Just so you know, the coin is up over 1,000% since the US elections on November 5.

Source: CoinGecko

Not bad for a cryptocurrency that allows users to submit fart jokes or memes to claim initial tokens. Over USD60 million is traded every day; with a market cap of $830 million, it is the 189^th largest cryptocurrency. We are in uncharted territories.

Regional market concentration

Source: BofA Global Investment Strategy, Global Financial Data, Bloomberg

The concentration of the gap in valuation between US stocks and the rest of the world is driving up the valuation of US stocks to extreme levels. Global markets have been tumultuous since the pandemic, but with the rush for AI and technology, the US market has shown to be the most resilient, therefore drawing investors from abroad in droves.

Top ten concentration

Source: BofA Global Investment Strategy

Regarding the gap between the top-10 stocks in the S&P 500 and the remaining 490, a similar divergence is taking place when we examine equity market flows. In fact, the best way to measure the fervour is in the investor concentration towards US equities, specifically the S&P 500. With the Magnificent Seven making up nearly 50% of the S&P 500’s gain, this high is volatile. Any earnings slowdown or unfavourable news within this seven could result in outsized impacts on the overall performance.

We will let you judge if this a risky environment or not. To quote Mark Twain, “History doesn’t repeat itself, but it often rhymes.”

Instead of trying to find reasons why this market might correct, allow us to concentrate on what we see as opportunities.

Global opportunities outside of the United States

We’ve written numerous pieces on opportunities within small caps in Japan, Europe and emerging markets this year, so it’s no surprise when we say that we believe that the Japanese economy will be the fastest growing developed market economy in 2025.

The country has turned the corner on deflation. The virtuous wage/price spiral has taken hold. Pay rose 3.6% for base pay and 5.17% in total pay in 2024. We expect a similar increase in 2025. Interest rates will probably rise another 0.5%. Japan is a beneficiary of mega trends, from friendshoring to AI, semi-conductor investments to green transition. A newly announced ¥39 trillion fiscal package will help even further. As a result, a stronger economy with a large discount in Japanese companies’ valuations and investor-friendly measures such as M&A and buybacks mean Japan should be the top performing developed equity market in 2025.

In Europe, how a few years make a huge difference. Countries like Spain and Italy should be outperformers, as well as the UK and Sweden as these countries and their economies begin to turn.

For emerging markets, China will deploy fiscal stimulus that is similar to 2008, putting a floor on deflation risks, stimulating consumption and buoying the stock market. Given the underweight of most asset managers, it may mean healthy returns for the Chinese markets.

MSCI EAFE Small Cap minus Russell 2000

Source: Global Alpha Capital Management Ltd.

Since fall 2024, there has been a rotation into US small caps, fueled even more by the Trump Trade: Could we see international small caps catch up? One can observe the relative outperformance of EAFE small cap between 2002 and 2010. Seven years of underperformance is unprecedented. And we need to know that Japan is around 33% of the EAFE small cap index. According to the fundamentals and history, if there is a slowdown in the United States, international markets including international small caps could stand to be big beneficiaries.

Mergers and acquisitions

Source: Global Alpha Capital Management Ltd.

We have also recently seen a pick-up in M&A activity. A consensus is emerging from advisors like Goldman Sachs, Evercore and others that 2025 will be a record year. M&A activity is projected to be 15% greater 2024, which was already up 15% over 2023.

Source: Global Alpha Capital Management Ltd.

Finally, the relative valuations of global and EAFE small caps versus large cap indicate a once-in-a-few-decades opportunity.

Investments are currently overloaded into the US market, with an oversaturation in the Magnificent Seven stocks. But it is clear there is opportunity in small caps – particularly international small caps – therefore, this is an opportunity that excites our team going into 2025.

In closing, the entire team at Global Alpha would like to thank you for your trust, and we want to wish you a beautiful holiday season and a wonderful 2025 ahead.

A sign of the times: tariffs will increasingly be part of our risk analysis resulting in both threats and opportunities in the global view of our investment universe. The impacts could be large in magnitude.

According to Goldman Sachs, a 25% tariff on North American trade could increase the consumer price index by 9%. In this extreme tariff environment for Canada and Mexico, Vietnam, Germany and Japan (all being equal) are the countries that would benefit in the short term as they have the most trade deficit with the United States. Mid-term, inflation sets back in and the winners would become sectors led by banks, real estate, utilities and commodities.

Lifting tariffs from down under

Meanwhile, at the other end of the globe, China and Australia are coming out of a trade war and Australia is set to benefit from increased free trade. China has recently ended heavy sanctions on Australian goods such as an 80.5% tariff on barley and a 212% tariff on wine. Further, China has recently declared an intent to promote free trade as a way of ending their economic slowdown. Over 30% of Australian exports are destined for China, making it by far Australia’s largest trading partner.

In 2024, trade between Australia and China continued to grow significantly, with volumes exceeding pre-pandemic levels. Australian exports like iron ore, coal and natural gas remained dominant, while products like barley, timber, and potentially wine and lobster recovered after previous trade restrictions were eased. China’s imports from Australia showed double-digit growth, supported by warming diplomatic ties.

Over-reliance on China prompted Australia to diversify. As per the Organisation for Economic Co-operation and Development (OECD), the recent Australia-UK Free Trade Agreement provides new opportunities for agricultural exports, opening doors for Australian beef, lamb and wine producers to access high-value European markets, reducing dependency on Asia.

Australian services exports surged by 9.9% in the June quarter, reflecting strong recovery in tourism and international education. These sectors are critical for reducing Australia’s reliance on raw materials and fostering a more balanced trade profile. In addition, Australians have kept busy addressing tariffs and non-tariff barriers. Tariff cuts under the Australia-India Economic Cooperation Agreement fostered significant increases in exports, particularly in mining and agri-products.​

Australia and the United States maintain a significant trade relationship, but the relationship is 20 times smaller than the US relationships with China or Canada. The 2023 Australian trade surplus with the United States was a mere $2.5 billion. Key exports from Australia include beef, alcoholic beverages and industrial equipment, while imports from the United States feature technology, vehicles and pharmaceuticals​.

Australian investments

Global Alpha is invested in Australia in different sectors with companies that both serve the local markets as well as ones dedicated to exporting goods. Many of its holdings should profit from reduced trade barriers.

The AUB Group Limited (AUB:AU) is an ASX200-listed insurance broker and underwriting group based in Australia. It operates across approximately 595 locations globally, employing over 5,500 people. The group manages about AUD10 billion in insurance premiums annually for around 1 million clients.

AUB acquired the UK-based Lloyd’s wholesale broker Tysers in 2022 for AUD880 million. The deal significantly expanded AUB’s international presence, integrating Tysers’ operations in London, Singapore, and Miami. Tysers, a leading Lloyd’s broker, contributed AUD192.4 million in revenue in its first full year under AUB, highlighting strong performance and alignment with AUB’s strategy to address global and specialty insurance markets.

Orora Group (ORA:AU) is a global leader in packaging, headquartered in Australia. It operates across Australasia, North America and Europe, with a strong focus on the beverage industry. Orora Beverage specializes in glass bottles, aluminum cans and closures for wine, beer and other beverages. The acquisition of Saverglass in France in 2023 expanded its global footprint in premium glass packaging.

Orora primarily exports glass bottles and beverage cans to China, with a focus on packaging solutions for beer, wine and more. Exports have historically been tied to the Australian wine industry, but volumes dropped significantly after Chinese tariffs were imposed on Australian wine. Orora was able to shift capacity to other markets and is now ready to reap the benefits as wine tariffs to China are eased.​

Orora’s total annual production includes about 900 million glass bottles and substantial can output, with investments in new facilities and sustainability to support future growth​.
Also headquartered in Australia, ALS Limited (ALQ:AU) is a leading global provider of testing, inspection and certification services. Operating through three main divisions – commodities, life sciences, and industrial – it specializes in servicing the mining and exploration industries through:

• Analytical and metallurgical testing,
• Geochemistry,
• Quality testing,
• Microbiological, physical and chemical testing, and
• Remote monitoring.

ALS also provides diagnostic testing and engineering solutions for energy, infrastructure, and transportation, servicing the power and petrochemical sectors. The segment experienced growth in environmental services, particularly in Europe and the Americas, offset by challenges in pharmaceuticals​.

ALS stands to benefit soon on many fronts including the junior mining sector revival, the increased demand for environmental chemical testing, and the turnaround of its pharmaceutical testing division.

Source: Hyundai Heavy Industries

Last month, we visited Korea (South, not North) which remains in the “Emerging Markets” indices. We visited to conduct due diligence on existing and prospective holdings, attend a conference and meet with and learn from local asset managers who share the same approach to investing as us.

From the Miracle on the Han River to K-everything

From the ruins of the Korean War (1950 – 1953), Korea emerged to become the tenth largest economy in the world in 2005. Dubbed “the Miracle on the Han River,” Korea’s GDP grew from USD1.3 billion (GDP per capita of USD67) immediately after the war to over USD1.7 trillion (GDP per capita of over USD33,000) 70 years later in 2023. Continuous investment in technology and human capital has been a driving force behind the economic development. According to Organisation for Economic Co-operation and Development’s (OECD) latest publication on R&D spending as a percentage of GDP data, Korea (5.2%) ranked second only to Israel (6.0%) and higher than the United States (ranked third with 3.6%) in 2022.

First used to denote Korean pop culture (K-pop) and Korean drama (K-drama), the use of the “K-” prefix to introduce anything Korean to the outside world has spread to K-food (Korean BBQ, Buldak ramen), K-beauty (Beauty of Joseon, Anua, Cosrx), K-defense (K2 tank, K9 artillery), etc. What is interesting is that given the diversity of industries represented in the Korean Stock Exchange, these K-themes present potential investment opportunities. In this week’s commentary, we take a closer look at one of the themes that has been gaining traction among the local asset managers: K-shipbuilding.

Korea as a global shipbuilding powerhouse

Korea, China and Japan dominate the global shipbuilding scene, with combined market share of 91% in terms of Compensated Gross Tonnage (CGT) in 2023. China accounted for 51% and leads the world in dry bulks, tankers and containerships as the world’s largest importer of commodities. Korea, which came second with 26% share, has differentiated by prioritizing high-value ship orders (liquified natural gas carriers (LNG carriers), gas carriers and drill ships) given its cost disadvantage versus China. When we visited HD Hyundai Heavy Industries (329180 KS)’s shipyard in Ulsan – which is the largest shipyard in the world – we were able to see with our own eyes that of the ten fully occupied dry docks, six or seven of them had LNG carriers under construction. In 2022, the world saw an unprecedented number of orders for LNG carriers. One hundred and sixty-three LNG carriers were ordered in 2022, up 117% year-over-year and nearly five times the prior 20-year average of 34. Korean shipyards won orders for 121 LNG carriers or 74% of total.

LNG is widely regarded as a “bridge fuel” to smooth the transition to net zero. Over the years, the United States has emerged as a major exporter of LNG, joining the ranks of the Middle East and Australia as top exporters of LNG. The demand for LNG is mostly found in Asia and Europe, sparking demand for LNG carriers that can transport the liquid across the seas.

Source: LNG export & import shipping routes. Incorrys, used with permission.

LNG is also increasingly being used to power ships (as dual fuel), and this is driven by the strengthening greenhouse gas (GHG) emission regulations in the maritime industry. On January 1, 2020, the International Maritime Organization’s rule (known as IMO 2020) to limit the sulphur content in the fuel oil used to power ships came into force. Last year, the IMO unanimously agreed to reach net-zero GHG emissions from international shipping by 2050. This year, the EU ETS (EU Emissions Trading System) introduced the first ever carbon tax for ships entering and exiting EU ports.

Against this backdrop of strengthening GHG emission regulations in vessels, Shell projects LNG bunkering to increase as more containerships are expected to run on LNG. We met with senior engineers from Samsung Heavy Industries (010140 KS) and HD Hyundai Mipo (010620 KS) during our trip and learned about how the regulations are driving the Korean shipyards to develop next generation ships powered by LNG, ammonia and liquified hydrogen. HD Hyundai Mipo expects LNG bunkering to remain the primary fuel choice until 2040, after which ammonia is expected to take over. Year to date, of the eight orders for LNG bunkering vessels, HD Hyundai Mipo alone won three.

Source: Shell interpretation of Clarksons Research, DNV. Shell LNG Outlook 2024.

Investment spotlight: Dongsung Finetec

Korean shipyards (including Hanwha Ocean (042660 KS) not mentioned above) offer investment opportunities to capitalize on this long-term trend of increasing demand for LNG and vessels powered by alternative energy sources. However, their market caps are either above our limit or closer to the limit offering limited upside. At Global Alpha, we study an industry’s supply/value chain to identify how and where else the value is captured in the ecosystem.

Dongsung Finetec (033500 KS) is a Korean manufacturer of Mark III (licensed from GTT) membrane type cargo containment system (CCS) that is used to store LNG. The company serves both the Korean and Chinese shipyards and is one of only two companies (duopoly with 50% market share) that manufactures the CCS in the Korean LNG carrier supply chain. The company also manufactures LNG fuel tanks for ships using LNG as dual fuel and for LNG bunkering vessels and is currently developing an ammonia fuel tank.

When we invested in the company in late October, its share price had not reflected the company’s order backlog – which amounted to over four times the company’s 2023 revenue on the back of record LNG carrier order wins by the Korean shipyards – or the increased production capacity to convert more of the backlog to revenue. Trading at the time at only mid to high single digit price to forward earnings and against the backdrop of structural growth in demand for its CCS and fuel tank, we knew we had found a mispriced opportunity.