Page 4 – CC&L Financial Group Ltd.

As the global economy contends with mounting climate-related losses – over USD600 billion in insured damages over the last two decades – the investment case for climate adaptation is gaining strength. From flooded subways in New York and burnt-out neighborhoods in California, to drought-stricken farms in Europe and storm-ravaged coastlines in Japan, major environmental disasters are no longer fodder for movies, and the costs to rebuild are no longer abstract.

In the United States alone, hurricane Milton and Helene in 2024 were amongst the costliest hurricanes in US history, at approximately USD35 billion and USD80 billion in damages respectively, while Canada’s wildfires in 2023 became the most expensive on record for the country, with damages surpassing $1 billion.

The future also holds a sobering reality: insurance claims are likely to rise in regions that were once considered “safe.” In fact, properties along Florida’s eroding shorelines are beginning to lose insurability altogether as entire homes inch closer to the sea with every storm surge. Meanwhile, infrastructure around the world faces the stress of extreme heat, intense rainfall and prolonged droughts, putting pressure on insurers, governments, and private capital to respond.

While mitigation (reducing emissions and overall environmental impact) remains essential, adaptation (making systems more resilient to the physical impacts of climate change) is emerging as an investable trend. For long-term investors, this shift presents an opportunity to capture growth, hedge risk, and align capital with real-world resilience.

Companies that help communities, infrastructure and ecosystems adapt to physical climate risks are unlocking new growth markets while also de-risking their operations and strengthening their long-term resilience. For investors, these businesses represent not only defensive plays but also strategic exposure to rising demand for resilient systems in sectors like water, energy, agriculture and construction.

At Global Alpha, we aim to capture these adaptation-driven opportunities across our small cap portfolio. Several of our holdings are actively contributing to building climate resilience from various angles including conservation, advisory services and infrastructure.

Valmont Industries Inc. (VMI US) offers advanced adaptation solutions for the agricultural sector. As climate change intensifies, the demand for efficient water management and resilient farming practices grows. Valmont’s innovative irrigation technologies, such as their Valley® centre pivots and remote monitoring systems, help farmers optimize water usage, enhance crop yields and reduce operational costs. These solutions not only support sustainable agriculture but also position Valmont as a key player in addressing the challenges posed by climate change.

Mueller Water Products Inc. (MWA US) develops smart water infrastructure, including leak detection and pressure management solutions. These technologies help cities reduce water loss, extend infrastructure lifespan, and ensure a stable supply of clean water – all essential in the face of increasing droughts and floods. By investing in smart water technologies, Mueller enables communities to make informed decisions and prioritize spending on critical assets, thereby enhancing resilience against climate-related challenges.

Montrose Environmental Group Inc. (MEG US) captures opportunities by providing end-to-end solutions for environmental risk management. From air and water quality monitoring to remediation and climate risk advisory, Montrose helps clients adapt operations to a changing climate. Their expertise in climate risk assessment and sustainability advisory helps clients navigate the complexities of climate adaptation, ensuring resilient and sustainable operations

Casella Waste Systems Inc. (CWST US) plays a critical role in climate adaptation by delivering resilient waste management and recycling services. From post-disaster clean-up to ensuring service continuity in rural and underserved areas, Casella helps communities recover quickly and maintain public health as climate-related events grow more frequent.

Rockwool A/S (ROCKB DC) supplies stone wool insulation that improves energy efficiency and helps buildings withstand extreme heat, fire and moisture. As the built environment faces growing physical risks, Rockwool’s products contribute directly to urban structural climate resilience.

Investors should consider these companies as part of a diversified portfolio aimed at capitalizing on the growing demand for climate adaptation solutions. By investing in firms that prioritize resilience, investors can not only mitigate risks but also drive sustainable growth and long-term value.

Monetary trends suggest that China’s economy is better placed to withstand tariff damage than Japan’s.

Chinese six-month real narrow money momentum rose further in March, reaching its highest level since August 2020. Japanese momentum moved deeper into contraction – see chart 1. (US March numbers will be released next week, with Eurozone / UK data the following week.)

Chart 1

Inflation divergence has contributed to the wide gap but it mainly reflects nominal money trends: Japanese narrow money is contracting even in nominal terms.

The Japanese fall is partly explained by money-holders switching out of sight deposits (included in narrow money) into time deposits (excluded), which now pay modest interest. Still, broad money trends are also weak: M3 grew by just 0.5% at an annualised rate in the six months to March. Broad money expansion has been dragged down by BoJ QT and a fall in bank lending to non-bank financial corporations.

By contrast, six-month growth of Chinese broad money – on the preferred definition here excluding deposits held by financial institutions – was stable in March at a level close to the 2015-19 average. This pace was associated with solid nominal GDP expansion – chart 2.

Chart 2

Broad money trends have been supported by PBoC and state bank purchases of government bonds issued to finance fiscal stimulus measures. In addition, six-month growth of bank lending has revived recently, despite a drag from debt swap operations (under which funds raised through bond issuance are used to repay bank loans of government-related entities).

Previous posts suggested that Japanese monetary weakness would be reflected in downside economic and inflation surprises. The composite PMI output index fell sharply last month, to well below levels in the US, Eurozone, UK and China.

Annual growth of scheduled earnings, meanwhile, undershot expectations in February. Inflation believers have been relying on a developing wage-price spiral but bumper headline pay awards in the spring Shunto may not be representative of trends across the whole economy – chart 3.

Chart 3

The stock market experienced significant volatility last week due to escalating trade tensions following President Donald Trump’s announcement of new tariffs aimed at reducing the US trade deficit. These tariffs were implemented on April 2, 2025 – a day referred to as “Liberation Day” – leading to widespread market reactions across developed markets globally.

The technology sector for both large and small caps were among the sectors most adversely affected during this period. Technology stocks faced substantial declines, with companies like Tesla and Nvidia experiencing drops of 36% and nearly 20% respectively, over a two-day span. Industrials and consumer discretionary also suffered notable losses, as companies within these industries are often sensitive to trade policies and global economic conditions.

In contrast, defensive sectors such as consumer staples, healthcare and utilities showed resilience. These sectors tend to be less sensitive to economic cycles and trade fluctuations, providing a buffer during periods of market volatility.

The new US tariffs could reduce global GDP growth by 50 bps, with a 100-150 bp drag on US growth, a 60 bp drag on Asian growth and a 40-60 bp drag on Euro-area growth. It is expected the US administration will negotiate country-specific comprehensive packages involving trade, defense, energy and immigration. The aim is de-escalation in the global trade war over the coming weeks and months, though negotiations with China will likely prove difficult, given the geopolitical tensions between the two countries.

Global Alpha will continue to monitor the effect of tariffs on the companies it is invested in. From supply chain to end consumer, the ripple effects are multi-factor dependent. Can production relocate? Is it a service or a good? Where are competitors located? Can the buyers absorb the price increase? And ultimately, what is the demand destruction?

The length of tariffs is also unknown as we recently saw with Vietnam which offered to remove tariffs less than 48 hours post Liberation Day. Nike re-couped half its losses on the announcement.

Presently, our largest exposure to tariffs is the aluminum company Alcoa Corp. (AA US) with 50% of its Canadian production destined to the United States with no real US substitution. The company estimates that a car price tag will increase by $1200 from aluminum alone. If tariffs persist, on-shoring plans could re-surge.

On-shoring will continue to accelerate whether tariff induced or not. Political tensions are only increasing and productivity will continue to rise and automate. In fact, we may be on the verge of one of the largest productivity gains in recent times through the realization of a theme society has dreamt of for a long time: humanoid robotics.

In our discussion with companies, we can start seeing mid- to near-term plans to use humanoid robots. Tesla’s development plans for the Optimus humanoid robot begins with progression of human-superior autonomous driving by Q4 2025 (sensorial decision making). Following that step would be the replication of that technology in humanoid robots. The first launches of the Optimus Robot in the logistics sector are planned for Q1 2026. With this plan, it is easy to imagine Mr. Musk telling President Trump that his industrial labour shortages will be solved in the mid-to-long term.

The global humanoid robot market size was valued at USD 2.4 billion in 2023 and is projected to grow from USD 3.3 billion in 2024 to USD 66.0 billion by 2032, exhibiting a CAGR of 45.5% during the forecast period. Asia Pacific dominated the humanoid robot market with a share of 42.0% in 2023.

The wheel-drive version (versus biped) segment held the highest market share of 65.6% in 2024 and an even higher market share in real-use cases; the biped is still in its infancy when addressing performance.

In 2022, Elon Musk suggested that the Optimus robot could eventually be priced at around $20,000 to $30,000 per unit when mass production begins. This price range is based on Musk’s vision for the robot to be affordable, allowing widespread adoption and possibly replacing some human labour in industries like manufacturing, logistics and even home use.

The Optimus robot is designed to resemble a human in both appearance and movement. It stands 5’8” tall (around 173 cm) and weighs about 125 lbs (approximately 57 kg).

Global Alpha is a shareholder of GXO Logistics Inc. (GXO US)

GXO is a global leader in supply chain solutions and logistics services. The company focuses on providing advanced logistics capabilities for customers across a variety of industries, including retail, e-commerce, consumer goods, automotive and technology. GXO operates with a strong emphasis on innovation and technology, aiming to enhance efficiency, optimize operations and improve customer service through automation, robotics and artificial intelligence.

Today, GXO is a leader in the implementation of traditional robots like autonomous mobile robots (AMRs) or robotic arms. However, the company is likely to continue exploring humanoid robots as the technology evolves.

Key areas of GXO:

Warehouse management: GXO operates large-scale, automated warehouses that utilize sophisticated technology to manage inventory, order fulfillment and distribution. This includes the use of robotics, AI and data analytics to improve efficiency and accuracy in managing supply chains.
E-commerce fulfillment: GXO specializes in providing logistics services for e-commerce companies, including fast order processing, picking, packing and last-mile delivery solutions.
Transportation and distribution: The company offers end-to-end transportation management services, optimizing routes and using data-driven systems to improve fuel efficiency, delivery time and cost-effectiveness.
Cold chain logistics: GXO also manages cold storage and temperature-sensitive goods, offering specialized logistics solutions for food, pharmaceuticals and other perishable products.

GXO is exploring humanoid robots for:

Assistive tasks in warehouses: Humanoid robots are being developed with the potential to assist in warehouses with tasks that require human-like dexterity and mobility. They could perform tasks like sorting, packaging and even delivering materials across different sections of a warehouse.
Customer service: Humanoid robots might also be used in customer-facing roles within logistics operations. For instance, they could assist with customer queries or provide support in retail environments where GXO provides fulfillment services.
Human-robot collaboration: GXO, like other companies in the logistics and supply chain sector, is likely to focus on robots that complement human workers rather than replace them entirely. Humanoid robots can be deployed in environments where human workers are still essential, but can be augmented by automation to handle repetitive or physically demanding tasks.

Global Alpha also owns Kerry Logistics Network Limited (636 HK)

Kerry Logistics is a Hong Kong-listed third-party logistics (3PL) provider offering a comprehensive range of supply-chain solutions. Their services include integrated logistics, international freight forwarding (air, ocean, road, rail and multimodal), industrial project logistics, cross-border e-commerce, last-mile fulfillment and infrastructure investment. With a presence in 59 countries and territories, Kerry Logistics has established a solid foothold in many of the world’s emerging markets.

Incorporating robotics into their operations has significantly enhanced Kerry Logistics’ efficiency and profitability. For instance, in 2023, they implemented the “KOOLBee” sorting robots across facilities in Hong Kong, Tianjin and Dongguan. These intelligent and flexible robots increased overall sorting productivity by 270%, enabling the company to meet the growing demands of fashion e-commerce fulfillment.

Additionally, in 2021, Kerry Logistics introduced “KOOLBotic” robotic arms dedicated to cold chain logistics in the food and beverage industry. These robotic arms improved sorting productivity by 20% and allowed operations to run 20-hour shifts in low-temperature environments, effectively reducing human contact during the pandemic.

By integrating such robotic solutions, Kerry Logistics has not only boosted operational efficiency but also enhanced its capacity to handle large volumes and meet customer expectations, thereby positively impacting profitability.

Although we are excited by the prospect of humanoid robots, the early stages of the technology keeps us from integrating their commercial viability in our financial assumptions. It is a question of “when,” not “if.” These themes continue to provide us with opportunities and earnings growth in our investment universe.

Global money growth has picked up since late 2024 but remains subdued, while the stock of money is no longer in excess relative to nominal economic activity and asset prices. The monetary backdrop, therefore, appears insufficiently supportive to offset economic / market damage from US-led tariff hikes.

Prospective tariff effects, meanwhile, require a revision to the previous forecast here of a downside global inflation surprise in 2025 related to extreme monetary weakness in 2023. A price level boost this year is unlikely to yield second-round effects given disinflationary monetary conditions, so a near-term lift to annual inflation should reverse in 2026. The effect may be to extend the lag between the money growth low of 2023 and the associated inflation low from two to three years.

The elimination of a surplus stock of money has been mirrored by erosion of excess labour demand, with job openings / vacancy rates mostly now around or below pre-pandemic levels. Economic weakness, therefore, may be reflected in a rise in unemployment that eventually dominates central bank concerns about inflationary tariff effects, suggesting that current policy caution will give way to renewed easing later in 2025.

Global six-month real narrow money momentum – the key monetary leading indicator followed here – fell between June and October 2024 but has since rebounded, reaching a post-pandemic high in February. (The timing of the mid-2024 dip has changed slightly from previous posts, mainly reflecting annual revisions to seasonal adjustment factors for US monetary data.) Real money momentum, however, remains below its long-run average – see chart 1.

Chart 1

The lead time between real money momentum and manufacturing PMI new orders has averaged 10 months at the four most recent turning points. Based on this average, the 2024 real money slowdown and subsequent reacceleration suggest a PMI relapse in Q2 / Q3 followed by renewed strength in late 2025 – chart 2.

Chart 2

Tariff effects – including payback for a front-loading of trade flows – are likely to magnify mid-year economic weakness and could push out or even abort a subsequent recovery: delayed central bank easing, a confidence hit to business / consumer credit demand and a near-term inflation lift could reverse the recent pick-up in real money momentum.

Previous posts, meanwhile, argued that stocks of (broad) money in the US, Japan and Eurozone are no longer higher than warranted by prevailing levels of nominal economic activity and asset prices, implying an absence of a monetary “cushion” against negative shocks. Excess money appears to be substantial in China but could remain frozen as US trade aggression and domestic policy caution sustain weak business / consumer confidence.

Chart 3 shows six-month real narrow money momentum in major economies. Chinese strength is a stand-out but may partly reflect payback for earlier weakness – momentum needs to remain solid to warrant continued (relative) optimism. A Eurozone recovery still leaves momentum lagging the US (where revised numbers show less of a recent slowdown), with the UK further behind. Japanese weakness is alarming, suggesting significant downside economic / inflation risk and consistent with recent lacklustre equity market performance.

Chart 3

European economic optimism has been boosted by a relaxation of German fiscal rules and a wider drive to increase defence spending. This is significant for medium-term prospects but has limited relevance for the near-term economic outlook, which hinges on whether an uplift from monetary easing will prove sufficient to offset trade war damage.

The two flow indicators of global “excess” money followed here are giving a mixed message: six-month growth of real narrow money has crossed above that of industrial output (positive) but 12-month growth remains below a long-term moving average (negative). This combination was associated with global equities slightly underperforming US dollar cash on average historically.

From a cyclical perspective, a key issue is whether the US tariff war shock brings forward peaks and downswings in the stockbuilding and business investment cycles, which are scheduled to reach lows in 2026-27 and 2027 or later respectively. The previous baseline here was that upswings in the two cycles would extend into 2026, a scenario supported by the current monetary signal of a rebound in economic momentum in late 2025.

The next downswings in the two cycles are likely to coincide with a move of the 18-year housing cycle into another low. Triple downswings are usually associated with severe recessions and financial crises. Such a prospect is probably still two years or more away but the US policy shock may have closed off the possibility of a final boom leg to current upswings before a subsequent crash.

Table 1 updates a comparison of movements in various financial assets so far in the current stockbuilding upswing (which started in Q1 2023) with averages at the same stage of the previous eight cycles, along with changes over the remainder of those cycles. Three months ago, US equities, cyclical sectors, the US dollar and precious metals were performing much more strongly than average, suggesting downside risk. By contrast, EAFE / EM equities, small caps and industrial commodities appeared to have catch-up potential.

Table 1

Q1 moves corrected some of these anomalies, with the US market falling back, Chinese / European equities performing strongly, US cyclical sectors lagging, the dollar falling and industrial commodity prices recovering. Precious metals, however, became even more extended relative to history, while small cap performance has yet to pick up.

The updated table suggests potential for further strength in EM and to a lesser extent EAFE equities, along with industrial commodities. Cyclical sector underperformance and dollar weakness could extend, while gold / silver appear at high risk of a correction. The larger message, however, is that, even assuming a delayed peak, the stockbuilding cycle has entered the mid to late stage that has been unfavourable for risk assets historically.

The suggestion of EM outperformance is supported by monetary considerations. Six-month real money momentum is stronger in the E7 large emerging economies than in the G7, while – as noted earlier – global real money is outpacing industrial output. EM equities beat DM on average historically when these two conditions were met, underperforming in other regimes – chart 4.

Chart 4

International stock markets performed well for most of the quarter although the potential implications of President Trump’s trade tariffs began to weigh on equities in the second half of March. The EAFE index returned +2.89% in local currency terms, with a larger gain of 6.86% in US dollars. The positive headline result, however, conceals significant style / sector rotations, with growth, quality, IT and consumer discretionary underperforming but strong gains for high dividend yield / value stocks and some defensive areas. Utilities, energy, financials and communications were the best-performing sectors over the quarter delivering double-digit returns.

These moves reflected macroeconomic developments, in the form of Germany’s announcement of a major medium-term loosening of fiscal policy and signals from the US administration of a determination to press ahead with the imposition of high tariffs on imports. The German fiscal news, reinforced by an EU commitment to increased defence spending, spooked bond markets, with the 10-year Bund yield jumping by 0.5 pp to retest its September 2023 high. Higher yields dragged down growth and quality, while helping to sustain strength in financials. Rising expectations of significant reciprocal tariffs, meanwhile, contributed to weakness in consumer discretionary.

In Asia real money growth is up in China but lagging in Japan. We continue to believe that the domestic Japanese economy is vulnerable due to policy missteps by the Bank of Japan in raising interest rates. Headline inflation has been boosted by food prices and the lagged impact of yen weakness, but the core rate is sub-2% and likely to fall further. We favour overseas earners remaining underweight domestically orientated stocks. Despite a strong run, Chinese stocks appear inexpensive relative to other emerging markets while the EM asset class looks more attractive relative to the US; our checklist of emerging versus developed market indicators is at its most positive for many quarters.

Our monetary indicators have been suggesting a loss of global economic momentum in Q2 / Q3 2025 followed by a reacceleration in late 2025. The imposition of US tariffs at a higher-than-expected level, with strong probability of reciprocal actions, will magnify near-term weakness and could push out or abort a subsequent recovery. Planned German / Eurozone fiscal loosening is significant for medium-term prospects but will provide limited support this year. Despite a mechanical inflation impact from tariffs, central banks are likely to come under greater pressure to ease policies to limit a rise in unemployment. We would expect this scenario to be associated with stable or lower longer-term bond yields and an associated recovery in growth / quality and some defensive areas. Tariffs, meanwhile, are likely to inflict greater economic damage on the US than its major trading partners, inclining us to avoid US economic exposure in favour of the Eurozone / China, where monetary recoveries have continued, and the authorities have policy space to offset tariff damage.

Stock and sector selection were both negative as volatility rose in the latter part of the quarter. The overweight in IT and underweight in defensive sectors such as utilities and energy were negative as was the underweight in financials. Stock selection disappointed across regions as the growth and quality factors lagged value and high yield. In healthcare Danish insulin giant Novo Nordisk (-20%) was weak as efficacy trials on its new generation of diabetes drugs disappointed; by contrast, Swiss pharmaceutical giant Roche (+20%) re-rated as its drug pipeline momentum improved. Japanese optics specialist Hoya (-11%) also underperformed within the sector, reflecting its exposure to the semiconductor industry. Performance was weak in industrials as Schneider Electric (-9%) continued to be de-rated due to its exposure to data centres even though this represents just 20% of the business. Negative sentiment towards data centres after the Deepseek release also impacted Australian real estate play Goodman (-20%) and partly explains the fall in Australian investment bank Macquarie Group (-11%). Investors questioned the previous optimistic outlook for energy demand driven by AI use.

Stock picks were better in consumer discretionary where Sony outperformed on announcement of an additional buyback and strong Q3 results in which games were a stand-out. European defence stocks such as Thales (+84%) received a boost as governments signalled an increase in spending to compensate for a reduced US commitment to NATO, while Germany’s easier fiscal plans helped cement maker Heidelberg Materials (+37%) and Nemetschek (+19%), which provides software for the construction industry. In financials Caixabank (+43%) benefited from loan growth in a strong Spanish economy.

Portfolio activity over the quarter has tactically increased exposure to stocks benefitting from a European recovery. These include the purchase of Heidelberg Materials and Siemens in Germany, insulation specialist Kingspan in Ireland and electric power tool maker Makita which is listed in Japan but has significant sales in Europe. We have reduced the underweight in financials with the purchase of Caixabank in Spain which has a powerful franchise across product categories with a strong capital return story. We have also added Commerzbank in Germany. In Japan we introduced Softbank where we like its largest asset, chip designer Arm, listed in the US. We have also bought Fanuc which is a global leader in factory automation and should benefit from the relocation of supply chains.

On the sell side we have reduced stocks with significant US economic exposure, including Compass Group, Experian and exited Ashtead in the UK and Recruit in Japan. We have lowered staples with the sale of Lindt and reductions in Unilever and Nestle. Blood plasma specialist Csl has been exited in Australia as has Samsung in Korea. We have sold lottery operator OPAP in Greece to fund the purchase of Bank Pekao in Poland.

The portfolio is overweight Europe versus underweights in Japan and Asia ex Japan. We favour software, insurance and luxury goods against underweights in retailers and banks while we continue to be zero weighted autos and miners. Better economic activity in Europe in 2026 should help cyclicals and we like stocks with eastern European exposure which should benefit from any ceasefire in Ukraine and subsequent reconstruction. As mentioned, our EM checklist is more favourable and we are looking for opportunities to add in the event of tariff-driven weakness.

We believe US tariffs, whether reciprocated or not, damage the US more than most other countries because of a higher affected share of GDP. A tariff boost to inflation will likely be modest and temporary. Policy easing in the rest of the world will be stepped up while the Fed waits. This favours further outperformance by EAFE markets. The Trump presidency has driven a rise in volatility and uncertainty with investment decisions seeming logical one day and misplaced the next, impacted by the noise created by the administration. We believe a disciplined, systematic approach focused on quality businesses with strong financials is the best defence in the current environment. Our focus remains on companies achieving a high or improving return on invested capital with good margins and pricing power that can weather the economic and political storms ahead.

The Composite rose by 1.79% (1.64% Net) versus a 6.86% rise for the benchmark.

A large rally in Chinese equities underpinned a positive period for EM equities. Quality companies in China made positive contributions, but were offset by Taiwan tech and Indian mid caps giving back performance after a strong 2024. In South East Asia, good stock picking in Malaysia and Thailand was outweighed by underperformance from overweight positioning in Indonesia and Philippines. The portfolio is overweight in Greece and Poland, with both markets surging on excitement over a European defence and infrastructure boom. Stocks and an underweight in South Africa were detractors as that market rallied. In Brazil, strong stock picking offset being underweight a large rally. Turkey reminded us that sound macroanalysis is crucial to avoiding downside shocks that come with investing in emerging markets. The market tanked on news of President Erdogan jailing 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. Portfolio activity included adding to China, GCC and Brazil, while reducing Indonesia, Philippines and trimming Poland.

An overweight to Indonesia was negative as the political backdrop soured on fears President Prabowo (a retired general) may boost the military’s political influence. We cut exposure on this basis, exiting politically and economically sensitive Bank Rakyat, while retaining blue chip Bank of Central Asia. In Malaysia, Public Bank reported solid results and posted a positive return in a down market. One of the most well-run banks in the region, it has been in the portfolio for nearly 25 years and generates a consistent ROE of around 13% on a conservative loan book. We met with General Manager Chin Soo Long in Kuala Lumpur to discuss the bank’s expansion into insurance through the acquisition of LPI. Public Bank paid 1.7x P/B for the insurer, which boasts an ROE of c.20% with room to grow through releasing excess capital buffers. Stocks in Thailand were positive, including global hospitality and restaurant leader Minor International.

The revelation of DeepSeek’s ability to innovate in AI triggered a rally in Chinese tech and selling of Taiwan’s AI supply chain companies. AI supply chain names Lotes and Ememory were hit by the news, while advanced chip monopoly TSMC fared better. We doubt DeepSeek will change demand for the advanced chips running at the lowest possible power. TSMC’s dominance in leading-edge production remains a competitive moat. We think the greater risk for TSMC came with news it will make $100 billion of additional US investments over the decade, responding to threats from the US government to impose 100% tariffs on chips from Taiwan. What we like about TSMC is its ability to expand the moat by reinvesting cash flows into R&D, allowing it to pull away technologically from rivals and stay highly profitable through the cycle. While its technological leadership is likely to remain intact, there is a risk that US investments hamper its ability to maximise returns on capital.

The withdrawal of foreign investors and rotation of domestic allocators in China into SOEs and high dividend stocks has resulted in unusually large and extended underperformance of quality stocks. Our response has been to devote more research hours to the exposure, including time on the ground to re-test investment theses. This validated the conviction that China is home to a host of attractive, growing and cash generative businesses at reasonable prices. A fragile economic recovery should favour companies with strong fundamentals. Portfolio names kept up with the rally set off by DeepSeek. Fuel was added by a speech from President Xi to an audience of tech leaders, declaring it was time for entrepreneurs to “show their talents.” Alibaba’s stock surged as investors seized on its AI models boasting similar performance to DeepSeek. AI revenue from its cloud division is expected to grow at triple digits through monetisation of the technology. Tencent outperformed on excitement over the integration of AI into WeChat, e-payments and online advertising. We kept our China overweight modest on a view this rally risks getting ahead of a subdued earnings season.

Shifting underweight in India was positive but offset by a pullback in mid cap exposure. We have been overweight the market for most of the past three years reflecting India’s strong structural growth story. This remains intact, but a deteriorating monetary backdrop provides less support for lofty valuations. Since September we have gradually downgraded our rating for India, feeding into a reduced risk budget allocated to the country. Varun Beverages underperformed and is one example of a long-term winner where we have taken risk off the table. The PepsiCo bottler reported a fourth quarter earnings beat, although volumes were softening. Guidance for 2025 is for the company’s international expansion to fuel growth and profitability. Consumer holdings in India were broadly weaker including Juniper Hotels, which reported lower occupancy and margins as it renovates Grand Hyatt Mumbai. Food delivery and restaurant aggregator Zomato is undergoing expansion and increasing investment in grocery delivery business Blinkit. Higher advertising and promotional expenses weighed on profitability along with slower than expected growth for food delivery.

Doubts in Europe over the Trump administration’s commitment to NATO was the catalyst for Germany lifting its debt brake, with plans to spend over €1 trillion on defence and infrastructure over the decade. This sparked a rally in European equities, including Greece and Poland where the portfolio is overweight. The portfolio’s heavy underweight to the GCC was positive.

More combative US trade policy is a catalyst for EM countries and trading blocs getting serious about opening up and integrating. We saw the potential for trade opening in EM first hand on a visit to the Johor-Singapore Special Economic Zone in February. Who would have thought we would see the likes of Japan, South Korea and China pledge to pursue deeper trade relations? India committed to cutting tariffs after a visit from the Trump trade team in March. While brutal, President Trump’s carrot and stick approach to trade has the potential to force historically closed economies to open up and compete.

The Composite rose 0.91% (0.70% Net) versus an 2.93% rise for the benchmark.

Chart 1

Chart 2

Chart 3

Table 1

Chart 4

Connor, Clark & Lunn Funds Inc. (“CC&L Funds”) is excited to provide an update on two liquid alternative funds: the launch of the PCJ Focused Opportunities Fund, and the renaming of CC&L Alternative Income Fund to CC&L Absolute Return Bond Fund (collectively, the “Funds”).

PCJ Focused Opportunities Fund

The new PCJ Focused Opportunities Fund is modeled after an existing institutional strategy that seeks to deliver an attractive long-term growth profile by taking long and short positions in North American Equities. This opportunistic fund incorporates many of the same themes and positions as the existing PCJ Absolute Return II Fund; however, without the requirement to be market neutral, it is able to pursue a higher level of returns. The portfolio manager is PCJ Investment Counsel Ltd. (“PCJ”). Risk rating: Medium.

“While liquid alternative funds are still a relatively new structure, our PCJ investment team has been successfully managing alternative strategies for the past 15 years through different market conditions. In our PCJ Focused Opportunities Fund, our team aims to deliver long-term return levels similar to equities, but with less correlation and lower drawdowns,” said Tim Elliott, President & CEO of CC&L Funds. “We view the launch of this fund as timely, as equity investors are faced with high valuations and potentially slowing economic growth. For investors seeking to diversify their equity exposure without reducing their expected return, we view this fund as an ideal solution.”

CC&L Absolute Return Bond Fund

CC&L Absolute Return Bond Fund, formerly known as the CC&L Alternative Income Fund, is also modeled after an existing institutional portfolio that employs three unique and complementary fixed income absolute return strategies to target attractive risk/adjusted returns with low correlation to conventional bond portfolios. The portfolio manager is Connor, Clark & Lunn Investment Management Ltd. (“CC&L Investment Management”). Risk rating: Low to Medium.

“Fund flow data suggests that individual investors have dramatically increased their exposure to corporate credit in recent years. Our CC&L Absolute Return Bond Fund provides a solution for investors who are looking to reduce that exposure/risk at a time when credit spreads, like equities, are quite expensive, without reducing their expected return from fixed income,” said Tim Elliott.

Focused investment teams, strong and stable organization

CC&L Funds, CC&L Investment Management, and PCJ are affiliates of Connor, Clark and Lunn Financial Group Ltd. (“CC&L Financial Group”), whose multi-affiliate structure brings together the talents of diverse investment teams who offer a broad range of traditional and alternative investment solutions. CC&L Financial Group is one of Canada’s largest independently owned asset managers, responsible for over $139 billion in assets on behalf of institutional and individual investors.

About the Funds

Available in A and F Series, the Funds conform with the regulatory framework related to alternative mutual funds offered by the Simplified Prospectus. The Funds are offered through licensed investment dealers, priced daily, with daily liquidity and available through FundServ.

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 $76 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 www.cclinvest.com.

About PCJ Investment Counsel Ltd.

Founded in 1996, PCJ Investment Counsel Ltd. is an independent privately owned investment manager focused on large and small cap Canadian equities and alternative investments including equity market neutral and long/short strategies. With approximately $1 billion in total assets under management, the firm has a deep and stable portfolio management team focused on identifying and exploiting unique investment opportunities, and constructing portfolios with attractive risk return characteristics. For more information, please visit www.pcj.ca.

About Connor, Clark & Lunn Financial Group Ltd.

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In early March, our emerging markets team traveled to Jakarta, Indonesia. Given the political transition following the presidential election last year and ongoing macroeconomic headwinds, we sought to assess the market firsthand. For bottom-up investors, Indonesia has long been one of the most promising equity markets in Emerging Asia, and despite near-term challenges, we continue to see compelling long-term investment opportunities.

Jakarta can be a difficult city to navigate, but with the onset of Ramadan, the usual congestion was noticeably lighter, allowing us to efficiently move between meetings. As the world’s largest Muslim-majority country, Indonesia experiences notable shifts in consumer behavior and urban activity during the holy month. While moving around the city, we were particularly impressed by the quality of Jakarta’s road infrastructure, which, in many areas, exceeds what we have seen in the capitals of more developed countries. The improvements in connectivity and urban planning are a testament to Indonesia’s infrastructure investments over the past decade. Over the course of the week, we met with companies across the consumer, healthcare, real estate and industrial sectors, gaining valuable insights into the country’s evolving economic landscape.

A recurring theme in our discussions was the growing fragility of the Indonesian consumer, particularly in Java, the most economically and demographically significant of Indonesia’s 17,000 islands, accounting for 56% of the population and 57% of GDP. Over the past few years, real wage growth has lagged inflation, eroding purchasing power across all income segments. However, while businesses serving the urban middle class are experiencing a notable slowdown, some ex-Java regions have shown resilience, benefiting from recent minimum wage increases, social aid for low-income groups, commodity-linked employment and past infrastructure investments.

This consumer sentiment is most evident in downtrading, as households opt for cheaper alternatives across food, personal care and general merchandise. A notable trend has been the shift away from multinational companies, such as Unilever, in favour of more affordable local alternatives that offer comparable quality at lower price points. Companies in healthcare and discretionary retail are reporting lower volumes, even as premium segments remain more stable. Our meetings and channel checks confirmed that consumption weakness among middle-income consumers is entrenched, creating a challenging near-term outlook for businesses exposed to domestic demand.

The continued depreciation of the rupiah adds to the pressure. The currency is among the worst-performing in Asia year to date, despite active central bank interventions. Foreign investors have pulled USD1.8 billion from Indonesian equities this year, and on March 18, the Jakarta Composite Index triggered a trading halt after a 5% intraday drop, highlighting nervousness in the local market.

Although the new government has set ambitious economic targets, many investors remain cautious about execution risks. President Prabowo has announced a goal of achieving 8% GDP growth, a level Indonesia has not seen since 1995. With structural constraints and weak private sector investment, breaking out of the 5% growth range recorded in recent years remains a significant challenge.

One of the government’s most ambitious initiatives is the Danantara Sovereign Wealth Fund, designed to consolidate state-owned assets and fund strategic projects. Danantara has a goal of reaching USD900 billion in assets under management, which would make it one of the largest sovereign wealth funds globally. However, questions remain about its governance, transparency and the potential impact on state-owned enterprises (SOEs). With Danantara expected to rely on SOE dividend payouts, banking and energy sectors could see their capital allocation priorities altered.

At the same time, the government’s pivot away from infrastructure spending raises concerns about long-term economic sustainability. Over the last decade, Indonesia’s growth has been supported by significant public infrastructure projects, such as the Trans-Java Toll Road, which improved connectivity and regional economic development. The decision to reallocate resources toward populist policies, such as the free school meal program, has introduced fiscal uncertainties, particularly as recent revenue collection fell short of expectations.

Implementing free school meal programs has proven effective in combating malnutrition and improving educational outcomes in various countries. For instance, India’s Mid Day Meal Scheme, which serves nutritious lunches to over 97 million children daily, has led to increased school attendance and a 31% reduction in anemia prevalence among adolescent girls. However, executing such an initiative across Indonesia’s vast archipelago presents significant logistical challenges. Ensuring the consistent distribution of fresh meals to remote and diverse regions requires substantial infrastructure and coordination efforts.

Beyond economic policies, we noted concerns about the rising military presence in government institutions, a development that some investors worry could signal a shift toward a more centralized power structure. While Indonesia has undergone remarkable democratic progress since the fall of Suharto’s authoritarian rule in 1998, memories of military-dominated governance still linger. While this shift has raised alarms among some observers, it is important to distinguish today’s political landscape from the Suharto era, as institutional limits on military influence have since been established.

For foreign investors, rule of law, policy predictability and strong institutions remain critical factors in assessing investment opportunities. Any perception of reduced transparency or shifts away from a market-driven economy could weigh on investor sentiment. While the trend warrants monitoring, fears of a full-scale return to military-dominated governance appear overstated.

Despite macro headwinds, Indonesia continues to offer structural advantages that make it one of the most attractive long-term investment destinations in Emerging Asia. With a population of over 270 million and a median age of just 30, the country remains one of the largest and youngest consumer markets globally.

Amid the macroeconomic pressures, healthcare remains one of Indonesia’s most resilient sectors, driven by rising demand and structural under-penetration. The country’s healthcare expenditure stands at only ~3% of GDP, one of the lowest in ASEAN, with the doctor and hospital bed ratios per 1,000 inhabitants (0.7 and 1.2, respectively) remaining well below the global average. The positive demographic trend and government-backed healthcare program (BPJS Kesehatan) continue to support patient volumes, with private hospital networks benefiting from both scale efficiencies and growing intensities. As Indonesia works to improve access to quality healthcare and expand private insurance adoption, the sector presents compelling long-term growth potential, even in a more challenging economic environment.

Indonesia has demonstrated resilience through past economic cycles, maintaining a relatively strong external position with foreign exchange reserves of approximately USD155 billion and government debt at ~39% of GDP. In 2024, the country recorded a current account deficit of 0.6% of GDP and a fiscal deficit of 2.3% of GDP, both within a manageable range for an emerging market. From a valuation perspective, Indonesian equities are now trading at very compelling levels, with the Jakarta Composite Index (JCI) at ~11x forward P/E, roughly two standard deviations below its 10-year average.

Source: Bloomberg

If global monetary conditions ease, Indonesia could be well-positioned for a rerating.

In this environment, stock picking is key. We continue to focus on companies with strong pricing power, resilient demand drivers and long-term structural advantages – qualities exemplified by our holdings in Sido Muncul and Mitra Adiperkasa.

Industri Jamu Dan Farmasi Sido Muncul Tbk PT (SIDO IJ) is Indonesia’s leading producer of traditional herbal medicines and functional beverages. Its flagship brand, Tolak Angin, is synonymous with natural flu and cold relief, commanding a market share of 72% in the herbal cold symptoms product category and enjoying strong consumer loyalty and premium pricing power while remaining a staple of Indonesian households. The company’s vertically integrated supply chain improves cost efficiency, further strengthening its margin resilience in an inflationary environment. Unlike many consumer goods companies that face pressure from rupiah depreciation, Sido Muncul is largely insulated from currency volatility as its raw material sourcing and key input costs are primarily local. With a net cash position and ~7% dividend yield, Sido Muncul combines defensive qualities with long-term structural growth, supported by expansion into functional beverages and overseas markets.

Mitra Adiperkasa Tbk PT (MAPI IJ) is Indonesia’s largest specialty retailer, operating a diverse portfolio of global brands, including Zara, Sephora, Nike, Starbucks and Apple (via authorized retail partnerships). The company benefits from strong pricing power through exclusive brand partnerships and a premium positioning, which allows it to maintain healthy performance even in softer consumption periods. While mass-market retail faces headwinds, Mitra Adiperkasa is well-positioned in the more resilient mid-to-premium consumer segment. Its long-term structural advantages stem from strong brand relationships, a well-executed omnichannel strategy and a track record of navigating economic cycles, making it a long-term winner in Indonesia’s evolving retail landscape.

Indonesia is experiencing a challenging economic transition, but its long-term structural advantages remain intact. Our Indonesian holdings are positioned for strong business fundamentals despite macro volatility.

The Fed’s economic forecasts are inconsistent with the suggestion of a 50 bp cut in rates by year-end, according to a model of its historical behaviour.

The model assesses the probability of the Fed being in tightening or easing mode in a particular month based on currently reported and lagged values of core PCE inflation, the unemployment rate and the ISM manufacturing delivery delays indicator. Despite the small number of inputs, the model does a satisfactory job of “explaining” the Fed’s past actions – see chart 1.

Chart 1

The model predicted that the Fed would hold in March with a slight tightening bias – the probability reading rose to just above the 0.5 neutral level, having previously been in the easing zone.

The FOMC median projections for core PCE inflation and the unemployment rate in Q4 2025 were raised to 2.8% and 4.4% respectively this month, from 2.5% and 4.3% in December. Assuming a smooth progression to these values, the model signals a greater chance of tightening than easing over the remainder of the year – chart 2.

Chart 2

The suggestion is that inflation and / or labour markets news will need to surprise significantly to the downside to warrant the 50 bp cut in rates by year-end implied by the median dot.

Chart 3 shows the model prediction in an alternative scenario in which the unemployment rate and core inflation move to 4.7% and 2.5% in Q4. The probability reading remains above 0.5 into the summer but falls back into the easing zone at end-Q3.

Chart 3

The Fed’s projection of a 4.4% unemployment rate in Q4 implies only a 0.17 pp rise relative to a recent (November) high. An indicator of labour market weakness from the Conference Board consumer survey rose further in March and is almost back to its January 2021 level, when the jobless rate excluding temporarily laid-off workers was more than 1 pp higher than now – chart 4.

Chart 4