After the “meme stock” frenzy of 2021 and a bruising surge of volatility in 2022, many investors assumed retail traders had finally stepped back. The story was neat: higher rates, tighter liquidity and fading stimulus would restore rationality to equity markets. We were not convinced and argued in February 2023 that speculative behaviour was more likely to adapt than disappear.

Fast forward to today, and the data suggest retail participation has not only persisted, it has become a defining force in short‑term market moves. Across the small‑ and mid‑cap universes, trading volumes in lower‑priced, lower‑quality names have surged, with roughly a quarter of daily volume now concentrated in stocks trading under $5, a share last seen at the peak of 2021’s speculation. This renewed activity has driven a striking rotation beneath the surface: low ROE and even unprofitable companies have periodically outpaced their higher‑quality, high‑ROE peers over short horizons.

In this weekly, we want to address two questions:

1. Why does high ROE – the best proxy for quality – matter when investing? And,
2. What does history tell us about the performance of companies with high ROE versus those with low or negative ROE?

What ROE really measures

Return on equity (ROE) is net income divided by shareholders’ equity; it tracks how efficiently a business converts owners’ capital into earnings. In practical terms, it tells you how many dollars of profit a company generates for every dollar of equity on its balance sheet. Conceptually, ROE links back to basic valuation logic: for a given starting multiple, a firm that can earn and reinvest at higher rates should grow intrinsic value and future dividends faster over time. A company that compounds book value at 15–20% per year for a decade ends up in a very different place than one compounding at 5%, even if both start at the same size and valuation.

High – and sustainably high – ROE typically reflects one or more durable advantages: strong pricing power, an advantaged cost position, valuable brands or networks, or business models that require relatively little capital to grow. This is why investors often group high-ROE companies under the broader “quality” or “profitability” factor. In other words, ROE is not just a ratio; it is often a shorthand for underlying business quality.

Why high ROE wins over time

History is clear: profitability and quality matter far more over multi-year horizons than they do over six month “junk” episodes. Portfolios tilted toward companies with high and persistent profitability have historically delivered higher average returns than portfolios concentrated in low profitability or unprofitable names, even after controlling for size and valuation.

There are three main reasons for this:

1. Compounding of retained earnings: High-ROE companies can reinvest a larger portion of each dollar of earnings at attractive rates. Over time, this drives faster growth in earnings per share and intrinsic value without requiring fresh capital from shareholders.
2. Resilience through cycles: Businesses that earn high returns on capital usually have competitive advantages that help them sustain margins and cash flows during downturns, which tend to show up as shallower drawdowns and faster recoveries.
3. Better capital allocation options: Management teams leading high-ROE franchises often have more flexibility: reinvest in the core, expand into adjacencies, pay dividends or buy back shares. Lower-quality companies, in contrast, often need to issue equity or debt simply to survive, diluting existing shareholders.

Short periods of outperformance by low-quality stocks can be sharp and uncomfortable, but they have historically been transient, while compounding fundamentals tend to dominate over longer horizons.

When you think about it, the lesson for long-term investors couldn’t be clearer: real wealth comes from investing in companies that steadily compound capital at high rates, not from jumping on every fleeting speculative surge. The junk rallies fade and quality compounding lasts.

Time to take out the trash – What really is a “junk rally”?

In a universe of over 12,000 companies within global small caps, not every balance sheet is one to admire. Our job as active managers is to find real quality – the companies that actually make money and know how to grow it – and to avoid the companies that are overleveraged, poorly managed or structurally unprofitable. Many of those “junk” businesses feel more like ticking time bombs than investments. So, what happens when these so‑called junk companies rally and drive index performance? Do we simply throw in the towel and chase them?

A junk rally is a period when the lowest‑quality stocks – often those with excessive leverage, negative earnings, high beta or heavy short interest – significantly outperform the broader market, particularly higher‑quality names. These episodes tend to be most intense and momentum‑driven in small caps, where smaller market caps and thinner liquidity allow collective enthusiasm and buying pressure to move prices disproportionately.

Junk rallies often arrive with a burst of excitement – usually from retail investors – as they rush into stocks chasing a story and paying little attention to fundamentals. To spread these stories, investors turn to platforms like Reddit, X or Instagram, using viral posts and online communities to build momentum. As more buyers join in, the rally feeds on itself, with price action attracting even more attention.

Common terms around these episodes include:

• Diamond hands: Investors who refuse to sell, convinced that holding long enough will eventually make them rich.
• Short squeeze: When heavily shorted stocks rise sharply, forcing short sellers to buy back shares to cover positions, which drives prices even higher.
• FOMO (“fear of missing out”): The anxiety investors feel when they believe they might miss a big gain if they do not act immediately.
• Pump and dump: When prices are hyped up – often by coordinated online promotion and early movers sell into the frenzy, leaving late buyers exposed when prices fall back.

These phrases rarely appear in institutional memos, but the behaviours behind them very much exist in our universe and often bring sharp, sudden volatility to stocks whose fundamentals have not changed.

How junk rallies behave in practice

Over the past five years, we have seen several junk rallies – wild bursts where low‑quality stocks suddenly take off. Each time, two features have stood out. First, these rallies are typically parabolic and short‑lived; trying to jump on the bandwagon after the move is underway is almost always a poor risk‑reward trade‑off. Second, they almost always mean‑revert back toward the market, making them more about timing and positioning than about sustainable value creation.

Normally, we would pay limited attention to these episodes. However, because these lower-quality stocks sit in our benchmark, big, synchronized rallies in some low-quality pockets can cause us to lag temporarily. That is exactly what happened in 2020, 2023, and again in 2025, when risk on sentiment sent the lowest quality corners of the market flying while our quality growth names took a back seat. As the excitement faded and fundamentals reasserted themselves, excess junk gains unwound and quality leadership reemerged.

Proof that low quality doesn’t last

Even without decades of data, recent episodes make the point: high ROE remains a long‑run winner. In the 2022 low‑quality rally, high‑quality stocks temporarily lagged as low‑quality names spiked and then sold off, but by the end of that six‑month stretch, the high‑quality cohort had again moved ahead. You saw a similar pattern in the quality rally of summer 2024, which lost steam by early 2025, and more recently in the post‑Liberation Day rebound, where relief from macro fears and crowded positioning turbocharged the most speculative, lower‑ROE parts of the market.

Once low quality lost steam, high quality rebounded faster

Low quality was ahead, but high quality protected during Liberation Day market correction

In the immediate aftermath of Liberation Day, low‑quality stocks rallied because the market shifted violently from fear to relief: investors moved quickly from pricing in severe recession and trade dislocation to betting on a softer outcome, and that swing in sentiment tends to benefit the most beaten‑up, highly levered and high‑beta parts of the market first. Positioning and mechanics amplified the move, as many lower‑quality names were heavily shorted and under‑owned going into the shock, so even a modest improvement in the macro narrative forced short covering and factor rebalancing, turbocharging returns in exactly the sort of speculative companies that typically lead junk rallies.

The current junk rally is showing signs of losing momentum, with lower-quality names starting to lag

Don’t hate the player, hate the game

Now that we’ve defined what junk rallies look like, let’s examine how they affect active management. As noted above, the post-Liberation Day period – when the MSCI World Small Cap Index surged 34.3% (CAD) between April 8 and October 31, 2025 – marked one of the strongest low-quality rallies of the past decade. During this time, market leadership – particularly in the United States – was dominated by lower-quality companies across a range of sectors. The AI and data centre trade became the theme of the year, driving performance regardless of valuations or ROE.

What you’ll almost never hear an investor say is that they’re overweight “junk.” It’s rare for anyone to deliberately focus on low-quality companies. As a result, low-quality rallies usually lead to short-term periods where active managers struggle to generate alpha. Looking at year-to-date and one-year returns, we’re seeing exactly that type of environment. With the MSCI World Small Cap Index ranking in the middle-to-high second quartile, about 60% of active global small-cap managers haven’t added alpha over the past year. Additionally, these periods usually come with a wide dispersion in manager returns, as portfolios with even modest exposure to the most speculative names tend to outperform sharply, while quality-focused strategies are left behind.

As we can see below, over the 7- and 10-year periods, global small caps remains an inefficient asset class – with more than 50% of active managers outperforming the MSCI World Small Cap Index.

What we’re trying to argue is that when these short periods of low quality take over, don’t hate the player, hate the game. The small cap market can be dysfunctional for short stretches, but over the long run, high-ROE companies almost always outperform their low-ROE peers.

Our Emerging Markets team attended a series of corporate meetings at a technology conference in Taipei last week. During these meetings, one topic kept emerging: as semiconductors become more advanced and complex, the importance of testing them is growing rapidly. This theme appeared consistently across our meetings, including with companies involved in probe cards, system-level testing and metrology. As the current AI-driven arms race accelerates investment in high-performance computing, testing has become a foundation for semiconductor reliability.

For many decades, progress in semiconductors came from shrinking transistor size and fitting more of them onto each chip. But as Moore’s Law approaches its physical limits, chip designers are increasingly turning to advanced packaging to continue pushing performance forward. This approach helps sustain technological momentum but also introduces new challenges and more potential points of failure. That is why semiconductor testing matters more than ever.

Modern semiconductors must now be tested at several points during a complex fabrication process. At the wafer level, testing examines individual dies (individual chips on a wafer) to determine which are viable before sending the wafer to subsequent steps. This is critical because the packaging stage adds significant dollar value, and if a defective die is mislabeled as good, the cost of assembling it into an advanced package can be substantial.

Once a chip enters packaging, it undergoes final electrical and functional testing, which confirms that the packaged device is assembled correctly and works as intended. A growing number of AI accelerators also require burn-in testing, where devices are stressed under elevated temperature and voltage to screen for early-life failures.

Finally, system-level testing validates each device under real-world operating conditions. As AI processors draw more power and generate more heat, system-level testing has become one of the most critical stages of the entire test flow.

In a sense, modern chips now go through the semiconductor equivalent of an endurance triathlon: wafer-level tests, post-packaging reliability tests (including burn-in) and finally system-level verification. Each stage is designed to catch a different type of failure and skipping even one dramatically increases the risk of defects later in the cycle.

Importantly, the most advanced AI accelerators require far more testing, nearly doubling test time and test content relative to previous generations. It is also why AI chips are now 100% tested, unlike many consumer electronics where sample testing remains common. As one management team noted in a meeting, “reliability can no longer be assumed; it must be verified.”

The economics of chip failure have also changed dramatically. Today’s AI accelerators are among the most expensive devices ever produced. A single AI server rack powered by NVIDIA chips can cost around USD3.5 million. One faulty component can compromise the entire system. Meanwhile, testing typically represents only about 2-3% of total chip cost, yet it protects assets worth millions. This asymmetry also explains why switching test solution providers mid-generation is rare: the potential savings are small, while the risks are substantial. Robust testing has therefore become a form of value protection.

Taiwanese testing companies are uniquely positioned because they operate in close proximity to TSMC, which today manufactures virtually all of the world’s most advanced chips, and within a rich ecosystem of its partners. Supported by deep engineering expertise, this environment enables tight co-development of testing solutions aligned with the industry’s most advanced semiconductor processes.

Among the firms we met at the conference were two companies we own in our Emerging Markets portfolio, both of which illustrate how we leverage this theme in practice.

MPI Corporation (6223 TT)

MPI provides tools used for wafer-level testing, particularly probe cards with fine needle-like contacts that touch each die on a wafer to verify it functions before packaging. The company is a key supplier of customized, high-performance probe cards for ASICs (application-specific integrated circuits) used by hyperscalers.

As AI and advanced packaging increase chip complexity, wafer-level testing now requires more precise and specialized probe card designs. This is contributing to rising unit sales and higher prices for MPI’s solutions. The company has also been enjoying sustained market share gains, supported by its ability to offer superior customization, short lead times and close integration with customers early in the chip design process. These strengths position MPI well for structurally rising test intensity across next-generation logic and AI devices.

Chroma ATE Inc. (2360 TT)

Chroma complements the theme at the opposite end of the test flow. The company is a global leader in system-level testing, power-testing equipment and metrology tools. As chips become more power-hungry and thermally constrained, ensuring reliable performance under real operating conditions becomes essential. Chroma’s solutions support both the growing energy demands of data centres and the precision requirements of advanced packaging.

As semiconductor complexity rises and Moore’s Law slows, innovation is increasingly shifting to packaging, integration and system design. Testing is what bridges that complexity with reliable performance. MPI and Chroma play important roles in this ecosystem. As fundamental investors focused on quality and growth durability, we view testing as a structurally growing and increasingly critical part of the semiconductor landscape.

In our view, testing matters.

Japan’s equity market is undergoing a structural reset. In October, Japan experienced its strongest month in net equity inflow in at least two decades. Net purchases by foreign investors reached 3.44 trillion yen, largely beating the previous record of 2.68 trillion yen in April 2013. A few factors contributed to the rally:

1. Expectations of pro-growth stimulus under new leadership of Sanae Takaichi.
2. Optimism on AI-related stocks.
3. Normalization of policy interest rate to create a sustainable and wage-driven inflation.
4. Acceleration of Tokyo Stock Exchange’s (TSE) corporate governance reforms.

According to Bloomberg, net equity outflows during 2015–2022 were about 13 trillion yen. So, it is reasonable to think that there is plenty of room for more inflows in the future.

Political impact and AI sentiment can be volatile. At Global Alpha, we would rather focus on structural changes such as sweeping TSE reforms and normalization of policy interest rate for healthy inflation. These two factors have been the game changers of Japan equity market in the past three years.

Game changer #1: TSE reforms

The positive impact of the TSE reforms on the market is mainly reflected in higher dividends, share buybacks, return on equity (ROE) and price-to-book value (P/B). Since TSE’s initiative on increasing shareholder values in 2023, we have seen notable increases in dividend and share buybacks.

 Sources: Factset, Jefferies

In the global context, Japan still has a long way to go to improve its ROE and P/B. Currently, 47% of stocks in Japan Prime Index are trading below 1x P/B. In contrast, the percentage is 15% in MSCI Europe and 5% in S&P 500. Median ROEs during 2000–2024 for MSCI regions are 10.1% in Japan, 12.0% in Europe and 16.2% in the United States. Working toward global standards could be attractive opportunities for Japan equities.

Game changer #2: Normalization of policy interest rate

In March 2024, Japan exited its negative interest rate policy with the first hike in 17 years. Since January 2025, the rate has been stable at 0.5%. Bank of Japan (BOJ) expects core inflation to be around 2.7% for fiscal year 2025, slowing to 1.8% in fiscal year 2026 and returning to its 2% target in fiscal year 2027. Recent BOJ meeting summaries indicated a chance of further interest rate hikes.

Year to date, “banks” is among the top performing industry groups in the MSCI Japan Small Cap Index, up 46.8%. We have two holdings directly benefiting from both the rising interest rate cycle and improving corporate value.

• Yokohama Financial Group Inc. (7186 JP)
  • One of Japan’s largest regional banks, growing both organically and via M&As.
  • A key differentiator is that its main customer base is in Kanagawa prefecture, close to Tokyo, which has a stable population outlook and strong economic growth.
  • ROE has been consistently improving from 2.3% in fiscal year 2021 to 7.0% now.
  • P/B also increased from 0.45 in fiscal year 2021 to 1.0 now.
  • After the recent quarter results, the company upgraded its full-year guidance for earnings and dividends.
  • Further, it unveiled a share buyback program for up to 30 billion yen.

• Rakuten Bank Ltd. (5838 JP)
  • Japan’s first and largest digital bank by both customer accounts and deposit balances.
  • Its parent company Rakuten Group is the number one web brand in Japan with over 100 million members, which continues to benefit Rakuten Bank in customer acquisition and cross-selling.
  • The company is targeting roughly 25 million customer accounts and 20 trillion yen in deposits by fiscal year 2027.
  • Among the six digital banks in Japan, Rakuten Bank achieved the highest deposit growth in the past five years.
  • ROE has consistently been improving from 12.3% in fiscal year 2021 to 20.2%.

 

After decades of offshoring, companies are increasingly building capacity closer to end markets. This nearshoring trend has triggered a surge in new factories, warehouses and intermodal terminals. The world is entering a new phase of industrial investment as countries rebuild supply chains, renew critical infrastructure and accelerate the shift to cleaner logistics. Manufacturing nearshoring, port electrification and large-scale public infrastructure programs are reshaping industrial demand.  

Governments are deploying significant stimulus toward infrastructure modernization. The U.S. Infrastructure Investment and Jobs Act, Europe’s Green Deal programs and national port renewal projects all call for automation and emissions reduction in logistics. Port operators, for example, are increasingly replacing diesel-powered cranes with hybrid or fully electric units, a market where Konecranes is already a technology leader. 

Among the beneficiaries from that multi-year capex cycle stands Konecranes (KCR FH), the Finnish leader in lifting equipment and services, positioned at the crossroads of automation and reindustrialization. Konecranes is one of our holdings in our International Small Cap Strategy.

As one of the largest global players in its niche, Konecranes benefits from scale-driven pricing power, a broad installed base and a growing stream of recurring service revenue. Its service segment, representing about 40% of group sales, generates EBITA margins above 20% – roughly double those of new equipment – thanks to long-term maintenance contracts and critical spare-parts sales that are largely price inelastic. The company services more than 600,000 cranes worldwide, leveraging its digital platform for predictive maintenance and uptime analytics. This connectivity creates high customer switching costs and allows for value-based pricing rather than cost-based competition.

Scale also enhances resilience. Through years of acquisitions and regional integrations, Konecranes has consolidated a fragmented market, broadening its service reach across 120 countries and multiple industries. This global footprint enables it to spread R&D, logistics and data infrastructure over a larger customer base while improving service response times – a key differentiator versus smaller peers. Moreover, the company’s ability to bundle equipment, parts and digital services strengthens customer relationships and supports long-term contracts that are difficult for competitors to displace. 

Equipment downtime can be very costly for customers. For Konecranes, this translates into pricing leverage and high renewal rates on service agreements. The inelastic nature of maintenance pricing, combined with the company’s deep integration into clients’ safety and compliance frameworks, provides durable margins and steady cash flow. Over time, Konecranes’ mix shift toward services and automation has driven operating margins from 7% to over 13% in five years, positioning it among the more profitable industrial equipment consolidators globally. 

Konecranes combines a diversified portfolio with a clear strategy centred on electrification, automation and data-driven service. This balance provides resilience across economic cycles while capturing long-term secular growth from reindustrialization and infrastructure renewal. We believe Konecranes is well placed to capture these structural tailwinds. Its technological leadership, digital service model and exposure to automation-driven capital expenditure make it a key indirect beneficiary of the ongoing industrial transformation.

It’s no secret that public finances in most of the markets Global Alpha covers are in a dire state, and one of the common culprits is usually pensions and other retirement benefits. Countries such as France and Italy spent roughly 15% of GDP over each of the last two years and are on average the second largest item after health care. Many countries are having to increase retirement age to alleviate the strain, and less than 30% of Gen Z expect to retire with similar retirement benefits than older generations.

In the 90s, Australia took its own unique approach to ensuring retirement-system sustainability through the development of the superannuation system. It is a mandatory savings scheme where employers are required to fund a minimum percentage of an employee’s salary into a superannuation fund on their behalf. Employees are then able to invest the amount on their own if they choose to and start withdrawing it at 65. This simple approach created one of the largest pension systems in the world with $4.1 trillion in assets, where employers contributed $147 billion in the last year. The Super Guarantee threshold, the percentage of salary employers must deposit, has once again increased this year to 12%.

Given the high expected retirement assets, it’s no surprise that Australian retirees have had a willingness to tolerate higher risk in their asset allocation while asset classes like annuities have seen a lower adoption rate compared to other developed economies. While the population is overall still young compared to the United States, there is a growing concern among experts that too much risk is being taken by individuals that cannot afford it. Regulators and policymakers in recent years have taken several steps to attempt to address the problem:

• Implementation of Retirement Income Covenant in 2022 requiring superannuation trustees to put additional emphasis on diversification and flexibility and increase educational resources.
• Friendlier mean-test treatment for lifetime income streams to improve middle-class retirees’ wealth and therefore reduce the need for risk-taking to reach retirement goals.
• Consultation on potential changes to capital settings and requirements for annuity products, with the aim of reducing capital intensity of insurers and allowing for more competitive pricing and supply, therefore making the product more attractive as part of an asset allocation.

We recently initiated a name that gives us exposure to this dynamic: Challenger Limited (CGF AU). The company operates both an APRA‑regulated life division (annuities and related longevity solutions) and a multi‑manager funds management arm (Fidante and Challenger Investment Management). Challenger manages $130 billion in assets.

As mentioned, annuities as an investment product in Australia has some of the lowest adoption rates of all developed countries at 2% vs. 15% for Japan and 20% for the United States. While some of this difference can be explained by demographics, the reality is that regulatory capital intensity for annuity providers has been much higher than other countries (meaning their pricing ends up worst) and education on the product has been lacklustre. What piqued our interest in the Challenger story is that the Australian Prudential Regulation Authority (APRA) has announced steps to address these problems as it seeks to encourage workers to include an annuity allocation in their retirement savings account. Some of the steps proposed by APRA to reduce capital intensity are now clearer. In 2025, APRA confirmed a consultation to change the treatment of the illiquidity premium, with the stated intent to lower capital requirements for annuity products when risk controls and asset‑liability matching are robust. If implemented as outlined, this would make pricing more competitive and broaden supply without compromising solvency standards.

As the dominant player in the annuity market, with a market share estimated around 90-95%, Challenger has been one of the more influential and proactive companies in providing feedback to the regulators and there are reasons to believe that regulators are using Challenger’s data to evaluate the impact of potential changes.

Even without betting on regulatory changes, Challenger has plenty of things going for it. The core annuity business in Australia is growing nicely as they are consistently landing new mandates with super annuities (which are being urged to provide their members with more guaranteed income products), the annuity book duration is increasing (allowing for higher margin/investment return), their unique Japan exposure is showing strong momentum (and they are expected to land another distributor in the near future) and the firm is launching new products both on the annuity and investment side which appear to be showing initial success.

One of the advantages of taking a global view on investing is that it allows us to find differentiated stories in a space we typically would not be overly excited about. Life insurance companies in Europe or the United States tend to exhibit bond-like features, being highly defensive and providing decent cash-flow. Meanwhile, Australia built one of the most successful retirement savings engines globally and is set to benefit from a large demographic tailwind that should see life insurers like Challenger benefit over the next decade, in addition to having regulatory tailwinds and policymakers’ support.

The Spanish economy has been the star performer in Europe recently, and consequently its principal stock exchange has also produced the best returns. In this week’s commentary, we look at the underlying reasons behind the performance of both the economy and stock market, as well as some of Global Alpha’s holdings in the country.

The Spanish economy grew over 3% in 2024, and another 2.7% of growth is forecast for 2025 which is significantly more than other advanced economies in Europe. The European Central Bank is forecasting 1.2% growth for the euro zone this year. Spain has seen its credit rating upgraded in recent weeks, in stark contrast to other large, developed economies such as the United States and France, which have recently seen their credit ratings downgraded.

A significant factor of this star performance is how the demographic situation in Spain is different from its peers. While the general movement in Europe has been toward more restrictive policies on immigration, Spain’s border has remained more open. The majority of the 600,000 average annual net inflow of immigrants are of working age which has resulted in record levels of employment (yet still the EU’s highest unemployment rate) and means Spain is not experiencing the labour shortage found elsewhere in Europe. A secondary effect is the increase in domestic consumer spending. Given that most immigrants are coming from Latin America, a shared language and culture have been key in the integration and, more importantly, acceptance into society. Most of the jobs being filled by migrants are in hospitality and construction, so there is more to be done to attract workers in high-end service sectors.

Spain has been, and continues to be, a prime beneficiary of the EU’s Recovery and Resilience Fund (RRF); only Italy has received more. The RRF provides loans and grants to EU member states for reforms and investments to make economies greener, more digital and ultimately more resilient. Spain received over €20 billion as recently as August for investment in renewable energy, rail and cybersecurity. The push into renewable energy because of the funds received from the RRF has reduced energy cost pressure and increased industrial competitiveness.

A final reason why the Spanish economy has performed so well has been the resiliency of tourism. Tourism accounts for approximately 12% of Spain’s GDP. Spain had a record number of visitors in 2024, an increase of 10% compared to 2023, and that record is expected to be beaten once again in 2025.

Combining the strength of the economy, investments and improved credit rating leads to the Spanish stock market outperforming. The outperformance is also helped by the composition of the IBEX 35, which has a large exposure to banks and financial institutions. The banks have outperformed on the back of the strong macroeconomic backdrop and improved asset quality post structural reforms. Spanish banks have low US tariff exposure, as do other domestic focused industries such as utilities and telecommunication companies.

Global Alpha counts three Spanish companies in its portfolios that give exposure to Spanish tourism, the resilient labour environment and domestic spending. Meliá Hotels International S.A. (MEL ES) owns and manages hotels and resorts. Meliá operates luxury, upscale and mid-scale hotels and resorts. Meliá operates hotels in Europe, Asia and the Americas. With fiscal spending increasing in Europe, consumer sentiment should improve, and leisure spending continues to show resilience. The demand in Spain means rates should remain strong and Meliá is well placed to benefit. Meliá has a much-improved balance sheet that trades at an attractive valuation.

Fluidra S.A. (FDR SM) is a global leader in the pool and wellness industry. They design and manufacture a range of products for residential and commercial swimming pools. The products include pumps, valves, heaters, filters, pool-cleaner robots, chemicals, and devices for pool IoT devices. Around 70% of Fluidra’s sales are to the residential end-market, and aftermarket accounts for the majority of Fluidra’s sales over the cycle, providing resilience while the industry waits for new-build activity to recover. Fluidra continues to trade at a discount to its US peers.

Merlin Properties Socimi S.A. (MRL SM) is the largest Spanish commercial REIT. It operates a 100% Iberian portfolio centred around offices, shopping centres, logistics, and most recently, data centres. Most of its assets are in the prime cities of Madrid, Barcelona, and Lisbon. The recent investment in data centres will start to contribute meaningfully to rental income by 2028 and represents the next leg of growth.

A headwind for Spain’s continued prosperity is that the minority government has been unable to pass much legislation. It has, however, avoided much of the turmoil seen in France. The challenge now is to capitalize on the domestic demand, robust tourism and EU recovery funds to continue to outperform its European peers.

In a world increasingly focused on wellness and sustainability, fish sits at the intersection of health and investment opportunity. From the cardiologist’s clinic to the equity analyst’s desk, the case for seafood has never been stronger. Whether you’re measuring omega-3 levels or return on equity, the numbers tell a similar story: balance, resilience and long-term growth.

In recent years, a quiet revolution has taken hold in nutrition circles: protein is back in the spotlight. Supermarkets and social media alike now highlight “high-protein” products, from snack bars and shakes to reformulated staples. What was once the domain of bodybuilders is fast becoming mainstream wellness. Major food industry reports confirm that the appetite for protein is real and broadening with 61% of US consumers increasing their protein intake in 2024, up from 48% in 2019. We all know the reasons: protein builds muscle, keeps you satisfied and supports overall health. What’s new is how it’s gone mainstream; it’s not just for athletes anymore.

This trend ties in perfectly with the growing focus on fish as a cornerstone of a healthy diet. As consumers shift toward protein-forward diets, seafood – long praised for its rich omega-3s – now gains even more appeal for its dual role: premium protein plus cardiovascular benefit.

Salmon isn’t just known for its omega-3s; it is a robust, high-quality protein source, and that amplifies its value in a protein-conscious world.

• Rich protein density: An 85 g portion of raw wild salmon contains about 17 g of protein, nearly all essential amino acids, making it a “complete” protein.
• Lean, but nutrient-dense: Compared to many red meats or processed protein sources, salmon provides its protein alongside healthy fats (primarily EPA/DHA), vitamin D, selenium and minimal saturated fat.
• High bioavailability and recovery support: The amino acid profile (especially leucine) in fish proteins supports muscle protein synthesis and recovery which is a benefit that complements the anti-inflammatory effects of omega-3s.
• Lower contaminant risk (relative to larger predators): While mercury and PCBs remain valid concerns for some species, salmon – particularly well-managed farmed or wild-caught types – tends to lie at the safer end of the spectrum, making it a smart choice within a diversified seafood diet.

This health-driven demand story is not only reshaping dietary habits, it’s also powering an investment opportunity. As one of the world’s largest salmon farmers, SalMar ASA (SALM NO) sits at the forefront of this global protein transition. The company’s scale, cost control and sustainability credentials make it a standout in the seafood sector.

SalMar is one of Norway’s leading salmon producers, and one of the highest-quality names in the global aquaculture industry. Based along Norway’s pristine coastline, SalMar combines decades of experience with innovative farming technology to produce salmon that’s both sustainable and consistently high in quality. The company’s strengths lie in its efficient operations, prime farming locations and focus on biological control, which keep production costs low while maintaining excellent fish health and environmental standards. With operations stretching from central to northern Norway and growing exposure in Iceland and Asia, SalMar is well-positioned to meet rising global demand for healthy protein.

Norwegian farmed salmon, more broadly, has become a gold standard for sustainable seafood. The cold, clean waters of Norway provide the perfect environment for salmon to grow naturally, while strict national regulations ensure traceability, low antibiotic use and responsible feed sourcing. Compared to other animal proteins, salmon has a smaller carbon footprint, delivers high-quality omega-3 fats and provides a complete source of lean protein making it a smart choice for both consumers and investors focused on health, sustainability and long-term value.

If consumers continue reprioritizing protein, salmon producers like SalMar, that manage costs, traceability and scale will enjoy structural growth beyond the broader seafood category. For our portfolio, the protein trend adds an extra degree of optionality of not just health credibility, but a narrative anchored in a “protein-first” consumer future.

The foundation of traditional Chinese medicine is Qi – the life force or energy that flows through a body. If, for any reason, the Qi in your body was to go out of balance or get blocked, one would end up falling ill. A wide range of plant- and animal-based medicines would then be used to unblock those pathways and to restore the balance of Yin and Yang in the body.

While traditional Chinese medicine techniques like cupping and acupuncture gain popularity both at home and abroad, China has been quietly making giant strides in the traditional pharmaceutical and biotechnology sectors. In the past, it applied the principles of scale and an integrated supply chain to manufacture inexpensive generics faster and cheaper than its competitors.

Cut to present day, China’s pharmaceutical industry is on the cusp of becoming a global leader in both drug discovery and development. According to Morgan Stanley, annual revenues from drugs originating in China could reach USD$34 billion by 2030 and USD$220 billion by 2040. Currently, drugs from China account for only 5% of all USFDA approvals, but that is estimated to rise to 35% by 2040. So how did China go from a middling pharma player to the hot house of innovation and manufacturing that we see today?

Broadly, we can trace three key factors that are fueling this boom:

1. Reforms – The comprehensive series of reforms needed to move the needle in this space did not happen overnight. Over the last decade, China has made a deliberate push to move from a large-scale generics manufacturer to an innovation powerhouse by pushing through the following reforms.

• • Increasing innovative drug approvals – In 2017, measures were introduced to reduce the review timeline of innovative drugs to 60 days, increasing the efficiency of the drug development process. The result has been a record 93 drugs receiving first approval from the National Medical Products Administration (NMPA) in China in 2024 with China surpassing Europe and Japan as the second largest country to receive first approvals.
  • Investment inflows – Funding is crucial for innovation and reforms such as 18A listing rules in Hong Kong and the launch of STAR Market (touted as Shanghai’s equivalent to NASDAQ) allowed pre-revenue biotech companies to list and raise money.
  • Globalization – In response to intense competition at home, Chinese pharmaceutical companies have started to spread their wings abroad through strategic partnerships. This is being executed by applying for global approvals for drugs developed in China and through so called out-licensing agreements, where Chinese companies further the development of their unique IP by leveraging the R&D and commercialization network of western pharma giants.

2. Speed – To accelerate development of novel drugs, China’s regulator is proposing to further cut the clinical trial review period from 60 to 30 working days, matching the time line of USFDA. The presence of large pools of patients in Chinese cities further expedites the go-to-market process.
3. Talent – China graduates around five million science, technology, engineering and mathematics (STEM) graduates every year. The recent crackdown in immigration in the United States has led many talented Chinese scientists and professionals (nicknamed “sea turtles”) to return home. The recent announcement by the Chinese government of the K visa program could further accelerate this trend.

This combination of speed, abundance of talent and structural reforms could throw up multiple opportunities in the Chinese pharma space. It is next to impossible to predict which company could win the next out-licensing deal. Similarly, picking the next big biopharma product requires a high degree of technical expertise. Hence our investment in Sunresin New Materials Co. Ltd. (300487 CH) takes a picks and shovel approach to this space.

Sunresin is a specialty resin manufacturer, making more than 200 different types of resin for a variety of applications from purifying water, extracting lithium to serving as an enzyme carrier for drug development including GLP-1 drugs. While its life sciences business makes up about a fourth of its revenue, given the trends discussed above, the growth opportunities and potential runway could be enormous.

The consumables that Sunresin manufactures have high barriers to entry, more stable risk profiles vs. betting on winning drugs and underlying high growth in total addressable market. Its products are used both for upstream synthesis of various active pharmaceutical ingredients (APIs) and for downstream separation and purification that determines the final quality of the drug.

Key trends that underpin Sunresin’s growth include:

1. Growth of the biologics (large molecules) market that is growing faster than the chemical drug (small molecules) market. Biologics production has an upstream API synthesis phase that requires carriers and a downstream purification phase that requires chromatographic media (CM) to capture target molecules.
2. Sunresin produces both upstream carriers (for both large and small molecules) and downstream chromatographic media. Entry barriers are high as both products can make up 15–40% of production cost and are crucial to the final quality of the drug. Switching suppliers by commercial drug makers can be costly and time consuming.
3. Rise of import substitution in China and rise of overseas opportunities from out-licensing deals could further underpin growth.
4. Build out of new high-end life sciences capacity that could support 10x of current sales.

Between its proven products, new capacities and tailwinds from the growth of biologics and the larger China bio pharma sector, we see Sunresin as a key winner in the race to find the new blockbuster drugs on the back of China’s booming pharmaceutical sector.

During a research trip to São Paulo this summer, our team met with the management teams of some of our holdings, with prospective investments and with local investors. We observed that consumer demand in Brazil is stronger than expected, particularly in higher-end categories. Companies we like such as Vivara Participações S.A. (VIVA3 SA) and Track & Field Co S.A. (TFCO4 SA) benefit from this consumer strength and offer a compelling risk reward given where these stocks traded during beginning of the year.

Local market behaviour remains distinctly short term, with high turnover and a focus on the next-quarter results. This is largely driven by the elevated Selic policy rate, currently at 15%, which leads investors to assess opportunities on an absolute-return basis rather than seeking alpha. With inflation near 5%, real yields approach 10%, creating a persuasive risk-free alternative that diverts capital from equities. In turn, local equity managers are adjusting their styles to retain AUM.

Banco Central do Brasil Target for Federal Funds rate (Selic)

Source: Banco central do Brasil

These dynamics reinforce our long-term approach: concentrating on high-quality businesses with durable earnings power and consistent EPS expansion. Looking ahead, with elections approaching and potential rate cuts on the horizon, we expect a reallocation of flows from fixed income back into equities, benefiting companies with strong fundamentals and clear earnings visibility.

Key players in Brazil’s political landscape

Brazil’s political landscape is already taking shape as the country heads toward the 2026 elections. One of the most significant developments is the exclusion of Jair Bolsonaro from contention. His ineligibility through 2030, reinforced by a conviction earlier this month, effectively removes the most polarizing figure on the right. In his absence, the centre-right governor of São Paulo, Tarcísio de Freitas, is emerging as the most likely challenger to President Luiz Inácio Lula da Silva (also known as “Lula”) in a potential second-round runoff. This dynamic sets up a more conventional contest between a centre-left incumbent and a pragmatic, reform-minded conservative.

For Lula, the current year has been a test of political resilience. His approval ratings hit a low point of around 24% in February 2025, but have since rebounded modestly, reaching roughly 33% by September according to Datafolha surveys. The recovery suggests some stability, though his support remains fragile, reflecting persistent dissatisfaction with the pace of economic recovery and concerns about fiscal policy. Nevertheless, the directional improvement offers the president some breathing room as he navigates the second half of his term.

From the perspective of markets, the electoral outlook carries important implications. A Lula re-election would imply continuity in the Workers’ Party approach: a more active state role in economic management, coupled with efforts to demonstrate adherence to Brazil’s new fiscal framework. Investor reaction would likely hinge on whether the government can maintain a credible path to primary balance and on its stance toward state-controlled enterprises such as Petrobras, where governance remains a focal concern. By contrast, a victory for a centre-right figure like Freitas would be interpreted as a more reformist and privatization-friendly outcome. Such a scenario could lower perceived political risk, reduce risk premia and prove supportive for equities and local rates markets.

Mexico rates, USMCA and tariffs

Headline inflation in Mexico remained relatively stable, with the Consumer Price Index (CPI) registering a 3.57% year-over-year increase in August. Preliminary mid-September data suggests a slight acceleration to approximately 3.7%. Inflation expectations continue to trend downward. The Bank of Mexico’s (Banxico) August private-sector survey shows a further decline in median inflation forecasts for both 2025 and 2026, signaling growing confidence in price stability.

On September 25, Banxico lowered its policy rate to 7.50%, executing a 25 basis point cut. The decision was not unanimous, reflecting differing views within the board. Forward guidance remains cautious, as core inflation is decelerating only gradually. Reuters notes that while the easing cycle supports domestic demand and longer-term fixed income instruments, external factors – particularly the pace of US Federal Reserve rate cuts or potential tariff shocks – will ultimately drive risk premiums in Mexican assets.

In 2026, the United States–Mexico–Canada Agreement (USMCA) is scheduled for its first mandatory joint review. At that point, the three countries must decide whether to extend the agreement for another 16 years, renegotiate its terms or allow it to transition into annual reviews. The outcome will directly affect trade certainty and tariff exposure in North America. Currently, approximately half of Mexico’s exports to the United States do not qualify under USMCA’s origin requirements and are therefore vulnerable to a 25% US tariff. Goods meeting the agreement’s rules of origin continue to benefit from duty-free treatment, but non-compliant products face higher costs and stricter enforcement.

In parallel, Mexico has recently imposed tariffs of between 10–50% on a wide range of imports from China, including auto parts, textiles, steel and consumer goods. This move underscores Mexico’s effort to shield domestic industries from low-cost Chinese competition, but also adds a layer of complexity to supply-chain strategies for companies operating across the region.

The 2026 review will thus be a critical inflection point: it could either reaffirm the stability of North American trade or introduce uncertainty through renegotiation and tariff escalation.

If you want to go fast, go alone. If you want to go far, go together. – African proverb

At Global Alpha, we truly believe in having strong, connected teams because we’ve seen how it translates into better performance at work. When team members trust each other, we can push boundaries, test new ideas and endure more uncertainty. So, when we’re looking for team-building activities we look for unique activities that feel relevant, challenging and outside of the box.

This year we did a couple of truly extraordinary events that brought our team together in new ways – like a crash course in sailing with future Olympians! – but the real standout was our participation in the Grand défi Pierre Lavoie. It’s an epic annual four-day, 1000 km relay race that unites thousands of cyclists to promote healthy living and fundraise to support research into rare diseases.

No one person completes the défi alone, just as no one person can run a successful investment firm alone. It takes a cohesive group of skilled team members who can trust and count on each other, especially in volatile times – this challenge was not only a test of physical endurance and teamwork, but also a metaphor for the long-haul journeys that define our success as investment professionals.

Building strength through trust and teamwork

Picture the starting line of the Grand défi Pierre Lavoie: the sun rising, nerves jangling, teammates poised for the first pedal stroke of a 1,000 km adventure. It’s daunting. The finish feels distant, almost impossible. But there are steady wheels on all members of this team – the kind of company that makes every bitter wind lighter and every small victory sweeter.

When you’re part of a team, you’re working toward achieving a common goal, whether it be crossing a finish line 1,000 km away or producing positive returns at the end of a volatile year. As with any team, there are different strengths to be found in each of its members. For the Grand défi Pierre Lavoie, some riders were fast on the straightaways, some were strong up the hills, some were daring through the turns. In our investment team, there are curious researchers, strong risk managers, detailed analysts and more, each of whose skills differ from the others.

On the race path or in the office, the Global Alpha team leans into the grind together, trading stories, picking each other up, finding the opportunities in setbacks. Making these journeys together, especially when there are struggles, builds grit. Over time, the team learns how to support the other members and how to play to their strengths.

There are challenges – sore legs, broken chains, missed targets, sour news, a string of rough quarters or market turmoil, but because of the trust within the team, these are not seen as failures. Instead, the team regroups. An injection of humour gives that second wind that pulls the team through a headwind; one rider’s encouragement or a colleague’s fresh perspective is the spark that keeps everyone moving forward.

But in both environments, there’s an important lesson to be learned: real breakthroughs come after being stretched to the limit.

Going the distance together

During a tough market or a rough patch in life, it can be easy to doubt the journey. During the Grand défi Pierre Lavoie, there are long, quiet stretches where progress feels invisible. Despite pedaling hard, the scenery barely changes. In investing, some days are just as sluggish – despite strong investment principles and proven strategies, the returns can still seem lacklustre.

But these stretched-out moments are where the magic actually happens.

Short-term lulls aren’t proof that nothing’s working – they’re part of playing the long game. It’s easy to chase quick wins or get spooked by setbacks. But by trusting the process, working as a team and continuing to move – one kilometre, one quarter, one decision at a time – perseverance and endurance will deliver quiet rewards and lasting success that go well beyond numbers or market cycles.

Endurance is at the heart of long-term investing because the real rewards come to those who stay disciplined through every market storm and quiet patch. Team endurance wins in investing by combining diverse strengths, steady encouragement and a shared commitment – making it possible to persist, adapt and thrive when others might falter or give up.

Here’s the heart of it: the real win isn’t found at the finish line, but in the journey itself.

• Riding together, sailing together, investing together – it’s never just about the numbers.
• It’s the camaraderie, shared resilience and group celebration after the slog, when you see how far you’ve come, thanks to each other.
• Teams carry everyone through the silent, invisible stretches when progress is slow and doubt is loud.

It’s not about quick wins or epic heroics. It’s about the discipline to show up, the courage to trust the team and the humility to lean on each other for a reset. After every breakdown – on the bike, on the water, in a tough portfolio review – the team draws closer. What once felt like a failure becomes a shared memory, a lesson, a source of strength.

Final thoughts and what we’re doing next

Global Alpha Capital Management stands out because the same teamwork, grit and appetite for challenge that drive us in events like the Grand défi Pierre Lavoie also fuel our investment success. Our edge lies in superior stock picking, shaped by deep, bottom-up research and a thematic, fundamental approach to finding quality companies with real growth potential.

We’re equally relentless in risk management, applying robust analytical frameworks to ensure every investment is weighed wisely no matter how uncertain the market gets. Just as our team perseveres together through endurance events – adapting, supporting and trusting the collective process – we do the same for our clients, aiming for long-lasting performance in turbulent times.

What’s up next for Global Alpha team members? A 30 km trail run on Mont Tremblant – another chance for us take on an uphill challenge and cross a finish line, together.