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We’re excited to share that Connor, Clark & Lunn Investment Management has been recognized with the 2025 Coalition Greenwich Award: Best Asset Manager for Institutional Investors in Canada!*

This award reflects excellence across both investment performance and client service, as measured by the Greenwich Quality Index. It’s a proud moment for our entire team – investment professionals, client solutions and operations teams, among many others – whose dedication makes achievements like this possible.

“This recognition is a testament to the strength of our people and the trust of our clients,” says Martin Gerber, President and CIO of Connor, Clark & Lunn Investment Management. “We strive every day to deliver exceptional results and service, and this award reinforces that commitment. I’d like to thank all of our team members for their dedication and great work that led to this recognition.”

We’re proud of having been awarded four times in the past five years by Coalition Greenwich for excellence in different areas of Canadian institutional investment management, and remain committed to delivering for our clients for years to come.

* Throughout 2025, Crisil Coalition Greenwich conducted interviews with 147 of the largest corporate pension funds, public pension funds, financial institutions, endowments and foundations in Canada and other global regions. Senior fund professionals were asked to provide detailed evaluations of their investment managers, assessments of those managers soliciting their business, and insights on important market trends. Connor, Clark & Lunn Investment Management did not provide Crisil Coalition Greenwich with any compensation for this survey.

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

International equities finished 2025 strongly driven by positive Q3 earnings surprises, attractive valuations relative to the US and a risk-on environment, with the AI capex narrative continuing to dominate. The EAFE index rose 6.13% in local currency terms and 4.86% in US dollars. Utilities was the best performing sector, rising 10.13%, helped by expected higher energy demand from data centres worldwide and the long-term electrification trend. Communications was the weakest, with media earnings impacted by reduced advertising spending and telecom free cash flow pressurized by capex burdens.

Global manufacturing PMI new orders fell for a second month in December, consistent with our forecast of a slowdown in economic momentum from late 2025, based on an earlier fall in real money growth from a March 2025 peak. Money numbers, however, have recovered since Q3, with EM growth reaching a new high. Accordingly, we now expect a PMI decline to bottom out in early 2026, with a recovery into mid-year. While global growth looks set to hold up in H1, this may not prevent a further rise in unemployment rates, partly reflecting AI job displacement. Moreover, the stockbuilding cycle remains on course to enter a downswing during 2026, suggesting another economic slowdown in H2.

The outperformance of Eurozone equities in 2025 was consistent with relative money trends, which remain favourable but less than a year ago – the money growth gap with Japan and the UK has narrowed. In Germany fiscal expansion focused on infrastructure and defence spending is offsetting weaker exports due to falling US demand and tariffs. In the UK uncertainty ahead of the November Budget against a backdrop of weak government finances weighed on consumer and business confidence. Inflation has undershot expectations allowing the Bank of England to cut rates but Chancellor Rachel Reeves has prioritised spending and deficit control over avoiding growth-damaging tax rises.

In Japan Sanae Takaichi became the country’s first female prime minister after leading her Liberal Democratic Party into a new post-election coalition. Her key policy aims are higher defence spending, investment in AI and nuclear power, lower interest rates and increased spending, representing a return towards the Abe playbook. However, the Bank of Japan has continued to raise interest rates as it ‘normalizes’ policy, although the Yen has remained under pressure, partly reflecting fiscal concerns. Rising Japanese bond yields could represent a global liquidity risk for markets in 2026 if Japanese investors repatriate funds attracted by higher domestic returns.

Stock selection was the main negative in both Japan and Europe. Performance was weak notably in industrials, IT, and consumer areas. Concerns about AI disruption continued to negatively impact UK-listed publisher Relx (-16%), UK online property marketer Rightmove (-28%) and Australian accounting software company Xero (-28%). Rightmove was also hit by an increase in investment, partly in AI tools, that will significantly impact margins. Meanwhile, Xero’s acquisition of Melio, a payments company, was viewed negatively: while accelerating Xero’s US growth ambitions, the US$2.5bln price was high and negatively impacts near term return on invested capital. In utilities UK power generator SSE (+24%) raised capital to increase network capex which should generate attractive total shareholder returns out to 2030. In materials, the rising copper price has driven Rio Tinto (+19%) higher while banks such as Caixabank (+17%) and Natwest (+23%) have continued to report well and the sector has been a standout multi-year performer within EAFE.

In Japan, food products and specialty chemicals company Ajinomoto (-28%) fell after weak Q2 numbers impacted by tariffs in the US, supply disruptions in Brazil and a timing mismatch in frozen food promotions. The hope is that these are one-off factors and management has maintained full year guidance but the market was skeptical. Japan Steel Works (-21%) was also weak as demand for petrochemical products has slowed in China while signs of progress in the Russia/Ukraine peace talks were viewed negatively. Other defence related stocks saw profit taking including Thales (-15%) in France and the unowned Rheinmetal in Germany (-23%) – the latter shows as a positive in attribution. The Japanese banks also fared badly versus their European counterparts with Rakuten (-22%) and Mitsubishi UFJ (-3%) both down despite the interest rate hike, with the market less confident about further rises after the more expansionary Prime Minister Takaichi came to power.

Activity over the quarter has moved the portfolio overweight the more defensive healthcare sector while reducing IT and industrials. We have re-introduced Swiss pharmaceutical giant Roche, which is growing its topline at ~6% and earnings at double digits for the next five years with upside potential from a strong drug pipeline. In financials UK-listed Standard Chartered has been bought, reducing the underweight in financials and bringing an attractive geographical exposure notably to Hong Kong and Singapore. The company is returning cash to shareholders, has strong local franchises in the fast-growing countries where it operates and is expanding its affluent wealth management business across its Asian footprint. We favour emerging markets as an asset class and have purchased Chinese multi-media giant Tencent which is benefiting from AI integration across its businesses and user base.

We have also added Swedish industrial equipment maker Atlas Copco which has returned to orders growth driven by semiconductor capex ramps. Atlas has suffered from its end markets such as automotive and construction stalling but the slowdown in growth can be reversed as interest rates fall and the valuation is attractive as key markets return to expansion. We have also purchased Japan Steel Works which operates in attractive areas such as defence, nuclear and power, but is on a valuation that has lagged other stocks in these areas. On the sell side in industrials we have reduced perceived AI-threatened business service companies such as UK-listed Relx and Experian, and taken profits in some defence-orientated stocks such as Thales and Safran, both in France.

2026 has been a challenging year for active managers with the significant underperformance of quality as a factor impacting fundamental stock pickers. The advent of AI as a major theme has negatively affected many of our favoured asset-light, high return companies across sectors in areas such as software and business services, while cyclical value stocks such as banks and defence-related industrials have enjoyed a significant re-rating.

We continue to view further market upside as limited given the maturity of the stockbuilding cycle – downswings are usually associated with underperformance of equities and other cyclical assets. Cyclical considerations similarly support our preference for quality, which may also act as a hedge against a recovery in the US dollar – sentiment and positioning are much less unfavourable for the dollar than a year ago. Our investment approach remains centred on high-quality, resilient businesses with durable competitive advantages and long-term growth potential. In the current market environment favouring speculative AI-related equities and interest rate-sensitive cyclicals, our strategy has lagged the broader index. We continue to monitor elevated valuations and capital deployment risks within the AI infrastructure space. Many firms are committing substantial investment with uncertain long-term returns. Should enthusiasm around AI moderate, we believe our portfolio is well-positioned to preserve capital and deliver attractive relative returns over time.

The Composite rose by 1.96% (1.81% Net) versus a 4.86% rise for the benchmark.

Emerging market equities posted a positive return for the final quarter. Strong returns for the asset class this year have in large part been a re-rating story with the AI capex boom the biggest thematic driver of returns. This was reflected in our overweight and stock picking in Taiwan and South Korea leading contributions to performance for the quarter. Stocks in China and Hong Kong were a drag following a strong twelve month run. Absolute and relative returns in ASEAN continue to be lacklustre despite enjoying the tailwind of a weakening dollar. Latin American equities surged, with stock picking in Brazil and Argentina positive. Zero exposure in Saudi Arabia was a contributor as a weak oil price and domestic fiscal concerns weigh on the market. Polish equities rallied with our stocks and overweight positioning adding to relative returns. While our companies in South Africa kept pace with the market, our underweight continues to be a negative as precious metals stocks rally. Activity included adding to Brazil, India, Mexico, South Africa, South Korea and Taiwan, and reducing Hong Kong and China, Peru, Philippines and Thailand. It is worth also highlighting the increase in exposure to Materials across iron ore, gold and copper.

Stock picking and overweight positioning in South Korea was one of the largest contributors during the quarter. A combination of the market’s exposure to the AI capex boom, and potential for Value-Up corporate governance reforms to drive structurally higher shareholder returns saw the market double in 2025. Holding company SK Square was one of the top contributors and is a leader in efforts to improve corporate governance centering on narrowing the stock price discount to the net asset value of its portfolio holdings. It also benefits from the fact that the largest portfolio investment is in high bandwidth memory (HBM) leader SK Hynix. Demand for HBM, a key component in GPU stacks which power AI, is so great that meeting demand means DRAM giants Hynix and our other portfolio holding Samsung Electronics must limit commodity memory supply supporting pricing and margins. Stock picking in Taiwan was also positive as our AI supply chain holdings including chip cooling technology specialist Asia Vital Components and data centre designer and manufacturer Wiwynn rallied.

Stock picking in mainland China and Hong Kong was negative as the market cooled following a strong run earlier in the year. Audio streaming platform Tencent Music was a detractor, fading on a lack of near term catalysts. We recently met with management who are confident ARPU growth – the key driver of margin expansion and profitability in a saturated market – will be sustained through moving more content behind the paywall, investing in podcasting as well as fan based interaction and offline concerts. Contract biologics drug manufacturer Wuxi Bio fell -23.3% on a broader biotech sector de-rating reacting to geopolitical concerns over an update to the US Biosecure Act and its potential to prohibit the company from contracting with US pharma companies. Ultimately, the update was not as strict as feared and we expect the stock to re-rate on its growing pipeline of drug development project wins with an order backlog worth over US$20 billion, supporting a revenue CAGR of c.15% and gross margin expanding above 40%.

India was one of the biggest laggards in EM this year, having underperformed broader Asian equities by the largest margin in decades. Late last year we flagged our concerns that earnings beats looked to be topping, while a flurry of private equity-led IPOs was soaking up liquidity. We took portfolio exposure underweight but opted against dismantling the Indian portfolio on a view that the long term structural strengths of the market (improving institutional quality and domestic liquidity) remain intact. Some of our big winners from previous years such as private hospital operator Max Healthcare (-15.8% over 2025) and Pepsico bottler Varun Beverages (-30.2%) were sources of profit for investors funding trades in markets like South Korea and China. Intense and unseasonal rainfall in India hit sales growth for Varun. While expanding operations in South Africa are providing a sales and margin boost, we reduced the position through the second half of the year as it looks expensive on c.40x 2026 earnings against a soft domestic backdrop. Although Max also trades on rich multiples, its growth pipeline of brownfield and greenfield developments, fast growing and highly profitable international patient business, and low doctor attrition of c.1-1.5% remain compelling. The quarter saw a recovery in telecoms names which had struggled earlier in the year. Bharti Airtel is enjoying stronger pricing power in a three player market. Indus Towers is India’s largest tower infrastructure provider and is benefiting from the 5G-led data boom.

In Latin America, Brazil’s largest jewellery brand Vivara is a resilient domestic story, which outperformed as it continues to grow store count while sustaining high profitability through its suite of popular brands. The company continues to sustain strong earnings growth despite falling consumer demand for jewellery, meaning growth is coming from expanding market share. Argentinian shale oil company, Vista Energy posted a strong quarter leading us to exit as it hit what we believe to be a rich valuation given oil price weakness.
Elsewhere, contributions from stocks in Poland were positive, led by fast fashion retailer LPP where margins are rising after the company decided to moderate its store roll out plans. Stock picking in Egypt was positive as property developer TMG rallied on high recurring income streams from its projects and growth prospects through expansion in Saudi Arabia.
Emerging markets appear poised to break out of nearly two decades of sideways price action and over a decade of underperformance relative to developed markets. As argued in previous commentaries the shift is fuelled by the virtuous circle of a weaker dollar feeding a stronger monetary backdrop and reflation in EM, supporting corporate ROEs and profit margins. Price to earnings ratios can move higher as flows chase the story. As this new cycle matures we think it will pay to look beyond the AI basket into relatively neglected corners of our markets for companies that are well-geared to these trends.

The Composite rose 5.29% (5.07% Net) versus an 4.73% rise for the benchmark.

The analytical approach used here is giving mixed messages for 2026 prospects. Global monetary trends appear modestly supportive of economic growth and markets, but the stockbuilding cycle remains on course to enter a downswing this year, with the housing cycle also in a time window for weakness.

Further considerations are likely suppression of labour demand from AI deployment and the unusual magnitude of gains in risk asset prices during the upswing phase of the current stockbuilding cycle.

The judgement here is to give greater weight to cyclical influences and plan for a negative shift in the investment environment during 2026, with caution to be reinforced in the event of deterioration in monetary indicators and / or data confirmation that a stockbuilding downswing is under way.

Global six-month real narrow money momentum – the key monetary leading indicator employed here – fell between March and July 2025 but recovered into November. The decline and rebound were driven by nominal money trends, with global CPI momentum stable at around its pre-pandemic pace (vindicating the monetarist forecast of full retracement of the 2021-22 inflation spike) – see chart 1.

Chart 1

The earlier fall in real money momentum has been reflected in a decline in global manufacturing PMI new orders – a timely indicator of economic momentum – from an October peak. Based on recent lead times, however, the monetary rebound suggests that the PMI will bottom out in early 2026, with a recovery into mid-year – chart 2.

Chart 2

While global growth may hold up in H1, it may not be strong enough to prevent a further rise in unemployment rates, partly reflecting AI job displacement – chart 3.

Chart 3

Meanwhile, the stockbuilding cycle – averaging 3.5 years in length historically – remains on course to enter a downswing in 2026, with a possible low in H1 2027. The focus here is on the survey-based indicator shown in chart 4, which has been moving sideways at a level consistent with a cycle peak – a decline into negative territory would confirm a phase shift.

Chart 4

Global inflation is expected to be little changed in 2026, with downside risk judged greater than upside. A key consideration is that G7 annual broad money growth, while recovering further over the past year, remains below its pre-pandemic average – chart 5.

Chart 5

A downside surprise could arise from AI job displacement depressing wage growth. One upside risk is a near-term burst of commodity price strength before the stockbuilding cycle moves into a downswing. Industrial commodity prices rose by less than usual earlier in the upswing and a catch-up could be in progress – chart 6.

Chart 6

The expected transition in the stockbuilding cycle coincides with the housing cycle – averaging 18 years, with a previous trough in 2009 – being in a time window for weakness. G7 housing investment moved sideways between 2023 and H1 2025 but fell to a new low in Q3 – chart 7.

Chart 7

Cyclical hopes rest on further strength in business investment, which follows an average 9-year cycle, with a previous low in 2020. While tech capex is booming, however, it accounts for only one-third of US business investment (and less than 5% of GDP), with other segments weak – chart 8.

Chart 8

The dispersion of real narrow money momentum across countries has narrowed – chart 9. Adjusted for a recent apparent data distortion, US momentum remains slightly below the Eurozone level. Japan is still a negative outlier but the UK has returned to mid-range. Strength in Australia / Canada suggests upside economic and rates risk, with an opposite message from a Swedish move into contraction.

Chart 9

Global real narrow money momentum remains below its long-run average but is nevertheless above weak industrial output momentum, suggesting “excess” money support for markets – chart 10.

Chart 10

Against this, risk assets have usually corrected – or worse – in the 18 months leading up to stockbuilding cycle troughs, with another such window now open on the analysis here. Table 1 compares moves in selected asset prices in the current cycle with averages across the previous nine cycles, with the mean maximum rise from the beginning of the cycle in column 1 and the subsequent fall into the cycle trough in column 2.

Table 1

Global / US equities, tech and other cyclical sectors, and precious metals have significantly outperformed their average gains in the current cycle, suggesting larger-than-normal reversals into the cycle trough. By contrast, European equities, EM, small caps and industrial commodity prices are lagging their respective averages, so may have more upside potential while a positive environment persists and / or prove more resilient in a subsequent risk-off phase.

A fall in the US dollar boosted risk appetite in 2025. The timing of the decline echoes the last three housing cycles, in which the dollar trended lower from an overvalued level in the years preceding and beyond the cycle trough – chart 11.

Chart 11

US currency weakness could become market-negative if a decline becomes disorderly, resulting in upward pressure on longer-term rates, for example in the event of further fiscal profligacy or unwarranted additional rate cuts by a politically controlled Fed. Alternatively, a negative market shift could be triggered by a temporary dollar rebound, if US economic news surprises positively and the Fed remains orthodox. Dollar sentiment and positioning were contrarian-bearish at the start of 2025 but current signals are neutral / positive.

A sharp rise in US demand deposits in November probably reflects a statistical distortion. Monetary trends overall remain consistent with moderate nominal economic expansion.

The narrow money measure tracked here – M1A, comprising currency and demand deposits – jumped by 6.8% in November, pushing six-month growth up to 19.9% annualised from 5.4% in October – see chart 1.

Chart 1

This surge, if genuine, would suggest a significant pick-up in economic growth during H1 2026, with associated upward pressure on interest rates.

The assessment here, however, is that the November jump likely reflects a statistical distortion cause by a bank or banks reclassifying savings deposits as demand deposits on the FR2900 reporting form.

Weekly unadjusted data show a large rise in demand deposits in the third and fourth weeks of November, with a corresponding drop in “other liquid deposits”, which include savings deposits – chart 2.

Chart 2

The weekly numbers are averages of daily figures. The hypothesis of a reclassification is consistent with the demand deposit increase being spread over two weeks of data, assuming that the day of the change was after the start of the first week, resulting in a carry-over to the average for the following week.

A genuine surge in demand deposits would be expected to play out over multiple weeks. The change in the latest week – ending 1 December – returned to “normal”. Data for the remainder of December will be important for confirming the reclassification hypothesis.

Similar reclassifications appear to have occurred in several months over 2020-22, following removal of reserve requirements in March 2020, which effectively equalised the treatment of demand and savings deposits. The procedure adopted then was to assume that monthly growth of demand deposits would have matched that of total liquid deposits in the absence of the distortion.

Applying the same adjustment now suggests “true” six-month growth of M1A in November of 5.3% annualised, little changed from October.

The official M1 and M2 aggregates, as well as the broader M2+ measure calculated here, include savings deposits so are unaffected by such reclassifications. Six-month growth rates of the three measures were 4.1%, 4.6% and 6.7% annualised respectively in November – chart 1.

These growth rates are in a range consistent with trend economic expansion and inflation around the 2% target. Current money trends, in other words, give no strong grounds for monetary policy changes in either direction.

As we close out another year, we acknowledge it has been a difficult one for fundamental investors focused on quality companies.

How does Global Alpha define “quality”? We mean companies with:

Revenue growth with a high portion of recurring revenues
Healthy profit margins
Strong balance sheet
Dividend paying
Fair valuation, ideally below the market multiples

Instead of quality, the market has been fixated on size (the bigger, the better), liquidity (the more liquid, the better) and momentum (what goes up will continue to go up).

In other words, it’s a very speculative market.

Are we in a bubble?

Ruchir Sharma, Chair of Rockefeller International, asked that exact same question in his piece in Financial Times – The four ‘O’s that shape a bubble. He described four characteristics that define a bubble, “four Os”: overvaluation, over-ownership, overinvestment and over-leverage. In our view, today’s market checks all four boxes.

Overvaluation

Consider the S&P 500 price-to-sales ratio. It is currently at an all-time high, well above the peak reached during the tech bubble in 2000. The market is paying record prices for each dollar of revenue.

Source: Bloomberg

Over-ownership

US household stock ownership, as a share of financial assets, is also at record levels. According to Gallup, about 165 million Americans – roughly 62% of US adults – own stocks, an all-time high.

On top of that, foreign investors now hold a record share of US equities. The market has rarely, if ever, been this “crowded.”

Source: Federal Reserve

Sources: Federal Reserve, Macrobond, Apollo Chief Economist

Overinvestment

Technology investment has recently surpassed 6% of US GDP, eclipsing the previous record set in 2000. But the ultimate return on these investments is still uncertain, and there are signs that adoption is slowing rather than accelerating.

Over-leverage

We often hear about the enormous cash balances of the “Magnificent Seven.” However, much less attention is paid to the other side of their balance sheets: liabilities.

Amazon, Meta, and Microsoft are now net debtors, and they are increasingly financing capital expenditures with debt.

So, all four Os suggest a bubble. But who are we to know?

Surely, this time, it’ll be different! Right?

We recently looked at some assumptions underpinning the current enthusiasm and valuations.

The general consensus is that global semiconductor sales will grow at an annualized rate in the mid- to high-20% range over the coming decade.

During the strongest period until now – the 1990s, with the advent of the personal computer and the internet – annualized growth in semiconductor sales was about 15%.

Once again, the narrative is that “it’s different this time.”

What could deflate this bubble?
If we had to name one catalyst, it would be Nvidia, now the largest company in the world by market value, the most owned and traded stock globally, and the poster child for the AI wave.

What could go wrong with Nvidia?

In a word: Competition. More competition would likely mean lower market share, lower prices and lower profit margins.

Lessons from Novo Nordisk

The chart below shows the stock price of Novo Nordisk, which was the largest European company by market value just over a year ago. As a leader in GLP-1 “miracle drugs” used for weight loss and other health benefits, Novo Nordisk became the market’s favourite story.

As competition intensified and prices came under pressure, Novo Nordisk experienced a dramatic shift: its market value has dropped by 68% since its peak in June 2024.

What happened to this market leader?

Simple: more competition and lower prices. In 2024, Novo Nordisk earned €24.48 per share, up 29% from 2023. By mid-2024, analysts were expecting earnings of €30 per share in 2025, implying another 23% growth.

Source: Bloomberg

Instead, according to Bloomberg consensus estimates, earnings for 2025 will be around €23.38, a decline of approximately 4.5%, with a further decline expected in 2026. Novo Nordisk remains a great company, investors have just overpaid for it.

Lessons from Cisco

At the peak of the dot-com era, Cisco Systems was the company that defined the Internet age. It was the most valuable company in the world at the start of 2000, supplying the routers needed to handle internet traffic that was doubling every few months.

Despite that dominant position, Cisco’s stock only just regained its 2000 peak price last week – more than two decades later.

Source: Bloomberg

Looking at past trends, we do not expect Nvidia to maintain the market share and pricing power implied in current analyst forecasts. In our view (shaped by history that competition, regulation and changing narratives eventually catch up with even the most celebrated leaders), it is more prudent to diversify and pivot back to high-quality, reasonably valued companies with durable earnings and strong balance sheets

Lastly, we encourage you to read our previously published piece on quality: Time to take out the trash – Why high ROE matters in the long run. We breakdown how quality outperforms in the long-run and why it matters as an allocator.

We wish you a happy holiday season to you and your loved ones.

May 2026 bring peace and happiness to the world.

Outlook

Emerging market equities have outperformed developed markets for the first time in five years, and by the most since 2017. The backdrop for the asset class is the most positive we have seen for the last decade or more. We expect the monetary backdrop to remain disinflationary for the first half of 2026, with treasury yields and the US dollar expected to continue declining.

Money growth in China is supportive, strong in India, and weak in Brazil, Mexico and South Africa. EM earnings growth is forecast to be 20.5% in 2026, nearly double this year at 10.4% according to Jefferies. On a more cautious note, global money trends suggest an economic slowdown into the end of Q4 and through Q1 2026 making us cautious on cyclical exposure.

Quality investing by first principles

In investing, there is a fine line between discipline and rigidity, or between conviction and stubbornness. Any resilient investment process must be nimble and adaptable enough to weather different market regimes. Investors relying too heavily on static profitability or valuation metrics in their investment process risk getting caught out when structural change takes place.

Screening for returns on equity, low leverage and earnings growth will give you only a very limited snapshot of investment value. Our aim is to paint a far richer picture of the businesses we are analysing.

We are trying to think about value creation in the stock market from first principles. Economic value added (EVA) stock analysis is one of the key tools we use for this. For those who missed it, we wrote about the core elements of EVA investing in a previous monthly, with highlights from that piece below.

Our approach to stock picking – focus on economic value added (EVA)

Made famous by Stern Stewart & Co., the approach homes in on the spread between the rate of return on a company’s invested capital and its cost of capital; economic value added, or EVA for short.

Why? We know that over the medium to long term, EVA is directly tied to the intrinsic value of any company and the fuel that fires up a company’s stock price.

Stock prices reflect how successfully a company has invested capital in the past and how successful it is likely to be at investing new capital in the future. EVA is the best methodology to measure the value that management has added to, or subtracted from, the capital it has employed over time.

How can management create value?

Bennett Stewart in his book The Quest for Value boils it down to three drivers:

The rate of return earned on the existing base of capital improves; that is, more operating profits are generated without tying up more funds in the business.
Additional capital is invested in projects that return more than the cost of obtaining new capital.
Capital is liquidated from, or further investment is curtailed in, substandard operations where inadequate returns are being earned.

We are looking for companies that can be expected to generate high or improving returns on the capital employed in their businesses. These are companies run by management teams laser-focused on making investments that earn more than the cost of capital, and undertaking all positive net present value projects, while rejecting or withdrawing from all negative ones.

Source: Bennett Stewart (1991), The Quest for Value

Understand what drives returns

Value creation is not enough for long run success. We need to know whether it can be sustained. Our process is focused on identifying the drivers of these returns and assessing:

whether there are historic changes or potential catalysts for improved value creation that are yet to be reflected in market prices; and
the sustainability of those returns – are there enduring competitive moats that will protect excellent returns on invested capital?

Our approach identifies highly productive and capital-efficient companies pursuing value creation in a variety of ways. It also focuses on whether that value creation is sustained via competitive moats.

Moats can take a number of forms, from differentiation via proprietary tech, brands or prime locations, to high switching costs, network effects, cost leadership, economies of scale or minimum efficient scale.

EVA helps to cut through the noise and home into whether a business is creating real economic value, and whether the trend of that value creation is strengthening or weakening. Crucially for emerging markets with weaker governance and opaque accounting, headline earnings can mask poor capital efficiency or inflated asset values. EVA cuts through these distortions by focusing on true economic profitability, drilling into the underlying economic strength of a business.

By emphasising value creation rather than headline earnings, EVA highlights when incremental investments fail to cover their capital charge – often an early warning sign of eroding competitive advantage. Further, this approach naturally draws attention to cyclical or structural changes impacting margin compression, rising capital intensity or declining asset productivity, which traditional metrics might obscure.

Below is a rough sketch of how EVA can provide a more robust check of company economics than an approach focused on accounting profitability.

Example: EM Real Estate Development Co.

Accounting view (P/E)
Reported net income: $100m
Shares outstanding: 50m
EPS: $2
Current price: $20
P/E ratio: 10x

On the surface, ABC Realty looks attractively valued at 10x earnings, suggesting a cheap stock relative to peers trading at 12–15x.

Economic value added view
NOPAT (Net operating profit after tax): $120m
Invested capital: $1.5bn
Weighted average cost of capital (WACC): 12%
Capital charge: $180m (1.5bn × 12%)
EVA = $120m – $180m = –$60m

Despite positive accounting profits, the company is destroying economic value, earning less than its cost of capital. This signals that growth funded by debt and equity is not creating shareholder wealth, even though the P/E ratio looks attractive.

In this case, the EVA approach provides a better assessment of whether a company’s moat remains intact and whether its strategic positioning continues to justify its valuation.

Below is a brief example of what we love to see from an EVA perspective.

Stock example – Vivara: market leader in Brazil’s jewellery industry, vertically integrated and expanding aggressively

Vivara is the dominant retail jewellery brand in Brazil, controlling more than 20% of the market.

Source: Vivara Investor Relations 2025

The business is improving its returns on capital through new store openings, sweating assets and maintaining cost control through scale as the only domestic player which manufacturers its own products.

Sweating the assets harder than peers
Retail space productivity (EUR 000s for sale/m²) correlates with EBIT margin (%) – Global players

Retail space productivity (R$ 000/sqm) correlates with EBIT margin (%) – Local players

Source: BTG Pactual 2024

Value creation highlights:

Opening 50–70 stores per year, focus on aspirational Life brand, forecast 40% of sales by 2026.
2-year sales CAGR of c.18% and EBITDA CAGR c.19%. Same-store sales growth consistently positive.
E-commerce 23% of total sales, headroom for further growth.
Plans to enter new markets Mexico and Panama, leveraging scalable business model.

Return drivers and competitive advantage:

Vertical integration: Vivara controls the entire value chain from design to production and distribution, enabling cost efficiency and rapid response to market trends.
Brand strength and market position: Strong brand recognition and customer loyalty, 75% retention rate and a broad product range catering to multiple segments.
Scale and retail network: Extensive retail network with 40% penetration in premium malls and significant opportunities for further expansion.

Our kind of business – this all translates into an attractive EVA profile

Vivaras ROIC charts

Source: NS Partners and Bloomberg

As emerging markets show renewed strength, our approach remains rooted in first principles: seeking resilient, capital-efficient companies positioned for long-term value creation that should drive stock prices.

Connor, Clark & Lunn Infrastructure (CC&L Infrastructure) and Alpenglow Rail (Alpenglow) are pleased to announce the successful closing of an inaugural private placement financing raising in excess of CAD280 million. The process attracted interest from a diverse group of leading North American financial institutions, resulting in the transaction being significantly oversubscribed. The private placement notes received an investment grade rating.

The strategic partnership between CC&L Infrastructure and Alpenglow was established in 2019 to develop and operate a diversified portfolio of rail businesses across North America. Alpenglow’s portfolio encompasses six rail terminals: three terminals in Canada under the VIP Rail brand (Sarnia and Corunna in Ontario and Alberta Midland in Alberta) and three terminals in the United States under the USA Rail brand (Port Allen in Louisiana and Port Arthur and Orange in Texas). Alpenglow offers a full suite of rail solutions to its customers, including railcar storage, switching, transloading and railcar cleaning, among others.

Ryan Lapointe, Managing Director at CC&L Infrastructure, commented: “CC&L Infrastructure is pleased to complete this successful financing, which underscores the strength of our partnership with Alpenglow and the quality of the rail platform we have built together. At the outset of our partnership, we envisioned creating a safe, scalable, customer-focused rail business and this financing positions us well to continue executing on that vision. Our long-term investment approach provides a strong value proposition within the rail sector, and we look forward to supporting the next phase of growth and value creation across the portfolio.”

Henning von Kalm, Chief Financial Officer of Alpenglow, added: “Together with CC&L Infrastructure, we remain focused on owning and operating high-quality rail assets for the long term. This private placement is a testament to the resilience of our business model and the confidence investors have in our platform. Alpenglow’s rail terminals are strategically located within North America’s leading refining and petrochemical hubs – the Alberta Heartland, the US Gulf Coast and Southwestern Ontario. With this established footprint across multiple markets, we are excited to build on our successes and continue delivering strong results.”

CIBC Capital Markets (CIBC) served as the exclusive financial advisor and lead placement agent to CC&L Infrastructure and Alpenglow. National Bank of Canada Capital Markets and Desjardins Capital Markets served as additional placement agents, and Torys LLP acted as issuer’s counsel.

About Connor, Clark & Lunn Infrastructure

CC&L Infrastructure invests in middle-market infrastructure assets with attractive risk-return characteristics, long lives and the potential to generate stable cash flows. To date, CC&L Infrastructure has accumulated over $7 billion in assets under management, diversified across a variety of geographies, sectors and asset types, with more than 100 underlying facilities across approximately 40 individual investments. CC&L Infrastructure is a part of Connor, Clark & Lunn Financial Group Ltd., 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. Connor, Clark & Lunn Financial Group’s affiliates manage over CAD167 billion in assets. For more information, please visit www.cclinfrastructure.com.

About Alpenglow Rail

Alpenglow Rail develops and manages freight rail businesses and related transportation assets across North America. Alpenglow Rail currently owns and operates six rail terminals strategically located in leading industrial markets within Canada and the US Gulf Coast. Alpenglow Rail was founded by a team of seasoned railroad executives with significant experience in the acquisition, operation, development and growth of North American short line railroads. For more information, please visit www.alpenglowrail.com.

Contact Information

Kaitlin Blainey
Managing Director
Connor, Clark & Lunn Infrastructure
(416) 216-8047
[email protected]

Henning von Kalm
Chief Financial Officer
Alpenglow Rail
(917) 293-2351
[email protected]

A measure of UK annual core CPI inflation excluding direct policy effects fell further to 2.6% in November, the lowest since July 2021 – see chart 1.

Chart 1

The measure adjusts for the imposition of VAT on school fees and bumper one-off rises in water bills and vehicle excise duty. It does not strip out the indirect impact of government actions, including national insurance and minimum wage rises.

Indirect policy effects continue to fade from shorter-term rates of change. The adjusted core measure rose at a 1.9% annualised pace in the three months to November from the previous three months, and by 1.8% between August and November – chart 2.

Chart 2

Favourable news, on the “monetarist” view, reflects the lagged impact of persistent monetary weakness.

Broad money – as measured by non-financial M4 – rose by an average 2.6% pa in the four years to October. Simple monetarism suggests that 4-5% growth is needed to support 2% inflation and trend economic expansion of about 1.5% pa, allowing for a trend velocity decline.

The rule of thumb is that money trends feed through to inflation with a roughly two-year lag. As previously documented, the median lead time with respect to core inflation in the UK has been longer, at about 2.5 years.

Transmission may have been further delayed on this occasion by 1) a monetary overhang from the 2020 money growth surge and 2) cost-push pressures from government policies.

A post last month suggested that annual CPI inflation would fall to c.2.25% in Q2 2026 (versus a November Bank forecast of 2.9%) and return to target during H2. Budget measures warrant a lowered profile. Inflation is now expected to reach 2.0% in Q2 and undershoot in H2.

Annual broad money growth remains weak (3.3%), so low inflation is likely to be sustained through 2027 barring an external shock or exchange rate collapse.

A slowdown in food, alcohol and tobacco accounted for half of the drop in annual CPI inflation between October and November. The previous post suggested that UK food inflation would break lower in 2026, based partly on an unusually wide UK / Eurozone gap. The differential remains at 2.2 pp (4.0% versus 1.8%), having been negative on average over 2015-19 – chart 3.

Chart 3

Of the five senses, vision is regarded as the most important as it allows us to navigate our environment, recognize the faces of our loved ones and read and watch to learn and entertain. But a good number of us do not have healthy eyes. According to the World Health Organization (WHO), at least 2.2 billion people globally suffer from near or distant vision impairment. The organization recognizes myopia as a significant public health concern given its rising prevalence around the world. A review of 276 studies (involving more than 5.4 million children from 50 countries across six continents) by the British Journal of Ophthalmology revealed that global prevalence of myopia among children and adolescents increased from 24% in 1990 to 36% in 2023 – one in three of all children and teens are nearsighted today. What is even more concerning is that myopia is starting earlier in children than before.

Prevalence of myopia by age group in 2000 vs. 2050, % of world population

Source: American Academy of Ophthalmology, BofA Global Research

The study predicted that approximately 740 million children and teens (more than half globally) will be myopic by 2050. American Academy of Ophthalmology in its 2016 article forecasted that by 2050, myopia would affect nearly half of global population. A more conservative projection this year puts the number at ~40% of global population – but it is clear that the world 25 years from now will have more than the 2.2 billion people in need of corrective lenses today.

Prevalence of myopia is not even across the world. Asia sees a higher prevalence (close to 40%) that is two to four times higher than that of other regions. East Asian countries – China, Taiwan, South Korea, Japan and Singapore – see much higher myopia rates, exceeding 80–90%, in their adolescent populations.

Source: ScienceDirect, Global perspectives on myopia and pathologic myopia: From environmental drivers to precision medicine

Primary drivers of myopia are genetics, near-work activities and lack of outdoor activities. A recent article in Progress in Retinal and Eye Research journal linked the high prevalences in the East Asian countries to educational systems characterized by intense academic competition, prolonged school hours and substantial homework assignments which significantly reduce opportunities for outdoor activities.

The WHO estimated that vision impairment cost the global economy an estimated USD411 billion in productivity loss, with only 36% of people with myopia having access to an appropriate intervention. Shanghai Conant Optical Co. Ltd. (2276 HK) in our Emerging Markets Small Cap Strategy seeks to address this global myopia pandemic. SCO, a sub-USD3 billion market cap company, is the second largest resin (plastic) optical lens maker in the world after EssilorLuxottica in terms of production volume. At its manufacturing locations across China and Japan, the company produced 209 million pieces to serve customers in over 90 countries around the world in 2024.

We believe SCO’s customer value proposition of value for money is especially effective in the product category of optical lenses. SCO’s high-index lenses (such as 1.74 and 1.67) are approximately half the price of comparable lenses from EssilorLuxottica, Hoya and Zeiss whilst providing the same level of vision correction. On product quality, SCO is an ODM (original design manufacturer) for all the previously mentioned global brands with various lens-coating options available. For the brand-conscious, it is “fortunately” very difficult to tell which brand of lens one is wearing. We are not surprised that the company is especially seeing strong demand in developing countries where its customer value proposition would be stronger. As a person who has been wearing glasses for the past three decades, I have found myself switching from the expensive Hoya and Nikon to much more affordable brands (including Asahi-Lite which is now owned by SCO), which have provided an identical visual experience – I have not looked back since.

China offers a significant room for growth, having entered the world’s largest short-sighted country in 2018, two decades after the company was established. Over 700 million people or roughly half the population in China are diagnosed with myopia. The prevalence of myopia is especially high in school-aged children – roughly 40%/70%/80% of students in elementary/middle/high school suffered from myopia according to a 2022 study published in Investigative Ophthalmology & Visual Science. Laser eye surgery is not an option for these youths, and they must rely on glasses for vision correction until they are older. SCO’s sales in China focus on higher-index lenses where competition is more limited and penetration is lower, and 80% of those sales are of its own brand. The company’s growth in China has been margin accretive given the higher mix of own brand and higher-index lenses.

The company is also involved in the development of AI/AR glasses with leading technology companies in North America and China. SCO as a partner to the technology companies makes sense, given SCO’s scale and cost competitiveness. We appreciate that SCO is trying to solve the problem of the global myopia pandemic, but do not doubt that AI/AR glasses offer the next leg of growth for the company.