CC&L Financial Group Ltd.

What’s new

We are pleased to announce the recent expansion of our UCITS Fund platform with the addition of a global small cap equity strategy and a global equity strategy. Both strategies, available to certain global investors, are managed by our Quantitative Equity team.

Financial Markets Returns (%) (C$)	Q2	1 Year
S&P/TSX Composite Index	8.5	26.4
S&P500 Index	5.2	14.8
MSCI Emerging Markets Net	6.2	15.0
FTSE Canada Universe Bond Index	-0.6	6.1

Global Equities

International Equity Strategies (%)	Q2	1 Year
CC&L Q Global Equity	8.1	20.7
MSCI ACWI Index (CAD) (net)	5.7	15.8
CC&L Q Global Small Cap	7.2	18.2
MSCI ACWI Small Cap Index (CAD) (net)	6.5	13.3
CC&L Q ACWI Equity Extension¹	6.6	23.4
MSCI ACWI Index (net)	5.7	15.8
CC&L Q US Equity Extension¹	5.9	19.7
S&P 500 Index (Net 15%)	5.1	14.4
CC&L Q International Equity	8.3	24.1
MSCI ACWI ex USA Index (CAD) (net)	6.2	17.4
CC&L Q International Small Cap Equity	12.0	21.2
MSCI ACWI ex USA Small Cap Index (CAD) (net)	10.9	18.0
CC&L Q Emerging Markets Equity	7.6	19.0
MSCI Emerging Markets Index (CAD) (net)	6.2	15.0

MSCI ACWI Sector Q2 Total Returns (Local)

TOP 3

21.6%

Information Technology

16.9%

CommunicationCommuni-cation Services

12.4%

Industrials

BOTTOM 3

1.2%

Consumer Staples

-5.5%

Energy

-5.6%

Health Care

MSCI ACWI Country Q2 Total Returns (Local)

TOP 3

21.7%

Korea

19.4%

Greece

18.8%

Peru

BOTTOM 3

-2.7%

Switzerland

-3.7%

Thailand

-5.0%

Saudi Arabia

Canadian Equities

Canadian Equity Strategies (%)	Q2	1 Year
CC&L Fundamental Canadian Equity	9.5	24.7
S&P/TSX Composite Index	8.5	26.4
CC&L Equity Income & Growth	8.2	23.9
S&P/TSX Composite Index	8.5	26.4
CC&L Fundamental Canadian Small Cap/Mid Cap	14.3	26.4
60% S&P/TSX Small Cap Index & 40% S&P/TSX Completion Index	12.1	24.5
CC&L Canadian Equity Combined (Q Core/Fundamental)	9.6	26.6
98% S&P/TSX Composite Index & 2% FTSE Canada 91 Day T-Bill Index	8.4	25.9
CC&L Q Canadian Equity Core	9.6	28.5
S&P/TSX Composite Index	8.5	26.4
CC&L Q Canadian Equity Growth	10.2	29.1
S&P/TSX Composite Index	8.5	26.4
CC&L Q Canadian Equity Extension¹	8.7	32.2
S&P/TSX Composite Index	8.5	26.4

TSX Sector Q2 Total Returns

TOP 3

14.2%

Information Technology

14.1%

Consumer Discretionary

12.1%

Financials

BOTTOM 3

3.1%

Health Care

2.6%

CommunicationCommuni-cation Services

1.3%

Energy

Canadian Fixed Income

Fixed Income Strategies (%)	Q2	1 Year
CC&L Core Bond	-0.6	6.6
FTSE Canada Universe Bond Index	-0.6	6.1
CC&L Universe Bond Alpha Plus¹	-0.3	9.2
FTSE Canada Universe Bond Index	-0.6	6.1
CC&L Long Bond	-2.4	4.8
FTSE Canada Long Term Overall Bond Index	-2.3	4.3
CC&L Long Bond Alpha Plus¹	-2.1	7.3
FTSE Canada Long Term Overall Bond Index	-2.3	4.3
CC&L High Yield Bond	0.8	9.2
30% Merrill Lynch US High Yield Cash Pay BB Index (Non CAD Hedged) (CAD$) & 30% Merrill Lynch US High Yield Cash Pay BB Index (CAD Hedged) & 30% FTSE Canada Corporate BBB Bond Index & 10% Merrill Lynch Canada BB-B High Yield Index	0.7	8.4
CC&L Short Term Bond	0.5	6.4
FTSE Canada Short Term Overall Bond Index	0.5	6.3
CC&L Money Market	0.6	3.6
FTSE Canada 91 Day T-Bill Index	0.6	3.8
CC&L Core Plus Fixed Income	9.0	–
FTSE Canada Universe Bond Index	-0.6	–

Bond Market Quarterly Changes (Bps)

Canada: 2-year yield: 15. 10-year yield: 30. US: 2-year yield: -18. 10-year yield: 2.

Credit Spread. Corporate: -17. Provincial: -10.

Balanced & Alternative Strategies

Balanced Strategies (%)	Q2	1 Year
CC&L Balanced	5.0	15.9
25% S&P/TSX Capped Composite Index & 35% MSCI ACWI Net (CAD$) & 40% FTSE Canada Universe Bond Index	4.0	14.7
CC&L Enhanced Balanced Fund	5.1	16.1
20% S&P/TSX Capped Composite Index & 40% MSCI ACWI Net (CAD$) & 40% FTSE Canada Universe Bond Index	3.9	14.2
CC&L Core Income & Growth	6.8	18.6
50% S&P/TSX Composite Index & 25% S&P/TSX Capped REIT Index & 25% FTSE Canada All Corporate Bond Index	6.1	18.9

Alternative Strategies (%)	Q2	1 Year
CC&L Multi-Strategy ¹	1.5	12.5
FTSE Canada 91 Day T-Bill Index	0.6	3.8
CC&L All Strategies Fund¹	1.6	14.0
FTSE Canada 91 Day T-Bill Index	0.6	3.8
CC&L Market Neutral¹	3.7	-0.1
FTSE Canada 91 Day T-Bill Index	0.6	3.8
CC&L Q Global Market Neutral (Cdn)¹	1.2	14.6
FTSE Canada 91 Day T-Bill Index	0.6	3.8
CC&L Alternative Income¹	0.6	6.6
FTSE Canada 91 Day T-Bill Index	0.6	3.8
CC&L Fixed Income Absolute Return Strategy¹	0.6	6.0
FTSE Canada 91 Day T-Bill Index	0.6	3.8

About Connor, Clark & Lunn Investment Management Ltd.

Founded in 1982, Connor, Clark & Lunn is a privately owned investment management organization dedicated to delivering outstanding client service and a wide range of attractive investment solutions to our diverse client base. We understand the investment challenges faced by individuals, pension plans, corporations, foundations, mutual funds, First Nations and other organizations, and focus our efforts on meeting their investment needs by offering a comprehensive array of investment strategies, spanning traditional and alternative asset classes in a variety of quantitative and fundamental styles.

Vancouver

2300 – 1111 West Georgia Street

Vancouver, BC V6E 4M3

604-685-2020

Toronto

1400 – 130 King Street West

P.O. Box 240

Toronto, ON M5X 1C8

416-862-2020

Montreal

1800 McGill College, Suite 1300

Montreal, QC H3A 3J6

514-287-0110

All data except MSCI Indices are as of June 30, 2025 and stated in Canadian dollars (CDN$). Source: Connor, Clark & Lunn Financial Group Ltd., FTSE Global Debt Capital Markets Inc., MSCI Inc., Thomson Reuters Datastream and S&P. Portfolio performance is preliminary, based on a representative account for the applicable strategy and may be subject to change. All performance data is gross of fees unless otherwise stated. Gross performance figures are stated after trading expenses and operating expenses but before management fees and performance fees, if applicable. Operating expenses include items such as custodial fees for segregated accounts and for pooled vehicles would also include charges for valuation, audit, tax and legal expenses. Management fees and additional operating expenses would reduce the actual returns experienced by investors. 1. These strategies are subject to performance fees, which will further reduce actual returns experienced by investors.

For further information on performance, please contact us at [email protected].

Source: MSCI Inc. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. MSCI makes no express or implied warranties or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. This report is not approved, reviewed or produced by MSCI.

Germany has embarked on a historic transformation of its fiscal and economic landscape with the passage of its latest infrastructure bill in March 2025. This legislation, resulting from a rare constitutional amendment, is poised to have profound and far-reaching effects on the German economy, public services and the broader European region over the next decade.

The new law creates a €500 billion infrastructure fund, to be deployed over twelve years, aimed at modernizing Germany’s aging infrastructure and stimulating economic growth. This fund operates outside the traditional constraints of Germany’s “debt brake,” a constitutional rule that previously limited new government borrowing to 0.35% of GDP. The reform also allows for increased borrowing by the federal states and exempts defence spending above 1% of GDP from debt restrictions, thereby freeing up additional fiscal resources for investment.

Last week, the government coalition agreed to borrow almost €500 billion to raise the defence budget to the new NATO target of 3.5% of GDP by 2029, and to borrow almost €300 billion for infrastructure over the same period.

This fiscal expansion should boost domestic demand for many years and more than compensate for weaker external demand. Fixed investment in machinery and equipment, as well as in construction, are likely to benefit from this fiscal impulse.

The infrastructure bill is expected to have positive spillover effects across the European Union. Improved transport links, increased demand for goods and services and a more competitive German economy could strengthen the EU’s overall economic resilience. Furthermore, the focus on energy transition and digitalization aligns with broader European climate and innovation goals.

Konecranes PLC (KCRA HE), one of our holdings in our international strategy, is well positioned to benefit from this massive infrastructure spend.

Konecranes is a global leader in material handling solutions, serving a broad range of customers across several industries. Its product portfolio lifts, handles and moves goods in a safer, more productive and sustainable way. The company reports under three business segments:

Industrial services: It provides maintenance services and spare parts for any kind of cranes and hoists. With presence in more than 23 countries, Konecranes has one of the most extensive maintenance coverages globally. This segment represents 36% of revenue but more than 56% of income.
Industrial equipment: It provides industrial cranes and hoists for a wide range of customers, including general manufacturing, logistics, distributors, construction and engineering, metals and transportation equipment. This segment represents 29% of revenue and 20% of income.
Port solutions: It provides heavy cranes, mobile equipment, software and services for the container handling industry. Konecranes remains the only western player with a broad end-to-end offering for port terminals. Most of the world’s automated container terminals run on Konecranes product. This segment represents 35% of revenue and 24% of income.

Konecranes is exposed to structural growth through increasing automation and digitalization in industry, where its smart lifting and IoT solutions are in high demand. The global rise in e-commerce and logistics boosts demand for its port and warehouse equipment. Sustainability trends drive customers to modernize with Konecranes’ energy-efficient and low-emission solutions. Additionally, infrastructure investment and industrial growth in emerging markets continue to expand its long-term customer base. We believe it is well-positioned to benefit from higher defence and infrastructure spending globally.

A further rise in China’s trade surplus over the past year has been accompanied by bumper growth of US dollar deposits in Hong Kong, suggesting that Chinese entities have been building a hedge against RMB depreciation – see chart 1.

Chart 1

US dollar deposits grew by $139 bn or 15.6% in the year to April to stand at $975 bn, equivalent to 4.5% of US M2. They have risen much more strongly than Hong Kong dollar deposits, now representing 92% of the value of the latter, up from 79% at end-2022.

Low inflation has allowed China to gain competitiveness without nominal depreciation, with the BIS real effective rate at a 13-year low – chart 2.

Chart 2

Is demand for US dollar balances starting to wane? The recent fall in Hong Kong rates is consistent with a switch into local dollars. The one-year Hong Kong / US rate differential is the most negative since 2005, before a sustained appreciation of the RMB – chart 3.

Chart 3

Chinese f/x settlement numbers, meanwhile, indicate that the authorities intervened to hold down the RMB for a second month in May. Upward pressure had been signalled by a forward premium on the offshore RMB, which has persisted in June – chart 4.

Chart 4

The onshore spot rate has moved from the weak end to the middle of the PBoC’s trading band, with the central parity rate edging higher – chart 5.

Chart 5

Any signal from the Chinese authorities of acquiescence to an appreciating trend could quickly become self-fulfilling by encouraging a further unwind of hedges, including via a reduced US dollar share of Hong Kong deposits.

- A further rise in China’s trade surplus has been accompanied by bumper growth of US dollar deposits in Hong Kong. With confidence in the US dollar eroding, accumulation of these balances may slow or reverse. The recent fall in Hong Kong rates and appreciation pressure on the RMB are consistent with such a shift (see charts).
- The US Conference Board’s leading index has issued a recession signal (see charts).
- Japanese annual core CPI inflation adjusted for policy effects remains below 2% (see charts).
- Eurozone / UK flash PMI results were little changed / slightly better respectively but still suggest weak growth (see charts).
- UK annual core CPI inflation adjusted for policy effects fell to 3.0%, a post-pandemic low (see charts).
- Please note: the next bulletin will be in w/c 7 July.

A further rise in China’s trade surplus has been accompanied by bumper growth of US dollar deposits in Hong Kong, suggesting that Chinese entities have been building a hedge against RMB depreciation:

Chart 1 showing China Trade Balance in Goods (12m sum, $ bn) & Hong Kong Customer Deposits in US$ (yoy change, $ bn)

Low inflation has allowed China to gain competitiveness without nominal depreciation, with the BIS real effective rate at a 13-year low:

Chart 2 showing China Broad Effective Exchange Rate (BIS, 2020 = 100)

US dollar deposits in Hong Kong are approaching $1 trillion ($975 bn, equivalent to 4.5% of US M2) and have almost caught up with the local currency money stock:

Chart 3 showing Hong Kong Customer Deposits (US$ bn)

Is demand for US dollar balances starting to wane? The recent fall in Hong Kong rates is consistent with a switch into local dollars:

Chart 4 showing Hong Kong / US 1y Deposit Rates & USD/CNY

The one-year Hong Kong / US rate differential is the most negative since 2005, before a sustained appreciation of the RMB.

Hong Kong dollar deposit growth has picked up and has been correlated with MSCI China performance historically:

Chart 5 showing MSCI China in US$ (% yoy) Hong Kong Customer Deposits in HK$ (% yoy)

Meanwhile, Chinese f/x settlement numbers indicate that the authorities intervened to hold down the RMB for a second month in May:

Chart 6 showing China Net F/x Settlement by Banks Adjusted for Forwards ($ bn) & Forward Premium / Discount on Offshore RMB (%)

The CNH / CNY forward differential suggests that upward pressure has persisted MTD.

CNY has moved from the weak end to the middle of the PBoC’s trading band, with the central parity rate edging higher:

Chart 7 showing USD/CNY & PBoC Central Parity Rate

The US Conference Board’s leading index met the organisation’s conditions for a recession signal in May (six-month annualised fall of below 4.1% with diffusion index of 50 or lower):

Chart 8 showing US Conference Board Leading Index (% 6m annualised)

Caveat: subject to revision.

Even the Conference Board is dismissing the signal, following the false warning of 2022 – classic recency bias?

Housing numbers were ominous, with starts / permits at new post-pandemic lows and homebuilder sentiment falling further:

Chart 9 showing US Housing Starts & Permits (000s, annual rate) & NAHB Housing Market Index

A fall in units under construction picked up speed, suggesting greater payrolls weakness ahead:

Chart 10 showing US Housing Units Under Construction & Residential Building Payrolls (mn)

Japanese annual headline CPI inflation edged down, with core unchanged and below 2% even adjusting for a recent cut in education fees:

Chart 11 showing Japan Consumer Prices (% yoy)

Eurozone / UK flash PMI results were little changed / slightly better respectively but still suggest weak growth:

Chart 12 showing Composite PMI Output Indices

UK annual core CPI inflation adjusted for policy effects eased further to a post-pandemic low:

Chart 13 showing UK Consumer Prices (% yoy)

Growth has underperformed MTD in the US and Europe, with Japan / EM bucking the trend:

Chart 14 showing MSCI Growth / Value Price Relatives 31 December 2024 = 100

We would like to announce that Bryce Walker has taken on the role of President and CEO of Connor, Clark & Lunn Funds Inc. (“CC&L Funds”) and has been named Ultimate Designated Person (“UDP”).

Tim Elliott is joining Connor, Clark & Lunn Investment Management Ltd. (“CC&L Investment Management”) in a role on its institutional client solutions team, effective July 1, 2025.

Bryce Walker joined CC&L Funds in 2012 as Vice President, Business Development, leading sales and service efforts in Western Canada. In 2018 he became Senior Vice President, Business Development, taking on the leadership of the sales and service teams across all of Canada.

Tim Elliott originally joined Connor, Clark & Lunn Financial Group Ltd. (“CC&L Financial Group”) in 2007 and founded CC&L Funds in 2012 with the aim of delivering unique and proven institutional investment strategies to the Canadian wealth management market through full-service investment dealers and the multi-family office channel. Since that time, the firm has grown rapidly in assets, strategies and people, to be recognized as a leader in the market for separately managed accounts (“SMAs”) and in liquid alternative and niche investment fund strategies.

“I’m very proud of the team and business that we have built at CC&L Funds in delivering unique, institutional-calibre investment solutions and in creating strong partnerships with some of the best Advisors and organizations in Canadian wealth management,” said Tim Elliott. “I’m really excited to be joining CC&L Investment Management at a time of rapid institutional growth for the firm, and also to see where Bryce and our terrific team can take the CC&L Funds business from here.”

“Tim and I have worked closely together for the past 12 years in building a business that is relatively unique in Canada, given our specialized approach in the wealth market, backed by one of Canada’s largest privately owned asset managers. I’m excited to lead the business forward through this next phase of growth and expansion,” said Bryce Walker.

This transition will support the strong growth for both CC&L Investment Management, particularly in the institutional market, and for CC&L Funds in Canadian wealth management, and is consistent with CC&L Financial Group’s long-term approach to succession planning.

About Connor, Clark & Lunn Funds Inc.

Connor, Clark & Lunn Funds Inc. partners with leading Canadian financial institutions and their investment advisors to deliver unique institutional investment strategies to individual investors through a select offering of funds, alternative investments and separately managed accounts.

By limiting the offering to a focused group of investment solutions, CC&L Funds is able to deliver unique and differentiated strategies designed to enhance traditional investor portfolios. For more information, please visit www.cclfundsinc.com.

About Connor, Clark & Lunn Investment Management Ltd.

Connor, Clark & Lunn Investment Management Ltd. is one of the largest independent partner-owned investment management firms in Canada with $78 billion in assets under management. Founded in 1982, CC&L Investment Management offers a diverse array of investment services including equity, fixed income, balanced and alternative solutions including portable alpha, market neutral and absolute return strategies. For more information, please visit cclinvest.cclgroup.com.

About Connor, Clark & Lunn Financial Group Ltd.

Connor, Clark & Lunn Financial Group Ltd. is an independently owned, multi-affiliate asset management firm that provides a broad range of traditional and alternative investment management solutions to institutional and individual investors. CC&L Financial Group brings significant scale and expertise to the delivery of non-investment management functions through the centralization of all operational and distribution functions, allowing talented investment managers to focus on what they do best. CC&L Financial Group’s affiliates manage over $142 billion in assets. For more information, please visit www.cclgroup.com.

Contact

Lisa Wilson
Manager, Product & Client Service
Connor, Clark & Lunn Funds Inc.
416-864-3120
[email protected]

Chinese monetary trends suggest a continuation of lacklustre economic growth with negligible inflation.

Six-month momentum of narrow and broad money picked up strongly during H2 2024, raising hopes of a reflationary scenario. Growth rates, however, have fallen back since Q1, to around the middle of ranges in recent years – see chart 1.

Chart 1

May activity numbers confirm an economic slowdown, with six-month growth of industrial output and fixed asset investment falling again, and home sales contracting at a faster pace. Retail sales were boosted by subsidy programmes and promotions, with payback likely – chart 2.

Chart 2

House prices haven’t stabilised. The three-month change in new house prices has stalled below zero, with that for existing homes becoming more negative – chart 3.

Chart 3

Monetary developments don’t yet warrant pessimism. Six-month broad money momentum remains respectable, at 4.0% – 8.2% annualised – in May. This could be consistent with nominal GDP growth of c.6.5% pa, based on a long-run trend rise of 1.75% pa in the money to GDP ratio.

Narrow money momentum has weakened more sharply but the sectoral breakdown is reassuring, showing stable growth of household and enterprise money, with the aggregate slowdown due to a fall in demand deposits of government-related bodies – chart 4.

Chart 4

This fall is unlikely to be a leading indicator of reduced spending by these bodies, particularly as their overall deposit growth – i.e. including time as well demand deposits – has remained stable.

The money numbers, moreover, exclude fiscal (i.e. central government) deposits, six-month growth of which has picked up since Q1. Demand deposits of government-related bodies could recover as funds are transferred to finance spending projects.

We have written extensively in recent months on how monetary and currency signals may be hinting that we are on the cusp of a “virtuous circle” for performance in EM equities. For any who missed it, a few recent pieces below:

Implications of Asian currency tremors

‘Beautiful’ tariffs and the end of exceptionalism

Are emerging markets on the cusp of a ‘virtuous circle’?

This is the most bullish we have been on the outlook for emerging market equities in over a decade.

Recent momentum has been positive, with MSCI EM up 9% to the end of May, part of a broader upswing in markets outside of the United States.

MSCI Price Indices
USD Terms, 31 December 2024 = 100

Source: LSEG Datastream

Macquarie Capital investment strategist Viktor Shvets wrote earlier this month that, in May, EM excluding China recorded the largest net inflow since December 2023. India ($2.3 billion), Taiwan ($7.6 billion) and Brazil ($2 billion) received the largest flows, helping to buck a trend of selling through 2024 and early 2025.

EM ex-China Net Foreign Flows (US$ bn) – strong flow reversal

Source: Bloomberg; Macquarie Global Strategy (May 2025)

Persistent negative outflows over the past decade from EM into the United States have driven what by many measures is an unprecedented valuation gap.

US relative to the rest of the world forward PE and dividend yield

Source: CLSA (April 2025)

Some premium is no doubt deserved given stronger US growth versus the rest of the world post-GFC, along with a better environment for capital and innovation. However, such extreme valuations imply lofty relative future growth expectations and leave US equities vulnerable to negative catalysts.

As John Authers wrote in his Points of Return column for Bloomberg:

Ultimately, EMs benefit most from the decline of US exceptionalism, giving central banks room to cut rates, as noted by Points of Return, and letting fiscal authorities spend without worrying about tanking the currency.

In a world where no one is exceptional, as Macquarie’s Shvets puts it, EMs are no longer penalized. At best, he calls the fall of American exceptionalism a process, not a collapse — creating conditions for a gradual rise in US risk premia while avoiding disorderly asset repricing. Investors will continue narrowing spreads between US and non-US assets, supporting EMU and Japan. Ditto for EMs, especially those with stronger secular drivers, with India, Korea, and Taiwan standouts.

Currency tailwind for EM

Source: NS Partners & LSEG

Winners and losers

Despite being caught up in Liberation Day tariff chaos, MSCI China has returned 13.1% over the same period. Since 2023, China has been one of the strongest equity markets in the world. Despite the rally, valuations in many of the high-quality businesses that we like remain modest.

Source: Jefferies (March 2025)

Having led the way for EM over the last few years, Indian stocks returned just 3% as sentiment moderates.

South Korea bounced 18.7% as domestic political risks eased following the impeachment of former president Yoon Suk Yeol following his failed attempt to impose martial law in December 2024. Former opposition leader Lee Jae-myung was elected to the presidency in early June and will immediately grapple with a contracting economy which has been hit further by US tariffs.

Taiwan has been a laggard, its market flat over the period which includes the DeepSeek shock that hit AI supply chain stocks on fears of lower demand for the hardware used to power the technology.

Stocks in Southeast Asia are yet to fire this year despite being beneficiaries of a falling USD and improving global liquidity. Perhaps investors remain fearful that these smaller, open trading economies risk getting trampled at the feet of the two fighting elephants in the United States and China. In a meeting with our CIO Ian Beattie earlier this year in London, Malaysian Prime Minister Anwar explained what a difficult position his country is in. China is Malaysia’s biggest trading partner and second largest investor, while the United States is its largest investor and second largest trading partner! If trade tensions between China and the United States cool, then these markets should soar.

Elsewhere, South African stocks have boomed, rising 24.4% powered in part by the country’s gold miners, along with a tentative improvement in politics under the ruling national ANC/DA coalition.

Brazil and Mexico have largely avoided president Trump’s ire and have rallied despite challenging political and economic backdrops, up 20.0% and 28.3% respectively.

Huge rallies in Greece (47.5%) and Poland (43.3%) have been driven by a powerful cocktail of geopolitical realignment between Europe and the United States and fiscal stimulus combined with cheap valuations. The most notable catalyst has been Germany’s dramatic policy shift under Chancellor Friedrich Merz. His government has proposed a sweeping €500 billion infrastructure investment plan and a major increase in defence spending. Crucially, the proposal includes exempting defence expenditures exceeding 1% of GDP from the constitutional “debt brake,” a move that would allow for significantly more fiscal flexibility.

Turkey bucked the trend (-15%), the market tanking on news President Erdogan jailed a political rival on trumped up corruption charges. The portfolio is zero-weight Turkey, and we are not tempted by ever cheaper valuations while Erdogan threatens the rule of law.

Finally, the GCC was a mixed bag with Saudi Arabia (-5.2%) hit by a weaker oil price, while the UAE (14.9%) was much stronger.

Caveat

Monetary data in the United States had been signalling a slowdown this summer, and this is now likely to be exacerbated by tariffs with a muted recovery in the latter half of 2025. The best-case scenario for EM at present would be contained US economic weakness, a slowdown in underlying inflation and a sustained pace of rate cuts. The story would be one of a late-cycle catch-up in EM performance, as illustrated by the table below.

Stockbuilding cycle & markets: EM, small caps, industrial commodities lagging – catch-up potential?

Source: LSEG Datastream, own calculations / dating, as at 2 June 2025

We would expect EM to underperform in a hard-landing scenario, although this might be temporary given the lack of prior outperformance, followed by a strong early cycle phase. The chart from CLSA below shows prior phases of early cycle outperformance.

Emerging equities are an early cycle play: EM equity outperformance phases post US recessions

Source: CLAS, MSCI, NBER

Mexico’s scorching rally belies deteriorating institutional quality

Ducking US tariffs and in prime position to benefit from US friendshoring, Mexico has been one of the top performing emerging markets this year. Strong stock picking in our portfolio allowed us to keep up despite an underweight to the country. However, we have used the rally as an opportunity to take profits and increase our underweight on a view that investors underestimate the impact of recent judicial elections.

In June last year we flagged the potential for Morena’s dominance in congressional and presidential elections to expose investors to rising institutional risks – Political risks in EM spike as Indian, South African and Mexican elections surprise:

Crucially for investors, AMLO and Morena are pursuing policies that could threaten Mexico’s institutions. Institutional quality is a key factor in determining whether a country moves up the economic development ladder. …

Investors fear that a strengthened mandate will allow Sheinbaum (or even an outgoing AMLO) to undermine judicial independence,and pursue plans to eliminate autonomous government agencies overseeing telecoms, energy and access to information, as well as weaken electoral supervisory bodies.

Morena under president Sheinbaum pushed ahead with an unprecedented judicial overhaul, with Mexican citizens voting in early June to elect judges including for the Supreme Court. As reported by Bloomberg on the 2nd of June – Mexico Judicial Election Sees 13% Turnout in Historic Vote:

The controversial election asked voters to pick judges among several thousand hopefuls which marked a first of its kind experiment for a large democracy. The judicial overhaul could give Sheinbaum broad influence over a revamped judiciary, the only branch of government the leftist Morena party does not control.

Critics of the process argue that this will undermine the rule of law by injecting more politics into legal and constitutional disputes.

Only 13% of registered voters turned out to participate, tasked with choosing between thousands of candidates, while accounting for specialties while selecting an equal number of men and women.

Politicising the selection of the judicial officers compromises Mexico’s separation of powers between the executive, congress and judiciary. This is a step backward as it undermines the institutional pluralism within the country’s system of government, where different power centres provide checks and balances and ways for the system to self-correct.

Regressive judicial reform coupled with a fragile economy hit by tariff uncertainty, falling remittances from a deteriorating US labour market and deportation fears is the basis for added caution.

Risks are to the downside for Mexico’s industrial production in 2025

Source: GBM (June 2025)

Exposure to Mexico in our portfolio is now c. 1% versus c. 2% for the benchmark.

Given the direction of travel in macro risk, we will debate whether to downgrade our country rating for Mexico further in the coming weeks. We are always seeking competition for capital in the portfolio, and in LatAm we are seeing interesting opportunities emerge in places like Argentina, Peru and Brazil, all competing for risk budget.

Last week, we visited Federal Signal’s flagship manufacturing facility alongside a select group of investors. Touring the plant floor, seeing the latest innovations in action and engaging directly with the teams driving Federal Signal’s record-setting growth gave us invaluable insights that numbers alone can’t provide. This on-the-ground approach reflects our commitment to deep diligence and transparency – values that set us apart in the investment community.

Our group witnessed not only the impressive scale of production, but also the operational excellence and culture of continuous improvement that permeate every corner of the company. From the hum of new automated machinery to the pride in the eyes of long-tenured employees, the visit reaffirmed why Federal Signal remains a leader in its field and a valuable investment.

Vactor Manufacturing production plant in Streator, IL. Source: Global Alpha.

A truck outside the Vactor Manufacturing production plant. Source: Global Alpha.

Another section of the production plant, highlighting other brands produced by Federal Signal. Source: Global Alpha.

A specialized truck produced by Federal Signal. Source: Global Alpha.

Who is Federal Signal?

Federal Signal Corp. (FSS NY) makes specialized vehicles and equipment that help keep communities safe, clean and running smoothly. In simple terms, the company builds things like street sweepers, sewer-cleaning trucks, fire rescue vehicles and emergency warning systems. Their products are used by cities, governments and businesses to clean streets, manage waste, respond to emergencies and alert people to danger.

Federal Signal: A platform built for power and agility

Federal Signal’s story is one of transformation and resilience. Over the past decade, the company has built a powerful platform that combines organic growth, strategic acquisitions and a robust aftermarket business. Since 2016, net sales have grown at a compound annual rate of 13%, reaching a record $1.86 billion in 2024. The company’s ability to scale quickly has been critical in overcoming challenges and seizing new opportunities.

Inside the plant: Innovation, efficiency and teamwork

During our visit, we saw firsthand how Federal Signal’s operational strategies translate into real world results:

Production efficiency: The Streator, Illinois facility set a new record for unit production in 2024, thanks to improved supply chains and process enhancements.

Lean initiatives: The Federal Signal Operating System, including 80/20 programs and lean manufacturing, is driving efficiency, cost savings and reduced lead times across the organization.

Electrification and new product development: The company continues to invest in electrification, with new offerings like the fully electric Broom Bear street sweeper and Rugby Vari-Class dump platform.

Safety and security: The Safety and Security Systems Group (SSG) posted a 7% sales increase, with EBITDA margins rising by 170 basis points, reflecting strong demand for public safety equipment and operational discipline.

These achievements are not abstract – they are visible on the plant floor, in the streamlined workflows and in the pride of the workforce.

Strategic growth: M&A and aftermarket expansion

Federal Signal’s disciplined approach to mergers and acquisitions (M&A) has been a key driver of its growth. Since 2016, about half of top-line growth has come from M&A, with a focus on integrating and strengthening acquired businesses. The recent acquisition of Hog Technologies, a leader in road marking and water blasting equipment, expands Federal Signal’s reach into new geographies and end-markets, such as airports.

The company’s aftermarket business – parts, service, rentals and training – continues to expand, providing stable, recurring revenue and deeper customer relationships. This diversification of revenue streams helps buffer the company against economic cycles and positions it for long-term sustainability.

Positioned for the future: Resilience and opportunity

Federal Signal’s future is bright, supported by a robust backlog, a healthy M&A pipeline and a diversified customer base. The company is well-positioned to benefit from ongoing infrastructure investment, including federal stimulus funds and the bipartisan Infrastructure Bill, which are driving demand for essential equipment like sewer cleaners, street sweepers and safe digging trucks.

A key differentiator is Federal Signal’s ability to adapt – whether by bringing more production in-house, optimizing distribution or leveraging cross-selling opportunities among its brands. The company’s platform approach ensures that every new acquisition and product line strengthens the whole.

What sets Global Alpha apart: The value of being there

Our recent plant visit is more than a symbolic gesture – it’s a core part of our investment philosophy. By engaging directly with Federal Signal’s people and processes, we gain a nuanced understanding of the company’s strengths and opportunities that goes beyond financial statements. This hands-on diligence gives us – and our investors – confidence in the company’s trajectory and our decision-making.

In a world where many rely solely on remote analysis, our willingness to “walk the floor” sets us apart. It’s how we build conviction, spot emerging trends early and ensure we’re investing alongside the best teams in the business.

Conclusion: Moving forward together

Federal Signal’s journey is one of continuous growth, innovation and resilience. As we saw firsthand this week, the company’s success is driven by a powerful platform, a culture of excellence and a commitment to serving customers and communities.

We are excited to continue this journey with you – on the ground, in the field, and at the forefront of industry leadership. Thank you for your trust and partnership.

Artificial intelligence (AI) represents technological advancements that enable machines to emulate how our brains work, mimicking the way we receive data, solve problems and make decisions. AI is acknowledged as the latest general-purpose technology (GPT*), following previous innovations like the steam engine, electricity and the Information and Communication Technology (ICT) revolution. This article examines how AI is expected to contribute to economic productivity and its implications for the asset management industry.

GPT and the economy

The economic productivity benefits of a GPT unfold in three phases:

Initial phase: During this phase, the technology is new and not widely adopted, resulting in minimal benefits.
Growth phase: As technology improves, implementation costs decrease, and it becomes more widespread, leading to significant productivity gains.
Maturity phase: The pace of improvements and rollouts slow, causing productivity gains to taper off.

Historically, it took several decades for GPT productivity gains to materialize. However, the timeframe for AI is shorter due to its software-based nature, allowing advancements to be deployed quickly and efficiently.

AI is anticipated to impact the economy in several ways:

Efficiency savings: AI will boost productivity through one-time efficiency savings, either by maximizing existing resources or performing tasks with fewer resources.
Human-AI collaboration: In some cases, AI will replace humans, while in others, it will help humans become more efficient in their jobs. Despite concerns about AI, 95% of workers recognize the value of working with AI.
Complementary innovations: The full benefit of AI is not likely to be realized until there are complementary innovations, like how the development of web browsers and search engines helped maximize the potential of the internet.

PwC forecasts that global GDP will be up to 14% higher in 2030 due to the adoption of AI, equivalent to an additional USD15.7 trillion. It is expected that over half of the gains will come from improved labour productivity. However, the economic benefits of AI will not be evenly distributed, with the United States anticipated to gain the fastest and possibly the most due to its substantial private and public investment in AI research and development and its large number of AI start-ups.

AI and equities

Equity managers can be broadly classified into two styles: fundamental and systematic (quantitative). Fundamental managers conduct in-depth research on individual companies, sometimes using AI tools to complement their analysis. In contrast, systematic managers have long advocated for the use of technology, using computer-driven models to analyze a large universe of stocks.

For example, technological advancements have enabled the Connor, Clark & Lunn Investment Management Quantitative Equity Team to enhance its investment process through increased computing power and greater availability of data. This has led to the team equally valuing their investment philosophy and technology philosophy, with portfolio managers collaborating closely with machine learning and other computing professionals in a fully collaborative environment.

As computers have become smarter and faster, the scope of analysis has expanded. The team has transitioned from using several fast individual machines to a large internal grid for parallel computing, located both in their office and in the cloud, allowing access to thousands of CPUs on demand in a cost-effective manner.

Data has always been central to equity investment management. Today the team can utilize significantly more data due to the increased sophistication of algorithms. The challenge for all asset managers is to narrow thousands of dataset candidates to the ones most likely to provide unique insights and then verify the selected data. This is where machine learning tools excel by transforming large and complex datasets and capturing non-linear relationships to reveal valuable information or organize unstructured data to better assess insights. Data sources are validated through multiple layers, including direct dialogue with data vendors, emphasizing the importance of both human and machine involvement in the process.

While greater availability of data and more powerful computing resources have elevated the systematic equity investment process, it still relies on the collaboration between humans and technology at this stage in the AI evolution.

AI and infrastructure

AI is significantly enhancing the efficiency of various infrastructure assets. There is also a need for substantial investment in the infrastructure network to support AI, including data centres, the electricity required to power them and fibre networks to connect them to users.

The demand for storage and computing power in data centres has surged. McKinsey estimates that global demand could quadruple by 2030. This presents challenges for powering data centres due to their huge appetite for energy. For instance, Microsoft has established a deal with Constellation Energy to supply power for its new data centre in Virginia, and Amazon has similar arrangements with Talen Energy Corporation.

There are many ways in which AI is contributing to enhancing the efficiency of infrastructure assets. For example, while a functioning elevator is important in an office building, it is critical in a hospital where it transports patients to life-saving surgeries. This type of infrastructure asset operates on an availability basis, meaning that if it is not working, deductions are taken from the revenue. AI is being used to predict when an elevator would benefit from early maintenance, thereby reducing potential income deductions due to non-working elevators and improving the return earned on the infrastructure asset.

At airports, AI models are being used to optimize staffing at security checkpoints to match the number of passengers at different times of the day, significantly reducing wait times. The time required to go through airport security will be further reduced when biometric AI technology to capture face-prints is more broadly introduced.

Risks of AI

While AI is making significant contributions in many areas, it is not without risks. A McKinsey survey found that nearly a quarter of respondents were most concerned about data inaccuracy, while cybersecurity was the second-ranked risk.

The concern with data inaccuracy is that “garbage in” implies “garbage out,” meaning we need to be wary of misinformation which occurs when AI unintentionally produces false information. An even bigger concern is disinformation, where unscrupulous people intentionally generate false information using AI. For asset managers, this underscores the importance of verifying any data source being used.

Opportunities and challenges of AI

The economic impact of AI is expected to materialize more rapidly than that of past GPTs, primarily because AI is software-based and can be deployed quickly and efficiently. As the volume of data continues to multiply, it will present both opportunities and challenges. AI is contributing to efficiencies in the asset management industry, particularly in certain segments of equities and infrastructure. However, its influence is expected to extend to many more asset classes over time. Staying abreast of technological advancements is crucial to avoid being left behind or, worse, being replaced by AI.

* Not to be confused with the “GPT” at the end of “ChatGPT” which, in that case, stands for Generative Pre-trained Transformer.

The directional signal from UK money growth is that annual core inflation – excluding policy distortions – will fall through end-2025. The level suggestion is that core will undershoot 2%. This suggestion is supported by recent exchange rate appreciation.

Turning points in annual broad money growth – as measured by non-financial M4 – have led turning points in core CPI or RPI inflation by a mean 26 months over the last c.70 years. Chart 1 highlights related troughs (gold dashed lines). (See a previous post for an equivalent chart highlighting peaks.)

Chart 1

The May 2023 core inflation peak occurred 27 months after a money growth peak.

Annual broad money momentum troughed at a 67-year low in October 2023. The mean 26-month lead suggests a core inflation low in December 2025. The median lag at troughs, however, was 29 months, so an inflation low may well occur later.

Core inflation fell sharply in H2 2023 and H1 2024 but has stalled since September. The expectation here is that May numbers released next week will show a decline, possibly to below 3%. (The core measure adjusts for the imposition of VAT on school fees and above-normal increases in water / sewerage charges and vehicle excise duty.)

Annual broad money growth averaged 4.2% in the 10 years to end-2019. Core inflation averaged 1.8% in the 10 years to February 2022 (i.e. allowing for a 26-month lag in the relationship).

Annual money growth moved slightly above 4.2% in late 2024 / early 2025 but dropped back to 3.9% in April. So the levels relationship of the 2010s suggests that core inflation will fall below 2%, with no significant rebound before 2027.

Historical variations in the lag between money growth and inflation – and in the levels relationship – often reflected the influence of the exchange rate.

For example, an inflation decline into 2000 occurred earlier than suggested by monetary trends because of a strong disinflationary impact from a prior surge in the exchange rate: the effective rate rose by 26% in the two years to April 1998 – chart 2. This impact was fading by early 2000, contributing to an unusually short interval between lows in money growth and inflation (six months).

Chart 2

Exchange rate considerations are aligned with the monetary message currently, with a 7% rise in the effective rate in the two years to May suggesting that import prices will remain under downward pressure into 2026.