Using a circular economy lens to uncover value amid disruption

The global supply chain has absorbed a series of shocks in recent years – from the Covid pandemic and the war in Ukraine to escalating US-China tensions and conflict in the Middle East. These underscore that uncertainty and disruption are now the norm and can emerge from anywhere with unexpected consequences across sectors.

The Circular Economy strategy’s broadness was designed with change in mind. It is anchored around a core of stability but with the flexibility to dynamically shift to new areas where value and growth are accelerating. Investing through a circular lens helps narrow the focus to companies that produce more with less, optimizing resources and controlling costs. Companies that excel at doing this are able to create significant environmental, social and shareholder value in any environment, but particularly when input costs are rising and resources constrained.

In response to chronic upheaval and change, companies are duplicating segments of their supply chains to improve diversification and resilience. This is clearly illustrated in the ‘China plus N’ strategy whereby companies retain a manufacturing foot in China but also move capacity to other regions. This reduces dependence on any single country, policy regime or supplier. The shift is already redistributing demand for the AI build-out to upstream suppliers of critical inputs in the right places around the globe. Printed circuit boards (PCB) are a prime example. They are the foundational layers onto which chips, capacitors, resistors and other circuit components are fastened – providing literally the backbone of AI and modern electronics.

Global PCB output is projected to grow 12.5% to nearly USD 96 billion in 2026 alone, alongside demand for AI technologies,¹ with many Circular Economy strategy holdings as clear beneficiaries.² For example, Taiwan’s Compeq* and Japan’s Meiko*, which produce high-performance PCBs for servers and AI networking equipment, are gaining share as customers diversify production away from China and toward alternative Asian hubs with advanced know-how.

The diversification wave is also hitting the US, where constant policy shifts, ‘on-off’ tariff switches and rising protectionism are encouraging some companies to co-locate production elsewhere. This is particularly evident across the AI and semiconductor value chain – from smartphones and laptops to data center servers and hardware – as firms seek to enlarge their vendor base as well as expand much-needed production capacity. ³

Eoptolink*, a supplier of high-performance optical transceivers critical for network communication between AI servers (and a holding), is a good example of how Chinese companies are capturing this branch of disruption. The company has seen significant year-on-year revenue increases and recently inked a deal with Nvidia* for next-generation optical modules. China’s neighbors are also benefiting from diversification waves. For instance, ASE*, the world’s largest provider of outsourcing for advanced semiconductor assembly and testing, is expanding manufacturing capacity outside of its home market of Taiwan toward Southeast Asia in order to offer customers geographic diversity. ⁴

Reshoring is a reverse trend that is also gaining momentum, as US tariffs and protectionist policies raise the cost and risk of producing outside the US. In addition to punishing policies, the US is also offering sweet incentives in the form of subsidies and tax breaks in order to attract companies to the US. This wave of domestic investment is already feeding through to the strategy’s holdings. Applied Industrial Technologies* and Wesco* are industrial distributors and automation providers which are benefiting from increased factory build-outs and the need to modernize production systems. Similarly, engineering and construction firms such as Emcor* are seeing rising demand linked to new manufacturing capacity and facility upgrades.⁵

As seen through a circular economy lens, AI and automation are key sources of value creation as digital technologies enable more output with fewer material inputs (see Figure 1). As a result the strategy is discovering and benefiting from strong positions in companies across the AI ecosystem. The AI buildout requires highly advanced materials and specialized manufacturing – areas where Asia has built decades of know-how. Within this ecosystem, the Circular Economy portfolio is exposed to niche leaders of complex inputs located further upstream in the AI value chain.

Union Tool*, a Japanese leader in precision drilling for electronics, and Elite Material*, a Taiwanese maker of complex substrate coatings for PCBs, are illustrative of expert suppliers where bottlenecks are emerging. Backlogs are also building for Organo and Acter*, upstream suppliers of the ultra-pure water systems and cleanroom environments which are required for advanced AI manufacturing. ⁶

The strategy’s edge lies in combining a top-down structural lens with bottom-up flexibility. Circularity provides a consistent framework – anchored in resource efficiency, system optimization and resilience – for identifying where long-term value will accrue. At the same time, active positioning allows the portfolio to adapt as macroeconomic and geopolitical forces reshape global supply chains in real time.

This flexibility is guided by a disciplined risk-return approach which aims to capture growth at a reasonable price while avoiding volatility and risks. In practice this means focusing on small and medium-sized companies embedded within value chains that offer robust growth and earnings potential but which may be under-researched and hence undervalued (see Figure 2).

A similar logic means the strategy steers clear of the concentration risks of US markets and mega-caps and toward smaller firms whose margins demand more cost and resource efficiency. These are oftentimes small but leading companies in niche segments of value chains such as providers of PCBs, packaging and testing services, specialized engineering, or waste management services. These companies can be found globally, particularly in the Asia-Pacific which benefits from regional clustering effects associated with expertise in semiconductors and electronics industries (see Figure 3).

Such an approach yields a ‘triple advantage’: exposure to structural growth at lower valuations and with lower concentration risks. This is particularly powerful as industries and manufacturing become more sophisticated and AI-driven, politics and trade trickier and resources more constrained.

The positioning also ensures the Circular Economy strategy remains highly adaptable in order to navigate the next wave of disruption wherever it arises. By staying focused on long-term themes of resource efficiency, while remaining flexible in short- and mid-term execution, it can shift with changing conditions and capture value as it migrates across regions, sectors and technologies.

*All companies referenced in this article are for illustrative purposes only in order to demonstrate the investment strategy on the date stated. The companies are not necessarily held by the strategy nor is future inclusion guaranteed. This is not a buy, sell or hold recommendation, nor should any inference be made on the future development of these companies.