Quarterly Commentaries

International Small Cap Strategy Quarterly Commentary – CAD

September 30, 2023

Macro-driven is an apt characterization of the markets year to date. With the third quarter now behind us, let’s assess the landscape.  

US markets have spent the better part of the last 12 months debating the likelihood that the Federal Reserve (the Fed) will keep rates higher for longer. It is becoming increasingly clear that the Fed is unlikely to change its stance, as doing so would jeopardize its long-term credibility. This has led US 10-year yields to reach levels not seen since before the Great Financial Crisis (GFC).  

Parallel to this, discussions around the ability of central banks to orchestrate a soft landing have yielded conflicting opinions, with a variety of data points to support either scenario. The Global Alpha team tends to think that a hard landing scenario is more likely. Excess savings accumulated during the pandemic in the US have largely been spent, except among the highest-earning households. Meanwhile, credit quality for items like credit cards and auto loans is deteriorating as rates rise to counter inflation. Also, China is unlikely to serve as the globally deflationary force it once was, given the increasing scrutiny on structural issues in its economy. 

In Europe, small-cap stocks are trading at their lowest P/E multiples relative to large caps in 20 years. A mix of weak industrial activity and consumer demand, in addition to geopolitical dynamics, has led to significant outflows from small-cap to large-cap investments. As a result, the total return drawdown between European small caps and large caps over the past two years now exceeds the maximum drawdown experienced during the GFC. While there is no immediate, obvious catalyst for change, it would not take much to shift sentiment favourably toward this asset class. 

Asia presents a more complex picture. Concerns linger about China’s consumer recovery, which has lagged expectations. A weaker Chinese consumer is impacting global demand for various products and commodities such as copper have seen increased inventories leading to a contango situation in their future contract curves. Nonetheless, there are reasons to be optimistic about China, as detailed in our commentary from October 6. 

Japan is seeing short-term recovery signs as well as structural changes to its economy that point to a transition from prolonged deflation to a more stable inflationary environment. Supporting this are rising wages, which increased by 3.58% in April 2023 and are expected to grow by another 3% next year. 


During the third quarter, the MSCI EAFE Small Cap Index outperformed the MSCI EAFE Large Cap Index and underperformed the MSCI Emerging Markets Index.  

Within the MSCI EAFE Small Cap Index, energy, which represents 3.2% of the Index, was the strongest-performing sector, delivering a 15.5% return. Information technology was the worst-performing sector, returning -5.9% for the quarter, with an Index weight of 9.5%.  


Over the same timeframe, our International Small Cap composite delivered a -3.1% gross return, underperforming the MSCI EAFE Small Cap Index by 1.7% (gross).  

L’Occitane International S.A. (0973 HK) is a French company listed in Hong Kong that manufactures, markets and retails natural and organic skincare and beauty products. The company has over 3,400 retail locations in 90 countries and its main brand, L’Occitane en Provence, represents most of its sales and is well-known for its quality at an affordable price.  

The size of the global beauty market is estimated at US$240 billion and growing between 3% and 5% per year, driven by demand in Asia. L’Occitane benefits disproportionately from this trend as its brand recognition in China outshines many of its Western competitors. 

So, what drove the stock up?  

L’Occitane stock shot up in the quarter driven by a rumour that the company’s chairman and controlling shareholder, Reinold Geiger, was considering taking the company private as its stock price was not reflecting the company’s true value. However, the stock pulled back somewhat after Geiger announced his decision not to proceed with an offer. Investors were nevertheless left with renewed interest in the company and its fundamentals remain strong. It continues to enjoy solid sales momentum, driven by the recovery in its core brands and strong growth in newly acquired ones. We remain happy long-term shareholders. 

Another top contributor last quarter was Samsonite International SA (1910 JP), the world’s largest lifestyle bag and travel luggage company. Founded in 1910, the company is known for its premium quality brands such as Tumi, American Tourister and Gregory.  

The global luggage market was estimated at US$22 billion in 2019, with 50% of the demand coming from Asia, and secular growth for the industry is estimated between 4% and 5%. This is driven primarily by the emerging middle-class demand for international travel, both for work and leisure. Samsonite is well-positioned to capture this secular growth trend, both through its best-in-class brand recognition and global presence. 

What drove the stock up?  

Samsonite benefited from the recovery of the global tourism industry in addition to gaining market share from its peers. Its revenue has recovered to pre-COVID levels, with better profit margins thanks to an improved region, brand and channel mix, as well as reduced promotional activities. We still see significant growth potential in both the travel and non-travel categories, driven by a recovery in China as well as the Tumi brand. A further catalyst has been the expectation that dividend payments will resume in 2024 as the company continues to repay debt.   

Our top detractor for the quarter was CVS Group (CVSG LN). A UK-based integrated provider of veterinary care, CVSG is one of the largest operators and consolidators. It offers a full range of services including surgeries, diagnostics labs, instrument businesses, a crematorium and an online dispensary. The company IPOed in 2007 and has over 8,500 employees, including over 2,200 vets. 

After years of hinting at more aggressive international expansion, CVSG recently announced its entry into the Australian market with a small acquisition there. While the TAM of Australia’s vet sector is estimated to be just a third of the size of the UK’s, acquisition multiples in Australia are on average lower than the UK and the pipeline of acquisition is also substantial. CVSG management expects to be able to replicate the consolidation story from the UK into this new geography without many hurdles. 

What drove the stock down?  

In early September, the UK Competition and Markets Authority (CMA) announced its review of competitiveness in the veterinary sector, causing CVSG stock to drop more than 25%. Investors immediately assumed that CVS, as the largest player in the space, would be the review’s primary focus. However, our analysis suggests these concerns may be exaggerated. Reviews by the CMA do not always lead to material industry impacts, as shown by its review of UK grocers earlier this year. Furthermore, while CVS has been a major player in consolidating the UK veterinary industry, this has not led to unreasonable price hikes. Average increases for CVS products and services hover around 3% net, which is unlikely to be seen as an outlier. There are minor areas, like lack of transparency in cross-selling and customer awareness regarding chain ownership, where CVS might face some hurdles, but we do not anticipate a substantial impact on the business model and believe the share price reaction is unwarranted. 


We finished the quarter with a new position in Elis SA (ELIS FP). Elis is a designer and provider of solutions for linen, workwear, hygiene and well-being products, cleanroom services, pest control and medical waste management. Operating its business under a rental model, Elis is well-diversified across a variety of industries and European countries. The last few years have been rich in macro events such as COVID-19, energy price fluctuations and wage inflation, and Elis’ management has demonstrated its ability to adjust quickly while maintaining its pricing power and protecting profits.  

Global Alpha believes that Elis will be well-positioned to outperform in bear markets. The company boasts an advantageous flexible variable cost structure that generates strong free cash flow and therefore allows it to deleverage its balance sheet (currently around 2.0x) or be opportunistic with M&A or share buybacks. 


During the quarter, we also initiated new positions in Hoshino Resorts REIT and Hexagon Purus ASA. 

During the quarter, we exited Rothschild & Co., OneSavings Bank plc and doValue SpA 


It has been a busy quarter for the Global Alpha team, filled with various conferences, trips and company meetings. Given the multi-year lows in small-cap valuations, we are finding many investment opportunities in companies that have solid fundamentals but are undervalued, as investors seem to be selling any name that does not show positive momentum.  

We are not making major adjustments to the portfolio’s sector or country allocations based on these observations. Rather, we are maintaining a diversified set of holdings with defensible business models that are trading at a discount to their intrinsic value. Our portfolio remains well-diversified across the many countries, currencies and industries that comprise our benchmarks. 

The Global Alpha team 

Global Alpha Capital Management Ltd.
September 30th, 2023