Global Equity Market Commentary – 3Q 2026

Global equity markets continued their solid year-to-date advance with small caps leading large. During the quarter the MSCI World ex USA Index rose 0.9%, behind the 2.9% from the MSCI World ex USA Small Cap Index. Both Indices declined in September after gaining earlier in the period. Currency had minimal impact with the DXY US Dollar Index returning just 0.26%.

Interest rates, energy prices, politics, and technology are generating widespread investor concern and will be covered extensively elsewhere, leaving little new to add by the time you read this. While we pay attention to these issues, the vast majority of our time is spent on the micro rather than the macro. We have a lot more insight into the business of a particular small cap Japanese retailer or Norwegian packaging manufacturer than we do to the next US Fed decision or US-Iran war strategy. Our current strategy views are also significantly different than those expressed by corresponding index weights. So, instead we highlight several non-US markets where we are most overweight, along with the opportunities we find most attractive.

In Japan, one of our largest overweights and normally seen as a value market, we like growth stocks at attractive valuations and is one of our largest overweights. Currently we are finding Japanese IT companies, both software and services, particularly compelling. Within IT, the market has instead been focused on hardware beneficiaries of the AI spending boom, but we think the risks to what are likely still highly cyclical, capital equipment providers are markedly underappreciated. Instead, the long-term winners will be the users and beneficiaries of AI productivity. In Japan, IT providers, historically short of skilled labor, should see a strong tailwind due to this ‘artificial’ labor supply driving efficiency gains and sales growth. As an example, we have been adding to our holdings of a technology consulting company, normally focused on strategy and solution design which is using AI to move downstream to implement projects traditionally handed off to larger ‘system integrators.’ There are early signs that despite lowering individual project revenue, cutting implementation times with productivity gains will allow them to significantly grow both sales and profits. Given their perceived risk of disruption the market offers us the opportunity to buy shares of a company growing around 20% a year, with a net cash balance sheet, 18% ROE at less than 14x this year’s earnings.

In Europe, we are finding attractive opportunities in both the Consumer and Financials sectors. Greece presents a unique situation as it prepares to regain developed-market status in May 2027, reversing its 2013 downgrade to emerging-market status. We have identified consumer businesses providing distinctive exposure to Southern and Eastern European markets, with strong sales growth, net-cash balance sheets, and compelling valuations. We also found an opportunity benefiting from rising demand and expanding production capacity, a food producer that recently reported organic sales growth of 25% and operating profit growth of 70%. Growth could have been even higher, but production constraints are being addressed through a cash-flow-funded expansion.

We have historically been underweight the Financials sector because we viewed many companies as mediocre at best. However, following a concerted research effort we have found enough ideas to move overweight. Examples of the opportunities currently within the sector include companies as diverse as listed exchanges, specialist insurers, asset managers, banks recovering from prior missteps, advisory firms that benefit during periods of distress, and global money-transfer businesses that appear misunderstood by the market. Collectively, these companies offer attractive valuations, net-cash balance sheets, and strong sales growth.

We feel strongly that small cap stocks look much more attractive than large, but you must be selective, as quality varies dramatically and what is popular now may not be what you will want to own over the long term. Our approach is to build portfolios of companies that: 1) grow faster than the Index, 2) have lower valuations than the Index, 3) have return metrics (i.e. ROE) better than the Index, and 4) have stronger balance sheets than the Index. It is almost impossible to find all four of those characteristics in the same stock, but we have almost always been able to do so on the portfolio level. Our view is that if growth, valuation, business quality, and balance sheets are attractive then the long-term should look after itself.