CC&L Financial Group Ltd.

Japan: Oasis of (political) stability

In February 2026, Japan’s first female prime minister Sanae Takaichi announced a snap election in the National Diet’s Lower House. She proceeded to win a commanding majority of roughly two-thirds of seats for her ruling conservative party, the Liberal Democratic Party (LDP). With conservative Osaka-based coalition partner, the Japan Innovation Party (JIP), the ruling coalition control about three-quarters of seats, providing a strong mandate to advance policy plans. After cycling through four prime ministers (including Sanae Takaichi) since the pandemic, Japan finally has political stability. In contrast, G7 peers like France, Germany, the UK and Italy are beset by fragile ruling coalitions or political infighting.

Figure 1: National Diet Lower House seats split by party before and after the snap February 2026 election

Source: Nikkei Asia

Fiscal investment, not consumption

The Takaichi administration is taking advantage of this electoral supermajority to pursue a more growth-oriented fiscal strategy with a ¥370+ trillion fiscal investment package into 17 strategic sectors through FY 2040E. Previous fiscal stimulus programs focused on consumer support and public works projects to prevent economic stagnation or to alleviate downturns and associated unemployment. However, Prime Minister Takaichi’s plan is aimed at boosting Japan’s long-term productive capacity.

Figure 2: Estimates of Japan’s real GDP potential growth rate from Bank of Japan and the Cabinet Office

Source: Bank of Japan, Cabinet Office via Bloomberg Economics

Figure 3: Annualized potential real GDP growth estimates across major economies

Country	Estimated potential real GDP growth rate YoY
Japan	0.7%
China	3.8%
United States	2.1%
Korea	<2.0%
Canada	1.4%

Sources: International Monetary Fund, Bank of Japan, Bank of Canada, Bank of Korea, USA Congressional Budget Office

Automation to offset a shrinking labour force

Against other advanced economies, Japan’s economic growth potential is low. This is partly due to its aging and falling population, but also because of low productivity relative to peers. The government and private firms both see automation, rather than mass immigration, as the solution to low productivity and structural labour shortages caused by an aging and declining population as well as insufficient technological adoption. By directing capital toward sectors such as automation, semiconductors, data centres, batteries and advanced healthcare, Prime Minister Takaichi’s fiscal plans seek to lift productivity, which will drive Japan’s long-term economic growth. Specifically, Prime Minister Takaichi’s fiscal roadmap includes allocations toward themes such as physical AI, advanced health care and soft power.

Figure 4: The Japanese economy’s capital intensity stagnated for two decades despite labour shortages

Sources: Bank of Japan, Cabinet Office, Ministry of Internal Affairs & Communications via Bloomberg

Figure 5: Prime Minister Takaichi’s fiscal stimulus plan through public-private partnerships into FY 2040E

Source: Cabinet Secretariat via Bank of America Global Research

Physical AI

Prime Minister Takaichi’s fiscal roadmap allocates ¥10.5 trillion to “physical AI.” This refers to the manifestation of Artificial Intelligence (AI) in the physical realm through robotics and automation. In Japan, labour shortages are concentrated in sectors where robots struggle to displace workers. For example, manufacturers have advanced machining tools, but too few operators to handle them. Logistics firms have sufficient trucks but too few drivers. Humanoid robotics and autonomous vehicles should eventually enable Japan to expand productivity via a capital-for-labour substitution.

In total, physical AI, semiconductors, data centre and battery investments comprise ¥101.6 trillion of the government’s 15-year ¥370 trillion fiscal investment plan. Our portfolios’ exposure to these core themes is concentrated in semiconductor production equipment makers and semiconductor material producers.

Tokyo Seimitsu Co. Ltd. (7729 JP)

Founded in 1949, Tokyo Seimitsu manufactures and sells metrology instruments and semiconductor production equipment for automotive, machine tools, semiconductors and aerospace, as well as charge and discharge testing systems for BEVs.

Micronics Japan Co. Ltd. (6871 JP)
Micronics Japan designs, produces and sells probe cards, which are used to inspect integrated circuits (ICs). The firm also manufactures wafer probers, probe card testers, IC handlers and inspection and testing devices used for liquid crystal display (LCD) manufacturing.

Horiba Ltd. (6856 JP)
Horiba manufactures and markets metrology instruments and analyzers. Key product lines include scientific/medical/emissions analyzers, environmental monitors for air/water and semiconductor testing equipment. Horiba has a local presence across China, Japan, Korea, India, Singapore, Thailand, Austria, France, Germany, the UK, the United States, Canada and Brazil.

Sumitomo Bakelite Co. Ltd. (4203 JP)
Sumitomo Bakelite Limited is an integrated processor of synthetic resins and a member of the Sumitomo Chemical Group, which retains a 10.5% equity stake. The firm’s materials are used during the production of electronic components such as chips and PCBs as well as in automotive where BEVs use more encapsulants. With an industry-leading 50% market share after acquiring Kyocera’s encapsulant business, the company is well-positioned to expand further, supported by the growth in automotive applications.

Kurita Water Industries Ltd. (6370 JP)
Kurita Water manufactures, sells and maintains water treatment equipment and facilities. It produces chemical consumables for precision cleaning and water purification. The company also manufactures equipment for wastewater treatment, purification, sanitation, soil remediation, sanitation and HVAC applications. Kurita Water remains Japan’s largest water treatment engineering firm.

Advanced health care

As Japan is a pioneer leading the world in aging, its government recognizes their firms’ “first-mover advantage” in tackling ailments. “Advanced health care” refers to pharmaceutical solutions and medical devices that improve human health. Prime Minister Takaichi’s fiscal plan allocates ¥64.1 trillion to pharmaceutical therapeutics such as antibody drug conjugates, bispecific antibodies, infectious disease vaccine R&D and AI-enabled medical device diagnostics. We have portfolio holdings that are positioned to benefit from the investments in this theme.

Asahi Intecc Co. Ltd. (7747 JP)
Asahi Intecc is a Japanese medical device manufacturer. Asahi operates through two segments. The medical segment develops, manufactures and sells private-label and OEM SKUs. The industrial devices segment develops, manufactures and sells components related to both medical and industrial products. It is the leading producer of interventional guidewires and microcatheters, perfected over 40 years with a longstanding presence in niche steel wire tech.

Sysmex Corporation (6869 JP)
Founded in 1968, Sysmex is the leader in hematology, hemostasis, invitro diagnostics, immunochemistry, urinalysis and the challenger in surgical robotics. The company designs, produces and supplies reagents, instruments, services and other products used in diagnostic tests.

Soft power

The government also understands the importance of “soft power.” This is the phenomenon of exerting geopolitical influence through cultural content such as manga, anime, music, and games. The fiscal plan outlines content investments worth ¥33.7 trillion to enable intellectual property (IP) monetization and new IP development, as well as the localization of Japanese cultural IP overseas, IP exports and tourism.

Sega Sammy Holdings Inc. (6460 JP)
Sega Sammy is the second largest gaming software and hardware producer by revenue, after Nintendo. Their entertainment content segment develops and sells games on third-party platforms (mobile, PC, consoles), licenses IP to film producers and goods manufacturers and sells equipment to arcade operators. Sega’s pachislot and pachinko machine segment manufactures and sells its products to game parlours. The resort segment operates hotels and golf courses at integrated resorts. The firm owns IP of major gaming franchises like Sonic the Hedgehog, Virtua Fighter, Yakuza and Angry Birds since 2023.

Kotobuki Spirits Co. Ltd. (2222 JP)
Kotobuki Spirits is a Japanese firm engaged in the manufacture and sale of confectioneries. It operates six segments: Sucrey, KCC, Seika Tajima, Sales Subsidiary, Kujuku Island and others. The firm is entering into retail after successfully operating via wholesalers.

Recent Eurozone economic news has surprised positively. Monetary trends suggest disappointment ahead.

The manufacturing PMI reached a 51-month high in August, according to flash data released last week. Recent strength was signalled by an upswing in six-month real narrow money momentum into July 2025 followed by a consolidation into early 2026 – see chart 1.

Chart 1

Real money momentum, however, has fallen sharply since February, turning negative in April and weakening further in July. Allowing for the usual six to 12 months lead, this suggests that the PMI is entering a time window to begin another sustained decline.

The fall in real narrow money momentum reflects a combination of a slowdown in nominal growth, probably explicable by misguided ECB policy tightening, and an energy-driven pick-up in six-month consumer price inflation – chart 2.

Chart 2

A country breakdown is available for the deposit component of narrow money but not currency in circulation. Six-month real deposit momentum is negative across the big four, with the largest contractions in France and Italy.

Chart 3

French monetary weakness suggests rising economic / fiscal risks, appreciation of which may explain a fall in demand for French government debt. Bond purchases by Eurozone banks in the 12 months to July were smaller than in the other big four markets, a reversal of the position a year ago – chart 4.

Chart 4

Further details show that purchases of French bonds by both French banks and other Eurozone institutions have slowed. French banks bought only €7.0 bn in the year to July, down from €48.9 bn in the prior 12 months.

The fall in demand for French bonds by French banks follows a reduction in the ownership percentage of French insurers and other domestic investors in recent years. Accordingly, the share of debt owned by non-residents rose to 57.5% in Q1 2026, a nine-year high – chart 5.

Chart 5

The US composite PMI output index surged to a four-plus-year high in August, according to flash results released last week – see chart 1.

Chart 1

The pick-up is consistent with marked monetary acceleration since the start of the year, which continued last month. Six-month growth of the broad “M2+” measure calculated here reached 8.1% annualised in July, with expansion of narrow money M1A hitting 10.2% – chart 2*.

Chart 2

The rise in broad money growth appears to have been driven a combination of firmer commercial bank credit expansion, the Fed’s reserve management securities purchases and external monetary inflows, reflecting large-scale foreign buying of US equities.

Monetary strength suggests that near-term economic news will remain robust, while medium-term inflation risks (i.e. for 2028 and beyond) are rising.

Could money momentum be peaking? Three-month growth of commercial bank loans and leases has fallen since April, although the impact on overall credit expansion has been softened by a pick-up in securities purchases – chart 3. The slowdown has been focused on C&I loans and the “all other” category, which includes lending to non-bank financial institutions.

Chart 3

Additionally, the boost from Fed bill buying is moderating, with purchases suspended for the current operating period (ending 14 September) and uncertain prospects for a subsequent resumption at the previous $10 billion per month pace.

*M1A = currency in circulation + demand deposits. M2+ = M2 + large time deposits at commercial banks + institutional money funds.

Japanese money trends are flashing red again. Broad money M3 grew by only 0.4% annualised in the three months to July, while narrow money M1 contracted – see chart 1.

Chart 1

Renewed weakness is unsurprising because the BoJ is continuing to ramp up QT, with monthly JGB purchases falling further behind the run-rate of redemptions – chart 2.

Chart 2

Recent f/x intervention will be a further drag on August numbers. (Yen purchases occurred on 30-31 July, so settled on 3-4 August.)

A post-covid fall in annual money growth accelerated from Q1 2024. This has been reflected in a slowdown in annual nominal GDP expansion since Q2 2025, to 3.1% last quarter – chart 3.

Chart 3

Nominal GDP growth may soon be at or below a pace consistent with the 2% inflation target, based on the BoJ’s estimate of potential expansion of 0.7% pa.

Annual money growth bottomed in Q2 2025, with a tepid recovery into Q2 2026 probably now reversing.

Money growth rates are far below 2010-19 means, when nominal GDP expansion averaged 1.4% pa, a pace associated with average annual CPI inflation of just 0.5%.

Optimists cite strong bank credit growth. Commercial banks’ domestic loans and discounts grew by an annual 6.7% in June, with corporate lending up by 7.8% – chart 4.

Chart 4

The “monetarist” view is that stronger lending has limited economic effects unless accompanied by faster monetary expansion. Otherwise, any rise in demand associated with the lending is balanced by weaker spending elsewhere – a monetary “crowding out” effect.

Lending buoyancy, in any case, is partly a consequence of the monetary squeeze imposed by QT, rather than being an independent positive signal. Rising yields due to the JGB dump have encouraged corporations to switch from bond market funding to cheaper bank borrowing.

Corporations may also have been borrowing domestically to finance rising FDI, contributing to downward pressure on the yen.

What would happen if QT were suspended? With the distortion of BoJ supply removed, domestic and foreign demand for JGBs would likely revive, resulting in lower yields and a rally in the yen. Money growth would recover but probably only to a moderate level, reflecting an associated slowdown in bank lending. Excessive monetary acceleration could be countered by raising rates. A stronger yen would damp near-term inflation while a recovery in money growth would reduce the risk of a medium-term undershoot.

Worth pushing for, Secretary Bessent?

Investors remained captivated by the AI capex cycle through a July selloff in tech hardware names across North Asia. A parabolic rally in tech hardware stocks controlling bottlenecks in the AI supply chains was followed by a sharp correction during the month. Pundits ascribed market jitters to concerns that hyperscaler capex may be curtailed, reflecting speculation that returns from investment in the technology might be less than compelling.

Second-quarter results from the megacap US tech companies flew in the face of these fears, with firms broadly reporting robust earnings growth in cloud computing services and hinting at healthy returns from their bets on AI. However, doubts are creeping in over whether earnings upgrades can be sustained, adding to concerns over the rising use of debt to fund the capex boom and the competitive threat posed by cheap open-source Chinese LLMs to more expensive frontier model providers in the United States.

Hyperscaler capex estimate by year (USD bn)

Source: Mizuho Securities Equity Research, July 2026.

Artificial Analysis Index – higher is better

Source: Artificial Analysis, August 2026.

Fragile liquidity backdrop

In our view, these risks were well understood before the sell-off. The unwind may instead have been driven by a deterioration in the global liquidity backdrop and an associated deleveraging in crowded trades. NS Partners Chief Economist Simon Ward flagged the risk early in the month (A “monetarist” perspective on current equity markets):

“Global six-month real money growth has fallen back since early 2026, crossing below industrial output expansion in April (see below chart). This suggests that the global economy will lose some momentum during H2, while the monetary backdrop for markets has become less favourable, at least temporarily.”

G7 + E7 industrial output & real money (% 6m)

Source: NS Partners & LSEG Datastream.

South Korean retail speculators driving parabolic rallies in AI hardware winners added to the vulnerability, with the correction appearing to coincide with systematic quarter-end repositioning. This triggered weakness in “speculation of choice” names that fed deleveraging and forced selling. According to Citi, more than 360,000 South Korean margin accounts were forced into liquidation with 62% of those individuals wiped out under the age of 35.

Leverage in South Korea

Source: Jefferies Equity Research, July 2026.

We had been trimming our AI exposure into the event, but in hindsight we should have been more aggressive ahead of what was the largest pullback in Asia momentum since 1999.

Asia Momentum (L/S) – monthly performance

Source: Bernstein Equity Research, August 2026.

Little has changed by way of the growth and profitability drivers of our tech hardware companies in Taiwan and South Korea

For example, TSMC is forecast to generate 30% EPS in 2027 with a gross profit margin of over 55% and trades on a PE of 15.8x 2027 and 12.7x 2028. Elsewhere in Taiwan a number of companies in the tech hardware supply chain continue to deliver EPS upgrades, with the recent de-rating providing some attractive entry points.

In South Korea, DRAM giant Samsung Electronics reported record revenues and operating profits for the quarter with the latter beating estimates driven by exponential growth in AI server demand. The company expects supply constraints to tighten further in 2027 despite investments in supply. The company has no debt and trades on a free cash flow yield of c.16% for 2026, with a PE of 3.1x for 2027 and 2.9x for 2028. We anticipate that the company will announce a shareholder return plan for c.50% of FCF in August including a special dividend, which should provide some support for valuations and reduce capital misallocation concerns.

Caveat: TSMC and the memory giants are very different beasts

TSMC is the monopoly in advanced semiconductors that power all of the latest technological innovations, boasting structural competitive advantages that underpin lower earnings volatility through customer lock-in. While the dominant memory companies SK Hynix, Samsung Electronics and Micron exist in an oligopolistic industry enjoying a demand supercycle powered by AI spending, they remain at the mercy of severe supply-demand swings. Although we expect this memory cycle to go on longer than most expect, nothing cures high prices like high prices.

Tech monopoly vs. memory super cycle

Source: NS Partners & Bloomberg.

We maintain a modest overweight to the AI supply chain on a view that sharply accelerating demand for compute will continue to support growth and profitability for companies dominating key tech hardware chokepoints. However, navigating the cycle successfully will require disciplined adjustments of conviction levels as fundamentals shift, and ensuring this is tightly aligned with portfolio risk.

EM performance is broadening out

In our last commentary, Taking stock of EM performance, we highlighted the extent to which EM outperformance has been dominated by the tech trade. There are signs the rally is starting to broaden out with a number of regional bull markets bubbling away, as illustrated below.

EM MTD and YTD Returns

Country	MTD (%)	YTD (%)
Colombia	20.1	54.4
Indonesia	11.2	-34.3
Poland	10.2	21.7
China	9.0	-7.2
Czech Republic	8.7	2.9
Greece	7.1	20.7
Brazil	6.4	16.4
Philippines	6.2	8.2
Malaysia	4.0	4.7
Peru	3.6	34.4
Egypt	3.5	24.9
Kuwait	3.4	-0.8
Mexico	2.0	13.3
India	1.8	-8.2
Hungary	1.7	42.0
United Arab Emirates	1.1	2.0
Thailand	0.2	25.8
Chile	-0.2	1.1
South Africa	-0.3	-5.2
Saudi Arabia	-0.5	4.7
Qatar	-2.8	-6.2
Turkey	-2.9	14.2
Taiwan	-5.3	54.0
Korea, Republic of	-17.1	81.4

Source: MSCI

Over the year to the end of July, 18 of the 24 EM markets above delivered positive returns, while 17 of the 24 rose in July. Latin America was the most consistent region across both periods with Colombia the standout, followed by Greece, Hungary and Poland in emerging Europe. In MENA, the GCC was weak across the board, positive momentum returned in Egypt, while returns in South Africa have been negative over both periods.

EPS growth in Taiwan and South Korea has been explosive, the trend in the rest of EM is improving

Source: HSBC Equity Research, July 2026.

EM valuations are low both in absolute terms and relative to DM

Price to Forward Earnings Ratios MSCI Indices, 12m Forward Earnings, Source: IBES

Source: NS Partners & LSEG Datastream.

Style rotation?

After years of outperformance, quality stocks within EM equities are showing signs of an upturn.

MSCI EM Style Indices relative to MSCI EM, 5y ago = 100

Source: NS Partners & LSEG Datastream.

Overvalued exchange rates are a headwind for Mexico, Brazil and Eastern Europe, with Asian currencies mostly cheap

Real broad effective exchange rates
% deviation from 5y ma, Source: BIS

Source: NS Partners & LSEG Datastream.

Emerging market equities have been resilient despite Gulf War III pressuring energy prices, yields and the dollar higher. As noted earlier in this piece, a cross-over of global real narrow money growth below industrial output growth (what we call negative excess liquidity, or less money than economies need) has historically been a negative performance indicator for the asset class. While real narrow money growth reconverged with output in May / June, this has not yet reversed the April cross-over.

Global real money growth on a par with output growth

G7 + E7 industrial output & real narrow money (% 6m)

Source: NS Partners & LSEG Datastream.

Strength amid these headwinds could reflect the combination of earnings upgrades, valuations and cheap currencies, and may be a signal of good things to come if the United States, Iran and Israel can broker a peace in the coming months.

Solid UK H1 GDP growth has been interpreted by some commentators as evidence of underlying economic resilience, warranting an upgrade to forecasts. Monetary trends argue otherwise.

GDP (gross value added) rose by 1.1%, or 2.2% annualised, in the six months to June, having shown no growth in the prior six months (i.e. between June and December 2025).

Energy prices spiked at the end of Q1 with the increase only now feeding through to household tariffs, so the claim of resilience is premature, even ignoring monetary considerations.

Both the economic stagnation of H2 2025 and the H1 2026 pick-up were signalled by money trends. Six-month rates of change of real narrow and broad money turned negative in spring 2025 but rebounded into early this year – see chart 1.

Chart 1

Momentum has since softened again, with real narrow money returning to contraction. Trends are not yet as weak as a year ago but still suggest a significant H2 economic slowdown.

As an aside, the latest Monetary Policy Report included an analysis of broad money developments, focusing on whether the current stock is out of line with its “equilibrium” level, implying future changes to spending / prices to restore balance. The conclusion was that any “money gap” is small, in contrast to 2022, when the analysis would have suggested significant inflationary potential.

While any discussion of money in the MPR is welcome, the view here is that a focus on uncertain estimates of stock disequilibrium risks neglecting the information content of changes in money growth for future activity and inflation. Monetary acceleration / deceleration carries a message for policy even in the absence of an underlying stock imbalance.

Crestpoint Real Estate Investments Ltd. is pleased to announce that, in partnership with Minto Group, its acquisition of Minto Apartment REIT is now complete. This deal marks an important milestone in the growth of Crestpoint’s Canadian real estate platform.

The transaction, valued at approximately $2.3 billion, establishes a long-term partnership between Crestpoint and Minto Group focused on the ownership, management and growth of high-quality multi-family rental properties across Canada.

For Crestpoint, this is a meaningful expansion of its multi-family real estate strategy and provides access to a high-quality portfolio of purpose-built rental properties in core Canadian markets. The transaction also strengthens Crestpoint’s position in a sector supported by long-term demand for well-located rental housing in major urban centres.

“Completing this transaction marks an important step forward for Crestpoint,” said Kevin Leon, President and Chief Executive Officer of Crestpoint. “We are pleased to partner with Minto, a highly respected residential real estate owner, operator and developer with deep expertise across Canada. This partnership aligns with our long-term investment approach and provides a strong foundation for continued growth in the multi-family sector.”

Minto will continue to provide property management services for the jointly owned portfolio and will also provide development and construction management services for future projects. This structure allows the partnership to benefit from Minto’s operating capabilities while leveraging Crestpoint’s investment management experience and access to capital.

Read the full press release

Global six-month real narrow money growth recovered further in June but remains below a February peak, as well as its long-term average – see chart 1.

Chart 1

The earlier slowdown suggested that the global industrial economy would lose some momentum during H2. A cooling may already have begun, with manufacturing PMI new orders easing for a third successive month in July. Still, the latest uptick in real money growth argues against significant weakness, at least through year-end.

The recent violent correction in momentum stocks followed global six-month real money growth – on both narrow and broad definitions – crossing below industrial output expansion in April, suggesting a loss of “excess” money support for markets. Real narrow money growth reconverged with output expansion in May / June, with real broad money growth slightly weaker – chart 2. This suggests a neutral monetary backdrop for markets, in contrast to positive conditions in late 2025 / early 2026.

Chart 2

The rise in real money growth has been driven by US acceleration / strength, contrasting with weakness in the rest of the G7 – chart 3. Such divergence is unhealthy, suggesting a misalignment of policy stances, a correction of which could lead to further monetary / market volatility.

Chart 3

As you can see in the performance chart below, the AI capex boom has been by far the dominant driver of returns this year.

Source: NS Partners and LSEG Datastream.

The rally in emerging markets this year has been so narrow that less than 25% of stocks have outperformed the benchmark.

MSCI EM – Percentage of stocks outperforming the index (rolling 12-month)

Source: Jefferies Equity Research, June 2026.

South Korea’s outperformance has been driven to an extreme by local retail participation in leveraged/unleveraged single-stock ETFs.

Fund assets of 16 single-stock leveraged/inverse ETFs linked to Hynix and Samsung Electronics

Source: Jefferies Equity Research, July 2026.

We are now seeing some profit taking and de-leveraging in overcrowded areas, and the correction from the highs among semiconductor stocks has been sharp, with the KOSPI correcting over -30% from its June peak.

Despite hitting oversold levels, our inclination is not to catch the falling knife and double down, but rather wait for signs of consolidation in tech while looking for opportunities in EM laggards outside North Asia.

The positioning data below from EPFR illustrates how many markets outside of Taiwan and South Korea have been abandoned by investors and may offer up some attractive opportunities.

The dominance of South Korea and Taiwan market performance over the last 12 months is reflected in significantly lighter positioning elsewhere

South Korea: 9.2% → 21.7%, OW vs benchmark went from +1.6pp to +5.3pp

Taiwan: 15.9% → 23.3%, active weight rose sharply, yet Taiwan active remains underweight vs benchmark. UW widened to −3.3pp from −2.6pp

China: 23.1% → 18.0%, cut heavily and UW vs benchmark narrowed from −2.2pp to −0.8pp

India weighting has nearly halved from the peak

India the “AI loser”

From the charts above, India stands out as the biggest victim of the enthusiasm for North Asian tech stocks. Just a couple of years ago India was one of the standout equity markets over a period of decades. Now Indian stocks cannot seem to catch a break.

Since the end of 2024, India’s weighting in the MSCI EM benchmark has fallen from nearly 20% to 9% today, as Taiwan and South Korea have surged from a quarter to almost half the benchmark. Last year, Indian equities posted their worst year relative to Asian equities since the 1990s.

Source: Bloomberg

Broken story?

In the lead up to the market peak in 2024, India’s investment narrative was the ideal EM structural growth story:

Continental-sized economy enjoying healthy growth.
Favourable demographics, the largest working age population accounting for around 69% of the population (United Nations Population Prospects 2025).
High levels of education, producing over 2.5 million STEM graduates annually.
Over a decade of stable politics under Prime Minister Modi.

Indeed, it was this final point that we were most excited about, as a decade or more of stable politics and positive incremental reforms were beginning to bear fruit. Our conviction for India’s bright prospects rest on an understanding that institutional quality is a crucial factor for unlocking sustained economic growth and moving up the development ladder.

Institutional quality can be the difference between a country like Argentina – which, at the beginning of the 20th century was one of the richest countries on the planet, to where it is today with high inflation and political dysfunction (although, under President Milei, Argentina is taking its first steps to resolve this) – and Singapore, one of the poorest countries on earth 50 years ago, before taking off in an era of rapid development to be one of the richest countries in the world today.

Is the market signalling that something is broken in India?

Incremental reform

Modi’s tenure has brought with it initiatives including bankruptcy law reform, sanitation universalisation, electrification of rural India, a national goods and services tax, demonetisation and digital payments infrastructure. Any one of these initiatives may seem relatively trivial in isolation. However, it is the compounding effect of these incremental steps that can create a virtuous circle that unlocks the next upward shift in wealth.

For a country the size of India, that progress will see several hundred million Indians join the formal economy and accumulate wealth, which can in turn present a host of opportunities for investors with the framework to harness these structural tailwinds.

We think this story remains intact.

GDP growth among the best in EM

Source: Berstein, June 2026

Multiple headwinds

Foreign investors have abandoned Indian equities, having designated the market an “AI loser” due the disruption of its five-million-strong IT services sector. Higher energy prices on the back of the US-Iran conflict have been an added headwind.

Annual foreign net buying of Indian equities

Source: Jefferies Equity Research, June 2026

After a decade of strong performance, India was an obvious source of funds to add to South Korea and Taiwan as the boom in hyperscaler capex saw the earnings of tech hardware companies in those countries skyrocket.

The foreign exodus has come as earnings growth for the market has fallen below the highs of 2022–2024 (over 30%). It appears to have troughed at 5.8% in 2025 and is forecast to accelerate into the mid-teens by 2027.

Lots of paper coming out

A stream of IPOs coming to market soaking up liquidity has been an added drag. In the financial year ending March 2026, an all-time high of 266 IPOs were filed with SEBI, and since March we have seen another 39 filings in three months suggesting these headwinds will persist.

Source: HSBC India Equities, July 2026.

While this is a short-term headwind, these listing are the makings of a far deeper and more diverse opportunity set for investors in India.

Still not cheap

On a price-to-earnings basis MSCI India trades one standard deviation above its 20-year average premium to MSCI EM of 1.5x, although on a price to book basis it looks reasonable.

MSCI India Trailing Price to Book

Source: Bloomberg.

There are pockets of value and positive earnings revisions across financial services, banks, real estate, software, healthcare and retail staples, but this is beside the bigger structural point. In India we have the institutional reform story fuelling sustained economic and corporate earnings growth, and a deep opportunity set of companies with high-quality management teams.

Key mantra: be careful relying on mean reversion tables when there is positive structural change taking place

Alongside the reforms mentioned above, the development of India’s domestic pension and mutual fund industry is a powerful force which can drive stock market re-rating. Just as we saw in places like Australia and Chile, the creation of a structural, non-cyclical source of demand for financial assets can create powerful feedback loops. Below is a rough schematic:

Jefferies Head of Global Equity Strategy Chris Wood has been one of the leading strategists emphasising the importance of these pension and mutual fund flows. His charts below illustrate that while foreigners have run for the exits, domestic demand for Indian equities remains robust.

Monthly net inflows into domestic equity mutual funds

Note: Exclude arbitrage funds. Data up to May 2026.
Source: AMFI, Jefferies

Estimated National Pension System (NPS) flows into equities

Source: Jefferies Equity Research, June 2026.

The AI earnings boom in Korea and Taiwan has captivated investors over the past 12 months. While we have held a healthy overweight to the theme for several years, we maintain a wide aperture in our search for positive structural stories across a diverse opportunity set in emerging markets. Despite being distinctly out of favour, India’s rise up the development ladder remains one of the most exciting opportunities in the asset class.

Next month we will publish a few examples of some brilliant companies in India capitalising on these structural trends, and where stock market malaise has presented us with some attractive entry points.

Ever thought of opening your own escape room or theme park?

Or maybe you’re thinking of contacting SpaceX to launch a satellite of your own?

It could be that you simply have a piece of art or expensive jewelry at home.

What if you’re trying to make it as an influencer where your online reputation is your most important asset?

To address all the above, and more, there is a niche segment within insurance called “specialty insurance.” As the name would suggest, specialty insurers attempt to cover risks that are too unusual, complex or volatile for standard insurers to price correctly. Examples of specialty insurance coverage include:

cyber insurance,
marine, aviation and energy risks,
kidnap and ransom,
directors’ and officers’ (D&O) risk, and
niche businesses or properties.

Standard versus specialty insurance: What’s the difference?

The line between standard and specialty insurance is not always straightforward. A small office building in the suburbs is more standard while a chemical manufacturing facility of the same size would fall well under specialty. The more unusual the asset, the environment and potential loss, the more likely you are to use a specialty underwriter.

The most significant difference from standard insurers is that specialty insurers do not rely on scale and mass data the to underwrite risk, but instead use specialized knowledge and models to support their underwriter’s judgement. Often, specialist underwriters grow a very specific set of knowledge around their segment: engineering intricacies, political risk, weather models, etc. The policies themselves are much less standardized, with more levers around maximum paid, duration, repricing, conditions to be met or excluded events.

The benefits of investing in specialty insurers can be significant.

What makes specialty special?

The building of detailed knowledge in niche areas is its own self-reinforcing moat. An insurer that has been covering political risk for decades will have more claims data, stronger broker relationships and increasingly better understanding of the risks to avoid. Because these risks are harder to assess, pricing is generally less commoditized. As such, customer retention rates and margins tend to be higher.

Specialty insurers also have more flexibility to respond to changing environments. They can reduce the amount of coverage offered, increase deductibles, add exclusion clauses or just reduce their overall exposure.

A good example is the beginning of the conflict with Iran, when insurance contracts on ships were repriced every 72 hours for the first few weeks, with the ship/cargo coverage going from roughly 0.25% of the ship’s value to several percentage points more. In some cases, quotes were increasing by more than tenfold.

Lloyd’s of London, the world’s largest marketplace for specialty insurance, wrote over GBP57.9 billon of gross premiums in 2025 and reported a combined ratio of 87.6% (implying an operating margin of 12.4%). Combined with investment incomes, it generated a return on capital of 22%. This level of profitability also points to competition flowing in with new money, leading pricing to degrade by 3.7% as insurers compete for growth. Price weakness was especially elevated in corporate property and global reinsurance, with the latter seeing unprecedented influx of new alternative capital. Life and middle-market insurance are still seeing a hard market (a positive pricing environment).

This is typical of the ebb and flow of the insurance cycle. Strong profit attracts new capital, which creates more competition and pushes prices down. Returns eventually deteriorate or a major loss removes capital from the market, leading pricing to improve again. With a highly diversified specialty insurance market, different segments will be at different points in the cycle at different times. The best insurers are not those that grow the fastest; they are the ones that are willing to shrink their exposures to segments where pricing doesn’t adequately compensate for the risk taken, while identifying when to get back in for the right price. Seems a bit like equity investing.

What else differentiates specialty insurers? One thing is that in some segments, claims can take years to emerge, particularly in casualty, professional liability and D&O insurance. This can lead to current profits and underwriting quality looking good at the expense of future profitability. As such, firms need to strike a fine balance between maintaining enough insurance reserves for future claims, while also not over-penalizing short-term profit.

How do we have exposure?

One of the specialty insurers we own is Hiscox Ltd. (HSX LN), a Bermuda-based Lloyd’s insurer with a strong retail specialty presence. The company operates in three segments:

Retail: specialty products to individuals and small businesses in the UK, Europe and the United States.
London market: underwrites complex risk through the Lloyd’s market, with a strong focus on marine, energy, aviation, terrorism and political risk.
Reinsurance: reinsurance for other insurers and insurance-linked capital supplied by outside investors.

In 2025, Hiscox wrote around $5.0 billion of contracts and has a reputation of excellent underwriting culture along with a best-in-class brand in the insurance world and among high-net-worth individuals.

Another name we own is US-based RLI Corp. (RLI US). It operates through a decentralized underwriting model and is a consistent top performer within the industry given its conservative underwriting and reserving. RLI focuses on the segments of niche properties, casualty and surety markets.

RLI has produced an underwriting profit for 30 consecutive years and increased its dividend for 50 consecutive years, an anomaly within the industry.

The specialty space is getting smaller

Within the sector, one of the big topics recently has been M&A. Twenty years ago, there were more than ten publicly listed Lloyd’s of London specialty insurers. Now only three remain, with the largest one – Beazley – in the process of being acquired by Zurich Insurance.

Given the attractive characteristics described above, it is easy to see why the large composite insurers would want to gain exposure to specialty insurers. Large composite insurers have significant capital to deploy and global distribution relationships, but lack the underwriting culture and specialist data required to enter these niche markets organically. Similarly for investors, specialty insurers can be compelling investments when they have the discipline to avoid bad risks and the expertise to price difficult risks better than competitors.