We now know what some of the biggest and most well-known hedge funds bought and sold last quarter. We went through a large number of 13F filings, looking beyond the headlines to build a broader picture of how institutional money is positioned: what funds own, which themes they are betting on, and where capital is flowing.

We present the most relevant ones below, but first, we take a look at where the AI trade stands today.

The most obvious theme of the filings was AI. A large number of funds have significant exposure to AI-related companies, many of which are trading at very high valuations and carry equally high expectations. That part did not surprise us.

What did surprise us was how little exposure many of these funds have to commodities. Maybe a copper miner just isn’t as sexy as SpaceX or Micron, but seeing so few meaningful commodity positions across these portfolios was still surprising. And that may be where things get interesting.

Let’s start by looking at where hedge funds are putting their money across sectors.

As expected, technology remains the most heavily invested sector. Consumer discretionary is also gaining traction, a sector we’ve been invested in since the start of the year.

We view this 13F exercise as a great way to gauge investor sentiment across large-cap stocks, which has a ripple effect across the entire stock market.

Table of Contents

1. Hyperscalers & Semis: The AI Trade

   1.1 Inside the KOSPI’s Volatility

   1.2 The Case for Further Upside

   1.3 The Other Side of the AI Trade

2. What Hedge Funds Are Selling

3. What Hedge Funds Are Buying

4. Our Final Thoughts

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1. Hyperscalers & Semis: The AI Trade

The AI trade is the hottest trade in the stock market right now.

But the more interesting question is how far it can actually go.

There are two sides to this trade. On one side, you have the companies spending hundreds of billions of dollars building data centers and buying the chips needed to run them. On the other, you have the companies supplying the hardware, memory, networking equipment, and everything else required to make it happen.

At some point, valuations have to come back down to reality. Unless earnings growth is strong enough to justify them, the numbers simply stop making sense.

How much can the companies building this infrastructure realistically spend? How much can the suppliers earn? And, more importantly, what valuations can investors justify if expectations keep getting higher? If we eventually find that there is a ceiling to how much money can be poured into this buildout, the unwind could get ugly. We are already getting a taste of what that looks like.

1.1 Inside the KOSPI’s Volatility

South Korea, home to some of the world’s biggest memory companies, has become one of the clearest examples. Samsung and SK Hynix have been at the center of the AI boom, but the broader KOSPI stock market has been moving like a casino lately: 7% moves up, 7% moves down, huge selloffs, massive rebounds, and even circuit breakers. At this point, we simply stopped trying to count them.

Need proof the KOSPI is volatile? It’s now more volatile than Bitcoin.

Korea’s Retail Trading Phenomenon

South Koreans have always been active in the stock market, but the AI boom has taken that interest to another level, especially around Samsung and SK Hynix.

This year, local investors have put more than 110 trillion won ($77B) into KOSPI stocks, helping companies raise money and fund their expansion. The downside is that this heavy retail buying has also made the market more volatile.

Foreign investors have largely been on the other side of the trade. Many global funds have had to reduce their positions in Samsung and SK Hynix because the two stocks had become too large a part of their portfolios. Foreign investors have sold $115B of KOSPI stocks this year, including more than $40B of SK Hynix.

South Korean retail investors are known for chasing returns and moving with the crowd. Rising prices can attract even more buyers who fear missing out, while sharp declines can trigger a rush for the exits. Institutional investors tend to be more patient, paying more attention to a company’s underlying value.

Leverage Adds Fuel to the Fire

Leveraged ETFs can magnify both gains and losses, and their popularity has exploded. Goldman Sachs estimated that assets in Korean leveraged ETFs rose from around $5B at the start of the year to more than $40B by late June.

That surge eventually began to unwind. As stocks fell, some investors were forced to sell, putting further pressure on prices and reducing ETF exposure. By July 29, JPM estimated that hedge funds had completed 90% of their deleveraging, suggesting that much of the forced selling was already behind the market.

Lastly, the KOSPI is unusually concentrated.

Samsung Electronics and SK Hynix, the country’s two major memory chipmakers, account for more than half of the KOSPI. That leaves the index heavily exposed to the semiconductor cycle. When memory demand is strong, the KOSPI can benefit significantly. When the cycle turns, the impact works both ways.

That doesn’t mean the AI trade is over. Far from it. But can spending, earnings, and eventually cash flows grow fast enough to justify the expectations already priced into these companies? That is the question we will answer next.

We recently added a high-quality, undervalued company to the Aurelion Index that we believe could benefit significantly from all this volatility.

1.2 The Case for Further Upside

The main question on everyone’s mind is whether hyperscalers and other AI-related companies can continue expanding, scaling, and growing their businesses at the pace the market currently expects. So far, spending has consistently moved in one direction. Capex estimates have been raised every quarter since Q4 2023, reflecting just how quickly expectations around AI infrastructure have grown.

Hyperscaler Capex Estimates Were Raised Every Quarter

And even when we look at consensus estimates, they have consistently fallen short. Hyperscaler capex has come in more than 56% above what the market was forecasting a year ago, showing just how quickly expectations have been moving higher. More importantly, this trend does not appear to be slowing, with spending estimates continuing to be revised upward.

Hyperscaler Capex Has Come in 56% Above Consensus

We recently added a high-conviction copper company to the Aurelion Index that we believe will be one of the biggest beneficiaries of the surge in AI infrastructure spending.

1.3 The Other Side of the AI Trade

There are always two sides to the story. And yes, we see a real risk that hyperscalers and semiconductor companies could eventually struggle to keep up with the market’s expectations. That does not mean growth is coming to an end.

We believe one of the bigger issues is that EPS growth could slow while expectations continue to rise. When the bar keeps moving higher, companies can deliver great results and still disappoint investors simply because they were not “good enough” relative to what was already priced in.

This is where we think volatility could really pick up over the next few quarters.

Take Micron (MU) as an example.

In a more normal market, missing consensus might have meant a 5–10% decline. Today, with expectations and positioning so high, the same miss could easily result in a 15–20% drop. The fundamentals may not have changed dramatically, but the market’s reaction can be very different when the bar is this high.

Semiconductor EPS growth is expected to peak at around 51% in Q2 2027. That is still a long way out, especially in a market where things can change very quickly, so we would not put too much weight on a forecast that far ahead.

Semis’ Contribution to S&P EPS Growth to Peak at 51% in 2Q27

Still, it is worth keeping in mind because the market is already pricing in very strong earnings growth. If that growth starts to slow, even while earnings continue to rise, the reaction could be very different, and things could get ugly.

We think this is one reason hyperscalers could eventually start to moderate their spending plans, especially after the recent underperformance across the sector.

If the market suddenly starts questioning (if it is not already) whether all this additional capex can generate enough incremental earnings and cash flow, companies may become more cautious about the pace of future spending.

Semis Returns Are Already Pricing in Slower EPS Growth

At the same time, Return on Incremental Invested Capital (ROIIC) has fallen back to its 10-year average of around 21–22%.

Hyperscaler ROIIC: Back to the 10-Year Average

That is important because it suggests the return on each additional dollar invested is no longer improving. If that continues, it becomes harder to justify increasing capex at the same pace. They can keep spending more, but at some point, the returns need to make sense. The only question is when.

Earlier in May, we wrote a special article on SpaceX and the other big upcoming IPOs.

2. What Hedge Funds Are Selling

The first interesting finding was Gina Rinehart’s massive bet on SpaceX. Australia’s richest person invested around $1.4B in the company, making it far too significant to ignore. She does not run a hedge fund, so it technically falls outside our 13F analysis, but a bet of that size from one of Australia’s most prominent people was worth mentioning.

Oracle (ORCL)

Interestingly, while most investors have been getting out of Oracle, the Swedish Rausing family, which manages its wealth through an investment fund, has been adding massively to the position. That said, David Tepper exited it entirely.

Google, Amazon, and Nvidia

We saw the famous investors Soros and Druckenmiller trimming some of the Magnificent Seven names, including Google, Amazon, and Nvidia.

For those looking for a way to benefit from rising memory prices and the broader semiconductor buildout without taking on the same risks as the companies actually making the chips, this is our favorite way to play the trend.

3. What Hedge Funds Are Buying

Intel (INTC)

Intel is particularly being bought by some of the “big guys”, including Coatue, AQR, and Tiger Global. That is interesting to us, especially since the shares are now trading near their lowest levels in recent months.

Nebius (NBIS)

Nebius is no surprise here. Almost everyone seems to be buying it as the stock has quickly become one of the hottest momentum names in the market.

Nvidia (NVDA)

Is interesting as well. Sentiment seems pretty divided, with some big funds making significant buys while others are taking large positions off the table.

SanDisk (SNDK)

Is seeing a major selloff, which isn’t too surprising given everything that happened with Situational Awareness and its massive position in the stock.

Palantir (PLTR)

Almost a 50/50 split between buys and sells for PLTR, with some big funds getting in while others are trimming. It just shows how divided sentiment is around the stock right now.

Amazon (AMZN)

Way more buys than sells, which lines up with the bullish comments we’ve been hearing about the stock and the view that it looks undervalued at current levels.

Tesla (TSLA)

Tesla is a company that is hard to figure out right now. It almost has a cult-like following among many investors, but institutions seem to be taking a more cautious approach for now, with several big funds trimming their positions.

Microsoft (MSFT)

Many funds are getting in, similar to Amazon. The stock is being bought because it looks relatively cheap compared with the memory momentum names, especially when you look at the earnings and cash flow these companies could generate.

Alphabet (GOOGL)

Not much to say about Google. It’s a great company, but there isn’t much action around it right now, with most of the attention focused on Microsoft and Amazon.

Meta (META)

Interesting to see Bill Ackman getting into this one.

He doesn’t make many new bets, so it could be an interesting one to watch.

Arista (ANET)

Arista is a Silicon Valley company we have yet to meet with management, but it’s definitely one we want to take a closer look at. It’s a high quality business.

Micron (MU)

This one is getting punished by funds that may think it ran too far, too fast. On our end, we think it’s a business with plenty of potential over the long term.

SpaceX (SPCX)

We kept SpaceX for last because it is seeing some of the biggest inflows right now, with several major investors building massive positions over the past quarter.

Per Hedge Fund

Here, we show what almost all of the major hedge funds bought this quarter.

Viking Global bought BCE, a Canadian telecom company we know very well that has been pretty much left for dead. BCE has been under pressure for a while, so seeing Viking step in is an interesting bet on a potential turnaround.

Soros Fund has some interesting names, to say the least. The portfolio is filled with lesser-known companies rather than the usual mega-cap names, which makes it look like they are searching for more alpha and less crowded ideas.

Druckenmiller’s fund (Duquesne) has some interesting names. PURR stands out given how volatile and momentum-driven the stock is, while RKT and RIOT also fit that higher-risk profile. On the other hand, DAL and FOX were more surprising to us and are names we think could be worth looking at more closely.

For Sequoia and Coatue, two of the biggest names in tech investing, it’s interesting to see that both are betting on SpaceX. Sequoia, however, seems to be going after a less obvious group of names compared with Coatue. Snowflake is one we’re less convinced by and looks close to a dead company in our view, while CBRS is a name we find much more interesting.

Millennium has SpaceX as well, making it one of the most recurring new buys we’ve seen across the filings. More importantly, we are finally seeing some money move into commodities, with positions in GOR, NCM, and ADT.

Balyasny has a bit of everything, as usual. We’re not sure there is that much alpha in the portfolio, but PINS could be an interesting one. STUB is worth watching, especially if the IPO story starts to come back.

D.E. Shaw also has STUB, along with some interesting bets on China and Brazil. BTDR is another notable position, which Druckenmiller Fund also bought.

Point72 (Steve Cohen) has a more low profile mix of ideas, but there are still some interesting names in there. ITUB is the one that caught our attention the most, especially given our view that the Peruvian economy still has plenty of room to run and that the new president could be positive for growth.

Citadel (Ken Griffin), probably the most famous hedge fund out there, also has some interesting names. ITUB shows up here again, while MAIR is one we are currently looking at and think could be quite promising.

Finally, Atreides, Gavin Baker’s hedge fund, is once again heavily focused on AI, with the portfolio almost entirely tilted toward tech. No surprise there, given Baker’s track record in the space. They are also adding heavily to SpaceX and CBRS, two of the biggest recurring AI-related names we’ve seen across these 13Fs.

A month ago, we had a really interesting conversation with Cerebras’ Head of Investor Relations, where we learned more than we usually do from these calls. Given how many hedge funds added CBRS in their latest 13Fs, we think it’s definitely worth a read.

4. Our Final Thoughts

Overall, we feel like the stock market is giving us more hints about what could come next. The latest 13Fs do not show that interest in memory, semiconductors, or SpaceX is fading. If anything, capital is still flowing heavily into these areas, although the positioning is becoming more divided across certain names.

At the same time, some companies are starting to look more interesting from a valuation perspective. When we compare where they trade today with the earnings and free cash flow they could generate over the next few years, the numbers are starting to make more sense. That makes the current positioning even more interesting, and we think the rest of the quarter could be quite telling.

View how the portfolio is positioned here: Aurelion Index link.

Below is our most recent report on a stock we just added.

The Aurelion Team

Questions? Reach us directly on Substack or at contact@aurelionresearch.com.

Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

However, with a chart like this, we decided to speak with the Investor Relations team at BSX. We like the entry point at these levels despite the special situation.

You’ll also see that this type of position is very similar to our prior ones in the healthcare field, like Medpace (MEDP), Stevanato (STVN), and Bruker (BRKR). Simply put, buying “high-quality” healthcare companies that are facing short-term issues can provide a very attractive risk/reward investment.

We are adding Boston Scientific (NYSE: BSX) to our portfolio, the “Aurelion Index”.

The story in short:

Boston Scientific was a Wall Street darling, with industry-leading growth and a track record of successfully developing new healthcare solutions. Since 2021, the company had been growing even faster, at around 15% organically, driven by its 2 new growth engines (Farapulse and Watchman).

However, in early 2026, both of those growth drivers started performing poorly. Farapulse is facing increased competition while Watchman has recently seen weaker demand from doctors.

With those 2 growth engines losing momentum, BSX is growing more slowly this year. Both products also had some of the highest margins in the business. Investors are clearly uncertain about the path forward and have sold the stock significantly.

3 things stand out from our call with investor relations:

1) After listening to the drivers behind their 2027 guidance, we believe it assumes close to a worst-case scenario, with plenty of potential positives that could lead to an upside surprise. New products in the pipeline are exciting and the rest of the business is generally on track.

2) BSX is making significant share buybacks, the first time since 2020.

3) Restructuring is recurring, rather than something being done simply to cut costs because they lack confidence in the two underperforming segments.

Methodology: Aurelion does not receive compensation from companies covered. We believe all information discussed is public, and answers from management are summarized and interpreted by us. They do not reflect the speakers’ exact words.

Table of Contents

1. Why Now?

2. Company Overview

3. Industry Landscape

4. In Conversation with Boston Scientific

5. Financials

6. Valuation

7. Risks

8. Conclusion

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1. Why Now?

1) Recent Insider Buying

The CEO, Michael Mahoney, bought $9M worth of shares on August 5th, 2026. This was his largest direct purchase in several years and increased his total ownership position by 15%.

Two other directors bought shares as well at the start of August.

For a healthcare company developing products that often require extensive trials and testing, this insider buying is a very positive sign for investors looking at the story. Management knows much more than the street.

2) Large Buybacks

The company made its first meaningful buyback since the pandemic, with $2B worth of shares, backing up its argument that the share price is undervalued.

3) Special situation with two product ranges that have significantly lowered the valuation.

There were three main events that caused the major slips. They are presented below in the price chart:

Farapulse treats irregular heartbeats.

A doctor threads a thin tube up to the heart and uses electricity to destroy the small area of tissue causing the problem. It is safer and about three times faster than the older method, which used heat to burn the tissue.

It went from nothing to roughly 80% of US procedures in just two years, meaning most of the market it was converting is now converted. Abbott, J&J, and Medtronic have also launched competing products. US growth has fallen to ~3% as BSX loses share. Management assumes sales stay flat through 2027 and gives no credit for winning share back before its next product generation launches.

Watchman helps prevent strokes. It is a small plug, about the size of a quarter, placed inside the heart to seal off the pocket where most dangerous blood clots form. It allows patients to stop taking blood thinners for life.

A wave of clinical studies came out in the last 9 months, some supportive and others less supportive. According to management and expert calls we have read, doctors responded by putting the decision off rather than working through the data because there was a lot and it was confusing.

Nothing changed about the device or the patients who need it. Management says physicians simply have not had time to absorb the data, assumes no improvement in 2027, and expects a new competitor to enter.

While we acknowledge the stock deserves a lower valuation given the lower growth coming from those two product ranges, which represent 25% of revenue, we think the stock has been unjustifiably punished. What we like is that there are several ways for investor sentiment to turn.

• Launches in 2027–2028: There are several new products coming onboard with billion-dollar market opportunities. These could fill the shoes of the two problem children.

• Farapulse: farawave ultra launches around mid-2027, with new heart imaging and faraflex coming in 2028. These could help growth recover in 2H27 and return to market growth in 2028.

• Watchman: Management is not counting on a recovery, but is increasing doctor education and direct-to-patient marketing. A possible label expansion and Medicare decision in 2028 could open a market where 30–40% of eligible patients are untreated.

We present a framework below of management’s expectations for Farapulse and Watchman as well as our own estimates. The key takeaway is that the impact is mostly that the company has lost these growth drivers quicker than expected, not that overall company growth is expected to turn negative.

Finally, we think that at 12x earnings versus its average of 20x earnings, we are paying very little for a high-quality business. Revenue generally grows 7–8% in the long term, plus acquisitions that they have proven to be successful with. There is also a margin expansion story, giving investors a great company to own even without those two performing well.

2. Company Overview

Boston Scientific at a Glance

Boston Scientific is a global medtech company that specializes in medical devices. It makes products that help doctors diagnose and treat serious health conditions, mainly in areas like heart disease, cancer, digestive, neurological, and urological care. BSX has a large and diverse product portfolio, which gives it exposure to several areas of healthcare.

Business Overview

Boston Scientific has two main businesses: Cardiovascular and MedSurg.

The company focuses on growing its existing businesses while also moving into new areas with growth potential. A big part of that comes from developing new products and gaining market share in procedures where demand is growing.

1. Cardiovascular Segment (67%)

The Cardiovascular segment is the larger and more diverse part of Boston Scientific’s business. It covers coronary and peripheral artery disease, blood clot removal, heart rhythm management, and electrophysiology.

One product is the AGENT, a drug-coated balloon used to treat patients whose arteries become blocked again after receiving a stent. Instead of putting in another stent, AGENT delivers the drug directly to the affected area without leaving any additional metal behind. It has been available globally since 2014 and is now the first and only coronary drug-coated balloon approved in the U.S.

BSX has products across the entire procedure, from imaging and vessel preparation to stents, thrombectomy, and other treatments.

It also has WATCHMAN, which is used to reduce stroke risk in certain patients with atrial fibrillation. BSX also has a growing presence in electrophysiology, where it has an interesting opportunity with its “FARAPULSE” platform.

FARAPULSE is one product we find particularly interesting. It’s Boston Scientific’s pulsed field ablation (PFA) system used to treat atrial fibrillation.

PFA is becoming a bigger part of AF treatment, with clinical data showing FARAPULSE can be as effective as traditional treatments while offering shorter procedure times.

As Boston Scientific’s Chief Medical Officer, Brad Sutton, put it: “We haven’t seen esophageal injury or pulmonary vein stenosis in nearly 40,000 cases.”

What also makes FARAPULSE interesting is that it covers several parts of the procedure, including access, mapping, and the actual ablation, which is the process of treating the heart tissue causing the irregular heartbeat. This gives BSX more exposure and more opportunities to sell its products.

A Look at FARAPULSE Products

As PFA continues to gain adoption, we think FARAPULSE will become an important part of Boston Scientific’s growth, especially as the company continues to expand its presence in the broader electrophysiology market.

2. MedSurg Segment (33%)

The MedSurg segment is mainly focused on Endoscopy, with products used to diagnose and treat gastrointestinal and pancreatic conditions.

The portfolio includes clips used to stop bleeding, stents used to open blocked areas, single-use scopes, and tools used in procedures such as ERCP. Boston Scientific also sells products for endoscopic surgery and weight loss, including the OverStitch suturing system and Orbera intragastric balloon.

ERCP Product in Action

One product we find interesting is OverStitch NXT, an endoscopic suturing system used to close tissue during certain procedures. It works with many commonly used gastroscopes, so hospitals may not need to buy new equipment to use it. It also gives doctors more control during the procedure and makes it easier to reach areas that can be difficult to access with standard scopes.

Overall, we see the MedSurg segment as another source of growth for Boston Scientific outside of cardiovascular, with a broad range of products used across different types of procedures.

China is a genuine growth market, with revenue above $1B and APAC growing 12% in Q1 2026. The main offset is VBP, which has cut device prices 50–93% and impacted parts of Vascular Therapies and Urology. Management is leaning into VBP by investing in local innovators and expanding its Chinese commercial team while competitors pull back.

3. Industry Landscape

Key named competitors:

Abbott Laboratories, Edwards Lifesciences, Medtronic plc, Stryker Corp.

Within offerings like endoscopy and urology (together 28% of 2025 sales) under the MedSurg segment, BSX is a dominant global player with stable and compounding revenues. In the Cardiovascular segment, BSX leads the market in LAAO with Watchman (though competitors are looking to enter) and they are #2 share in pulsed field ablation with Farapulse. Both of these markets (LAAO and pulsed field ablation) are becoming increasingly competitive, but BSX remains relevant or market-leading.

Outside of BSX’s dominant products where they are incumbents today, there are opportunities to expand the company’s product lineup, though not without competitive pressure.

One example: in intravascular lithotripsy (IVL), BSX launched SEISMIQ for peripheral use in January 2026 and is testing/awaiting approval for coronary use.

The key competitor in this space is Shockwave Medical (acquired by JNJ in June 2024). Shockwave’s C2 product entered the U.S. market in 2021 and has since become the 800 pound gorilla in the space, with over 600 peer reviewed publications covering 25,000+ patients. As a new entrant, that efficacy will be difficult to replace.

BSX’s offering in the space is slated to use laser and optical fibers instead of spark-gap electrodes to generate acoustic pressure waves which early data suggests produces a more uniform energy profile. In addition to Shockwave under JNJ, Abbott and Phillips Healthcare are seeking to enter the IVL market as well, with each player moving toward regulatory verification.

In coronary IVL specifically (related directly to or around the heart itself), BSX can take advantage of their broader coronary ecosystem in imaging, stents, and drug-coated balloons.

BSX essentially already offers steps 1, 3, and 4 of this procedure, whereas their coronary IVL offering would address step 2 in the chain and create a more unified ecosystem of products. Coronary IVL specifically has a $1Bn estimated TAM which would move the needle for BSX’s sales if they can penetrate the market.

There are many other segments and markets that can be entered organically or through investment and M&A. BSX has historically been an acquirer of companies with strong and complementary assets.

Examples include their Penumbra acquisition in January 2026 for $14.5B, granting assets in neurovascular and mechanical thrombectomy.

An interesting aspect of BSX’s capital allocation is their venture-capital playbook.

The Farapulse product that drove such strong growth in 2024 and 2025, BSX first invested in 2014, and in 2021 exercised an option to acquire the remaining stake in the company, bringing it fully in-house.

The acquisition-in-pieces structure allowed BSX to pay roughly $575M for 100% control over time for this asset that has now come to drive strong growth. BSX has run this playbook in other areas, with the initial VC investment approach to reduce risk, and a full acquisition once the application is proven.

Penetration vs Market Share

In medtech, penetration matters more than market share for determining growth. For example, Farapulse has reached ~80–85% of US procedures in two years, so Farapulse’s category-driven growth is largely over and further growth must come from taking share. LAAO is the opposite. BSX has >90% of the implanted device market, but penetration is still only in the mid-teens among ~5M eligible patients. The main issue is getting more patients referred.

Reimbursement is important too, since the procedure only grows when both doctors and hospitals have a good reason to do it.

To summarize, the industry is highly competitive but favors large, established players like BSX. The key is to look at each product category separately, as growth rates, market shares and competitors vary significantly. For BSX, management targets 7–8% long-term organic growth across its diversified portfolio.

4. In Conversation with Boston Scientific

We spoke with Boston Scientific’s Investor Relations team mid-August 2026. Below is our summary of what we took away in our interpretation.

1) The 2027 framework assumes a largely unchanged environment.

In the last call, management gave a framework (not “guidance”) of 2 - 4% organic growth for 2027, with formal guidance coming on the Q4 call in February.

The build behind it is simple: the other 75% of the business grows around 6%, the Watchman market declines mid-to-high single digits, and global EP sales are flat.

That’s it. There is no assumption that the medical education effort works, no assumption that referral patterns normalize, and no assumption that urology recovers from 1%.

We came away thinking the number is closer to a floor than a midpoint. It looks like they have more visibility into the problem. And it is reassuring with BSX’s history of surpassing expectations (they’ve cut guidance only 2x in 15 years).

2) The rest of the business grows at 6-7%

75% of the business has been growing at 6-7% for a number of quarters.

What we found more interesting is that the 6% of last quarter carries the urology segment growing at 1% and CRM at negative growth. There are measures in place to fix them. If either works, growth will be higher.

3) Urology looks fixable, although it has taken longer than expected.

The 2024 Axonics acquisition brought a “sacral neuromodulation” business that requires lots of human capital. Leadership and team turnover after the acquisition took reps out of the field. That hurt the selling effort and the patient funnel.

Refilling the funnel has taken longer than expected. Management expects growth to come back to the market growth rate which is 6 - 7% . This is definitely one of the most fixable of the 3 problems.

4) Watchman’s problem appears to be communication.

Nothing has changed in how the device is made or used, and it has been on the market for over a decade. What changed is that a large amount of clinical data came out at once, with some of it favorable and some less so.

According to management, physicians haven’t had time to fully absorb what it means in practice. For a busy doctor, the easiest decision is simply not to pursue it.

5) Spending on Watchman has not been cut.

The two largest cost lines are the sales force and direct-to-patient marketing and neither is being cut. Management was explicit that it does not want a short-term decision today to damage long-term growth.

We read continued investment into a shrinking franchise a proof of conviction.

6) The new products could increase growth in 2027 and 2028.

Management discloses the new products coming out in its investor relations deck. While we did not get more information, it’s safe to say these could be potential drivers. We look forward to commentary in upcoming earnings calls.

7) The restructuring is a scheduled program.

Boston Scientific runs one roughly every three years: 2019, 2023, and now. We see most of the benefit to land in 2028. The savings come from manufacturing efficiencies, supply chain optimization, and organizational structure. This would have happened regardless of how Watchman and EP performed.

8) Free cash flow guidance impacted by Watchman & Farapulse

The 2026 figure is now closer to $3.8B versus roughly $4B coming into the year, with the shortfall attributable to lower cash coming from Farapulse and Watchman. BSX targets 70–80% conversion from EBITDA. This appears to be a high target compared to historicals for us.

9) The broader demand environment is stable.

Management sees healthy procedure volumes and no evidence supporting the softer readings some analysts have published. The recurring variable is reimbursement, which splits into a physician fee and a facility fee. This year, the physician fee was relatively stable while the hospital fee was cut somewhat.

5. Financials

Because BSX makes meaningful acquisitions, we remove the acquired growth to look at the underlying business. The historical performance is consistent with management’s 7–8% CAGR target, with periods of higher growth when new solutions are coming out and lower growth when there are issues.

On the company’s margins, the trend has been clearly positive, driven by a mix of cost cuts and a better business mix.

2013–2016: BSX came out of the financial crisis with a bloated structure, a declining defibrillator business, and heavy litigation. Restructuring helped close plants, consolidate manufacturing, and reduce headcount, taking margins from 15.8% to 24.1%.

2016–2019: Management shifted toward higher-growth categories like endoscopy, urology, and interventional cardiology while moving away from slower-growth businesses. Margins reached 26.1% by 2019.

2020: COVID. Elective procedures stopped and margins fell. They recovered within two years.

2021–2025: mix and operating leverage. High-growth markets increased from 25% to 55% of revenue, while low-growth exposure declined from 30% to 20%. Farapulse and Watchman, both above corporate margin businesses, also grew rapidly.

The result is 1,220bps of margin expansion in twelve years, with roughly 80bps of annual expansion in 2023–25. For balance, 2026 is guided flat at 28.0%, as the mix tailwind that drove much of the recent expansion reversed.

BSX has made numerous acquisitions in the past, most of which have been financed with cash and debt. The company has been very successful at making these acquisitions. Share issuance has been low, which is something we like to see.

In total, combining organic growth, margin expansion, and a virtually flat share count, BSX has been able to grow at a CAGR of 12.2% over the last 14 years.

6. Valuation

Revenue Growth

We assume growth to be all organic but include announced acquisitions in our revenue numbers. We are slightly over the Street in the 2027 period because we think it will be easy to beat the 2 - 4% discussed by management. For the following periods, we assume the long-term range for BSX’s growth (7 - 8%).

Margins

Because new products coming in the 2027–2028 period should boast higher margins than the rest of the business, we give a bit of margin expansion to BSX.

Moreover, the restructuring they are doing should help lower costs for the 2027–2028 period, though we expect margins to be slightly impacted in 2027 with Farapulse and Watchman.

Because BSX has proven over time to be able to grow their margins in the last decade, we think this is the base case. Our EBITDA margin increases from 30.2% to 31.5% in 5 years.

Cash Flow Generation

Management told us 70 - 80% conversion from EBITDA as a target, though we view this as high compared to what they have historically done. Our model therefore implies more in the 62% conversion range.

Capital Allocation

We assume a +0.7% growth in diluted shares outstanding coming from normal stock compensation and the rest of cash to go towards buybacks.

Because BSX is now buying back a significant amount of shares and has proven that their acquisitions enhance the value of their share price over time, we think putting all the cash to work in buybacks is a fair projection for our long-term price targets.

Technical note: A few sell-side analysts double-count amortization in their adj. EBITDA calculation because amortization is already excluded from adj. operating income, so the result overstates true EBITDA.

We use adjusted operating income + depreciation only.

We do not argue for a comeback to the all-time high multiple, nor the average, but rather to the bottom of its historical average. 10 - 12x EBITDA is a multiple for a scenario where Farapulse and Watchman become significant detractors to growth, which has not been proven yet.

Our valuation is as follows, driven by an 8% earnings CAGR, meaningful buybacks, and a slightly higher multiple than the current one.

• Our price target for year-end 2026 is $67.

We do not think BSX is worth its previous $100 PT or that it will get there quickly, given the uncertainty and slower growth around Farapulse & Watchman.

However, even under what we consider a base case, where both Farapulse & Watchman perform poorly, our valuation still points to compelling upside.

7. Risks

1) Farapulse could lose more share than we expect. Management assumes global EP sales stay flat through 2027, which we view as conservative. However, one Abbott territory manager expects Farapulse’s US share to fall from ~70% today to 35–40% by 2027 as Affera and Volt gain traction. We would not take that estimate at face value, but if share loss is even directionally close, EP revenue could decline rather than stay flat. The main issue is that BSX’s mapping remains weaker until its new imaging product launches in 2027.

2) Watchman’s issue may be more than communication. Management believes doctors need more time to digest the recent clinical data. There may also be an economic issue, as hospitals and doctors can have different incentives around the procedure. With a new competitor coming in 2027 and no major label or coverage change expected until 2028, Watchman could remain a headwind for longer than expected.

3) Penumbra could weigh on the numbers. The $14.5B acquisition closes in 2H26 and is excluded from current guidance. Penumbra has lower margins than BSX, while integration costs and amortization will also create pressure. It also reduces the balance sheet flexibility that has supported BSX’s M&A strategy.

Overall, we think the risks are real, but importantly, we do not need Farapulse or Watchman to fully recover for the investment to work.

That is what makes the current valuation interesting to us.

8. Conclusion

Boston Scientific is going through a temporary slowdown.

Farapulse and Watchman have clearly become headwinds, and we do not expect either business to quickly return to its previous growth rate. But the rest of the company continues to grow, new products are coming, margins have a long track record of expansion, and management is still allocating capital aggressively through buybacks and M&A.

At 12x earnings versus a historical average of ~20x, we believe the market is pricing in a much worse outcome than our base case. Even assuming Farapulse and Watchman remain significant headwinds, we see attractive upside from the underlying business, new product launches, margin expansion, and buybacks.

The key for us is that we do not need everything to go right. We are buying a high-quality compounder while two of its growth engines are temporarily struggling. If either one stabilizes faster than expected, or the new product pipeline delivers, the upside could be meaningful. We believe this creates an attractive risk/reward and are adding Boston Scientific to the portfolio.

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View how the portfolio is positioned here: Aurelion Index link.

Below is our most recent report covering our previous stock addition.

The Aurelion Team

Questions? Reach us directly on Substack or at contact@aurelionresearch.com.

Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

However, we believe it is also a strong long-term compounder with solid fundamentals, and our goal is to hold the company for 5+ years.

The company is already generating revenue with surgical robots, but it is still a small percentage, and we believe the stock can do very well without surgical robotics. Given the low valuation (11x earnings, below peers and below historical valuation), we think this is an optionality, making the situation “asymmetric.”

Outside of surgical robots, the medical technology company is an established leader in spinal implants with best-in-class margins.

Further, healthcare sentiment has been shifting. Since the pandemic, performance of healthcare equities has been poor, with almost no gain since 2019.

However, in recent months we have seen a growing interest in healthcare, given that growth is proving to be strong and investors are looking to move away from AI uncertainty.

Whether AI booms or busts, you still need surgical tools.

Earnings are inflecting, margins are expanding, and the stock still trades cheap. We also provide expert calls with executives from the company.

Table of Contents

1. Why Now?

2. Company Overview

3. Industry Landscape

4. Expert Calls

5. Financials

6. The Acquisition Strategy

7. Surgical Robots Theme

8. Valuation

9. Risks

10. Conclusion

Read more

The new stock we are adding today to the Aurelion Index is a mining company that focuses mainly on copper, but also produces gold, silver and zinc.

And importantly, we go through our thinking on why we like copper-related equities now.

What we like about this one is that it offers a mix of existing copper production, mine-life extensions, and a growing pipeline of new projects. So this isn’t a mining story where you produce for a couple of years, make some money, and then need to get out. There is a long-term growth story here.

The company is Canadian, like many mining companies, but trades on both the NYSE in the U.S. and the TSX in Canada. It also owns and operates mining assets in friendly jurisdictions.

With a market cap of over $10B and strong trading volume, it is more accessible to institutional investors and has greater potential to attract momentum as the story gains attention.

Table of Contents

1. Why Now?

   1.1 An Attractive Entry Point

   1.2 The Copper Bull Case

2. Company Overview

3. Why the Valuation Is Attractive

4. The Path to Sustainable Growth

5. How We Value the Company

6. What Could Go Wrong

7. Our Final Thoughts

Read more

It is shaped by a unique combination of culture, policy, and its position as one of the world’s largest and fastest-growing economies, expanding at a mid-teens pace each year. Compared with China, India offers a more investor-friendly environment, making it an attractive destination for global capital.

However, as always, timing remains one of the most important factors in our investment process. Through this piece, we argue that the timing is right and have built an equity basket of high-quality Indian companies set to benefit from the country’s improving fundamentals.

You will also find discussions with locals, including an investment analyst from WestBridge Capital, a firm managing $7B across private and public markets in India, and an India-based investment banker.

Today, India is entering a new phase of growth. For decades, growth was driven mainly by IT services and domestic consumption. Now, a major investment cycle is taking shape. Manufacturing, data centers, power infrastructure, and industrial capacity are set to expand significantly.

We built a framework that we explore in greater depth later in this piece.

As shown below, our estimates point to a potential 106% total return for the Indian market by 2030. This potential return would be driven by three main factors: earnings growth, valuation multiple expansion, and rupee currency.

Few large economies combine India’s demographics and long-term growth potential.

AI adds another dimension. India could be one of the major beneficiaries through data centers, technology investment, and productivity gains. However, AI also brings challenges, especially for parts of the traditional white-collar workforce that have powered India’s economy for decades.

This makes selectivity more important than ever. India’s next phase will not benefit every company or sector equally. The biggest opportunities will come from identifying the businesses best positioned to benefit from this transformation and finding them before the market does.

Table of Contents

1. Why India and Why Now?

2. How We Estimate India’s Future Returns

   2.1 India Earnings Growth History

   2.2 Our Earnings Forecast

   2.3 Currency Impact on Returns

   2.4 Current Market Valuations

   2.5 India Total Return Potential

3. The Long-Term Growth Drivers

   3.1 A More Favorable Macro Environment

   3.2 Capital Flows Return to India

   3.3 Multiple Sectors Are Booming

4. Retail Investors Keep Faith in India Equities

5. The Presence of Hedge Funds in India

6. The Rise of Remote Talent in the AI Era

7. The AI Debate in India

8. The Growing Influence of Indian CEOs

9. In Conversation: Key Insights

10. Indian Equity Basket

11. What Could Go Wrong?

12. Final Thoughts on India

1. Why India and Why Now?

The Indian stock market and economy were on a growth path before the conflict in the Middle East began in early March. Conditions were not yet as strong as they had been between 2022 and 2024, but momentum was clearly improving.

A Look at the Indian Stock Market (NIFTY 50) Since 2021

That changed abruptly when the conflict between the US and Iran pushed energy prices significantly higher. As a major importer of crude oil, India saw its energy import bill rise considerably, putting pressure on inflation and weighing on consumers and businesses. At the same time, the higher import bill contributed to a meaningful depreciation of the rupee. The weaker currency and tighter financial conditions slowed economic momentum and hurt investor sentiment, interrupting what had been a steady improvement in the economy.

Indian Stock Market: Before and After the Middle East Conflict

USD/INR: The Rupee Performance Over the Past Two Years

That was the challenging part, but the positive side is that Indian markets have historically recovered well after periods of stress, especially when supported by new government reforms and policy measures. As a result, we believe the current environment presents an attractive entry point for long-term investors in India.

At the same time, we understand that concerns around domestic growth, commodity volatility, and broader geopolitical uncertainty have pushed investors into a wait-and-see approach following the market decline earlier this year.

However, short-term macro challenges do not change the long-term factors supporting India’s growth. Continued infrastructure investment, rising domestic consumption, manufacturing expansion, and policy reforms should remain key drivers of economic growth in the years ahead.

The key drivers of Indian financial conditions give us a good understanding of where things currently stand and help us assess whether the environment is becoming more favorable than what the market currently expects.

Key Drivers of India’s Financial Conditions

As shown above, almost every indicator of Indian financial conditions is pointing in the same direction: the cycle is gradually easing as we move through the summer. Conditions reached their tightest point when the Strait of Hormuz closed, but since then, the pressure has eased significantly and the overall environment has become much more stable.

To better understand this shift, we also look across different asset classes to see where capital is flowing and which areas are starting to gain momentum.

India Market Performance Across Asset Classes (YTD % Change)

Currently, equities are moving back toward the top of the performance ranking and are closing the gap with government bonds. This relative shift is important because government bonds typically outperform during periods of uncertainty, tighter financial conditions, or weaker growth expectations.

The fact that equities are starting to regain leadership suggests that investors are becoming more confident about a potential improvement in the economic cycle.

For us, this is another signal that India may be approaching an inflection point, where improving financial conditions and stronger growth expectations could begin to translate into better equity market performance.

Indian Equity Market Reaction to the Middle East Conflict

The recent reaction in Indian markets follows a pattern we have seen during previous geopolitical shocks. Higher energy prices, a weaker rupee, and foreign capital outflows have all contributed to the correction in Indian equities.

The March quarter was one of the most difficult periods for Indian markets in recent years, with the scale of the decline comparable to some of the major market disruptions of the past, like the 2008 Financial Crisis.

Why We Think the Current Setup Is Attractive

The key point is that some of the current pressures are temporary.

Energy prices historically normalize over time, and we believe the Strait of Hormuz situation will eventually be resolved. Once energy costs decline, one of India’s biggest external pressures should begin to fade.

India is a strong long-term growth story, supported by domestic consumption, infrastructure investment, and ongoing reforms. As macro conditions improve, investor confidence and capital flows should return to Indian equities.

2. How We Estimate India’s Future Returns

Our Methodology

Investment returns in India are driven by three key factors:

1. Earnings growth of companies in India (we use EPS).

2. Change in the value of the Indian rupee.

3. Change in valuation multiple on earnings (we use P/E).

This gives us an estimated total return CAGR.

Quarterly and annual returns will inevitably be volatile, but this long-term CAGR highlights how attractive the investment opportunity could be over time.

Historical Returns of the Indian Index

Correlation with S&P 500

India has moved with the S&P 500 for a few reasons:

The same global investors own both markets.

When US stocks fall, these funds reduce risk across their portfolios, so they often sell India as well. A large part of India’s index is made up of IT companies like TCS and Infosys. Their customers are mainly US companies, so when American firms reduce spending, Indian earnings are impacted.

Emerging markets as a group are different. That index is largely driven by China, Taiwan, and Korea, where semiconductors and Chinese policy play a much bigger role. That is why the grey line behaves differently.

One thing to remember: India tends to move in the same direction as the S&P 500, but the magnitude of the moves can be very different. It can also break away for extended periods, as we have seen over the last year and a half.

We did something very similar in our Latin America Primer, where we estimated how far each country's economy could develop over the long term and what that could mean for its respective stock market. You can find the analysis below.

2.1 India Earnings Growth History

We can divide the last 25 years into three distinct periods.

2001 to 2007: 20% Per Year

India benefited from a strong global growth cycle, with rapid credit expansion, companies investing heavily in new capacity, and strong commodity demand supporting the broader economy. During those seven years, Nifty earnings per share increased from ₹65 to ₹231. By January 2008, the Nifty was trading at more than 28x earnings, marking the peak of that cycle.

2008 to 2020: 4% Per Year

The capex boom of the previous decade left the banking system exposed to loans based on assumptions that did not materialize. As these loans turned bad, lending capacity weakened and private investment remained subdued for years.

Corporate profits fell from 7.8% of GDP at the FY08 peak to 1.8% in FY20, the lowest level since at least 1999-2000. Over those thirteen years, index earnings declined four times, with EPS rising only from ₹231 to ₹375.

Note the slight difference in historical returns compared with the chart above, as this one uses the MSCI India Index, which more accurately represents the Indian economy than the Nifty 50.

2021 to 2025: 25% Per Year

Three things changed at roughly the same time.

(1) Banks finished cleaning up their bad loan books, provisioning costs fell sharply, and lenders returned to record profitability. Financials represent 37% of the Nifty, so when the largest sector shifts from absorbing losses to compounding earnings, the entire index can be re-rated. That said, this process will likely take time and will not be a straight-line move higher.

(2) The 2019 corporate tax cut reduced the headline rate from 30% to 22%, creating a permanent boost to after-tax earnings for the same underlying businesses. A decade of deleveraging also meant interest costs had declined significantly, allowing more operating profit to flow through to the bottom line.

(3) Corporate profits grew at a 34.5% CAGR between 2020 and 2024, compared with nominal GDP growth of 10.1%. This shows that earnings are gradually recovering from a lost decade and the impact of the COVID period, but there is clearly still more work to be done.

2.2 Our Earnings Forecast

Why EPS Growth Should Accelerate

Rates are coming down. The RBI has cut rates by 1.25% since February 2025 and kept the policy rate at 5.25% through June 2026 while maintaining a neutral stance. Lower rates reduce borrowing costs for companies and consumers, supporting demand in sectors such as housing, autos, and consumer durables.

India RBI Interest Rate Outlook

Taxes were cut. GST rate rationalization reduced the tax burden on consumers, putting ₹1.5 trillion back into households’ hands and supporting spending.

The base is low. FY26 was a weak year. Oil marketing companies moved into losses as crude prices rose, autos declined 17.5% versus an expected 4.9% gain, and banks grew only 3.6% compared with 7.1% expected.

Trade uncertainty also weighed on growth, although India has since reached an interim arrangement with the U.S. and a framework with the EU. With a weaker year behind it, FY27 growth should benefit from easier comparisons.

Capex is picking up. Investment currently stands at around 35.3% of GDP. Morgan Stanley expects this to reach 37.5% within five years, driven by energy, defence, semiconductors, fertilizers, and data centres.

For context, investment has averaged 33.6% of GDP since 2004 and peaked at 41.2% in 2011. Reaching 37.5% would represent a strong investment cycle.

Why We Use 17%

First, it is important to note that most reputable banks and market research firms are using a similar range. The consensus expectation is that India’s earnings growth will exceed its 20-year average.

We believe this will be the case and that India can grow faster than its historical average. We estimate earnings growth at 17%, which is close to the higher end of the sell-side range.

We also have a different view on AI. We believe it will be a net positive for India, which differs from many of the concerns raised in sell-side research.

Why we think it will grow? India is entering a period of broad-based economic development, with multiple sectors expanding at the same time. Renewable energy, grid electrification, mining production, manufacturing, defence spending, and healthcare are all areas where significant investment is taking place.

India’s scale creates a unique dynamic.

With such a large population and a rapidly developing economy, the country needs to build, produce, import, and export across multiple industries simultaneously. It is moving quickly and has a strong incentive to make this transformation successful. Both companies and the government are actively investing and working to support this next phase of economic development.

Most investors expect India to deliver EPS CAGR between 14% and 19% over the next few years. Where returns could become significantly more attractive, and where opinions differ, is on the future valuation multiple.

If earnings growth reaches the higher end of expectations while sector sentiment continues to improve, companies could benefit from both strong EPS growth and a potential P/E re-rating, creating a powerful combination for investors.

2.3 Currency Impact on Returns

India’s currency has been impacted by its inflation differential versus the US, alongside other fundamental factors such as trade balances and global capital flows. While the rupee’s devaluation versus the US dollar has not been dramatic, its gradual decline over time is still something global investors need to consider.

India Dollar Credit: More Resilient

The recent policy measures are also positive for India’s corporate credit market, although the impact will likely take time to fully appear.

The main benefit is a more stable environment for borrowers, supported by better liquidity conditions, a stronger currency outlook, and improved access to capital.

This is particularly helpful for companies with dollar debt, as global funding conditions remain uncertain. Overall, these reforms improve the resilience of India’s credit market and make Indian corporate debt more attractive.

Now, let's look at the inflation history in India.

The INR’s depreciation against the US dollar has been modest but consistent, creating a currency headwind for foreign investors over the last few years.

What Happened in 2026?

The rupee started the year at around 90 to the dollar and fell to 97 at its weakest point. It currently sits at 95.2, down 5.7% year to date.

Three things drove the decline:

(1) US tariffs of 50% on Indian goods hurt exports during the first half of the year. (2) Foreign investors pulled a record $29B from Indian equities over six months. (3) And the Hormuz conflict pushed oil prices higher, which is important because India imports roughly 88% of its crude and pays for it in dollars.

The rupee has since recovered from its lows. The RBI has been selling dollars to slow the decline, oil prices have come down from their peak, and a package of reforms has helped stabilize foreign participation in the bond market.

Where the Street Sees It

The banks are unusually aligned.

MUFG recently updated its view and expects the rupee to be slightly stronger by year end. Barclays sits at the bearish end, expecting a 1.6% further decline.

Most credible forecasts are within a three-point range. Breaking below or above these levels would likely require a major catalyst. Another oil shock or a more hawkish Fed could push the rupee past 97, while a trade resolution and stronger foreign inflows would be needed for a move back toward 90.

The Inflation Gap Has Narrowed

Between 2000 and 2025, India averaged 5.9% inflation compared with 2.6% in the US, a gap of about 3.3%. Over the same period, the rupee depreciated by 2.9% per year. The currency tracked the inflation differential closely, which is consistent with purchasing power parity. Applying the same logic today suggests the currency drag should be closer to 1% per year.

The Rupee’s Decline Beyond Inflation

Over the last five years, India averaged 4.9% inflation and the US averaged 4.5%, a gap of only 0.4 percentage points. The rupee still fell roughly 4% per year during that period. This suggests that factors beyond inflation are affecting the currency.

India runs a persistent current account deficit and imports 88% of its crude oil, meaning it relies on foreign capital inflows each year. When foreign investors sell, as they did in the first half of this year, the currency comes under pressure.

Base Case: 3% Per Year

One point of the decline comes from the inflation gap with the US, which is roughly where it is today. The RBI also expects this gap to remain stable as US inflation normalizes. The other two points come from balance of payments pressures, which tend to appear when foreign capital flows slow.

All-in, we expect earnings to grow 17%, with currency impact reducing growth by 3%, resulting in 14% total earnings growth over the next five years.

2.4 Current Market Valuations

The valuation multiple of Indian equities has historically been correlated with the country’s growth. As India entered a higher growth period, the market multiple re-rated. We expect growth to continue improving, which should support a premium valuation compared with historical averages.

To estimate our expected P/E multiple, we focus mainly on 2021 and thereafter, as this was the period when India started to perform strongly. With the P/E multiple already elevated historically and now similar to the S&P 500, we expect this premium valuation to hold at around 23x P/E over the next five years.

This assumes a valuation similar to where the market traded before IT stocks declined on AI concerns, which have so far been more about sentiment than a real impact on fundamentals. India traded above 23x P/E for most of 2024 and reached 25.2x in July.

One downside we need to keep in mind when looking at valuations is that India currently lacks the type of mega-cap technology companies seen in other markets.

There is no Indian equivalent, at least for now, of companies like NVIDIA, SanDisk, Kioxia, or SK Hynix that are benefiting from the AI, semiconductor, and memory boom cycle while trading at extremely high valuations.

This is not necessarily a negative. In fact, it means the Indian market is less exposed to speculative valuation excesses. However, it also means India does not have a few massive companies trading at very high multiples that can lift the overall market valuation average, as we have seen in the US, Japan, and Taiwan.

As a result, India’s re-rating potential will likely come from broad-based earnings growth, improving profitability, and stronger sector participation rather than from a small number of AI-driven mega-cap companies.

2.5 India Total Return Potential

The multiple is doing very little work in our return assumptions. Nearly 90% of the expected return comes from earnings growth. Over the next five years, we expect the Indian market to deliver a CAGR of around 16%.

This growth profile is different and more attractive than many other regions, including the US, where EPS growth remains strong but valuations are already at levels where multiple compression could become a headwind over time.

India is in a different position, with growth expected to accelerate while the country’s investability continues to improve.

Importantly, we believe investors can generate returns above the broader market by focusing on the right sectors and companies. This is the approach we explore further in our equity basket.

3. The Long-Term Growth Drivers

3.1 Growth Driver 1: A More Favorable Macro Environment

Two major concerns for India earlier this year were elevated oil prices and tighter domestic financial conditions. Both are now starting to move in a more favorable direction.

1. On oil, we are less concerned given our bearish outlook on crude prices, unless there is a major escalation around Hormuz. A lower oil price environment would be a meaningful positive for India given its dependence on imported crude.

2. On financial conditions, the situation has also started to improve.

In June, the government introduced a package aimed at attracting foreign capital and improving liquidity conditions, including more affordable FX swaps for banks and public sector companies, incentives for overseas Indian deposits, and broader access for foreign investors in Indian bonds.

Some analysts estimate that this package could attract as much as US$65B in foreign inflows, which would provide a significant boost to domestic liquidity. After a period of tighter conditions, this could become an important support for investment, credit growth, and the broader economy.

A recovery is now starting to appear in fuel demand and petroleum traffic.

These indicators have improved significantly since the Strait of Hormuz disruption and are now back around, or potentially above, pre-conflict levels. While full July data is not yet available, current trends suggest that physical energy flows have largely normalized.

The Recovery Is Starting to Show Up in Fuel Demand

3.2 Growth Driver 2: Capital Flows Return to India

July was India’s strongest month for foreign investor inflows since February, before the start of the Hormuz crisis.

Foreign Investors Return to Indian Markets

This shows that the environment is starting to change: oil prices have moved lower, financial conditions are improving, and other macro factors are also helping. The risks that weighed on India earlier this year are gradually fading.

On debt and equity inflows, we can also see a recovery in July, reflecting improving investor confidence and renewed interest in Indian markets.

Debt Inflows from Mutual Funds & Foreign Investors

Equity Inflows from Mutual Funds & Foreign Investors

This follows the recent measures introduced by the Indian government to attract more foreign capital and improve domestic liquidity conditions.

3.3 Growth Driver 3: Multiple Sectors Are Booming

The Indian economy is massive, and that is something everyone knows.

With a population that continues to grow, the country benefits from powerful long-term drivers creating opportunities across multiple sectors. Growth has slowed in recent months, but as discussed earlier, we believe the economy is positioned to regain momentum.

India has many sectors entering important development phases, with significant TAM expansion opportunities ahead. We decided to dedicate an entire section to highlight some of the most interesting areas where we see potential.

A) The First One Is the Defence Sector

The defence sector in India is entering a major investment cycle.

Government policies are becoming increasingly focused on strengthening the country’s domestic defence capabilities, while rising geopolitical and border tensions are accelerating the need for military modernization. This is creating a major supply opportunity that India will need to address as it looks to expand its defence manufacturing capacity and reduce its dependence on foreign suppliers.

The Ministry of Defence recently received a record allocation, representing the largest share of total Central Government Expenditure at 14.67% and around 2% of India’s GDP. This marks a significant increase in defence spending and sets the foundation for a multi-year investment cycle focused on improving military readiness, upgrading capabilities, and increasing strategic independence.

India’s Defence Capex Cycle Is Taking Off

The next phase of investment will focus on key areas such as aerospace, naval capabilities, next-generation electronic warfare systems, and advanced defence technologies. India is also pushing aggressively to expand local manufacturing and domestic R&D, with the goal of reducing strategic dependence on imports for critical components such as sensors, and also guided systems.

India Defence Exports: Growth Set to Continue Beyond FY26

Alongside higher domestic spending, India is also building a stronger export-oriented defence ecosystem. The government’s push to increase local production, support private suppliers, and develop indigenous technologies is creating the foundation for continued growth in defence exports.

This is a trend we have also seen in Canada, where a stronger focus on domestic capabilities became an important growth driver for the sector.

The 2026 defence cycle is being driven by aggressive modernization targets, ongoing border readiness, and the long-term objective of building a stronger domestic defence industry. As capital flows into defence public sector companies, private suppliers, and technology development, opportunities across the entire defence value chain are becoming increasingly attractive.

B) The Second One Is the Power Sector

This is a recurring theme we are seeing worldwide right now with the AI wave, but it is even more significant in a country growing as fast as India.

India’s power sector is entering a multi-year investment cycle, driven by a simple reality: the country needs significantly more electricity.

Demand is rising, and India will need to expand its power generation, transmission, and grid infrastructure to support its next phase of growth.

India’s electricity demand is expected to continue rising steadily, supported by fast urbanization, increasing cooling needs, industrial expansion, infrastructure development, and the growth of data centres.

More Renewables Mean More Grid Investment

At the same time, India is accelerating renewable energy additions to meet its long-term clean energy targets. This transition will require significant investment across transmission networks, grid modernization, and power equipment.

Some analysts estimate that the grid equipment opportunity could reach as much as US$85B over the 2027-2036 period. This creates a strong long-term runway for companies positioned across India’s power infrastructure buildout.

Domestic demand is already translating into stronger order books for major grid equipment manufacturers, providing better visibility on revenue growth over the next several years. Companies are expanding manufacturing capacity and upgrading capabilities to capture this demand. The race now is about increasing production capacity fast enough to meet the scale of the opportunity.

Beyond India, global demand for high-voltage equipment is also accelerating as countries invest heavily in grid upgrades and energy transition projects. With supply constraints emerging across the global market, Indian manufacturers have an opportunity to capture a larger share of demand through competitive costs, strong engineering capabilities, and expanding production capacity.

Unlike solar, where India has relied more heavily on imported inputs, the power equipment sector already has a stronger domestic manufacturing base and deeper engineering expertise. The key challenge now is scaling capacity fast enough, while securing critical inputs such as CRGO steel and expanding high-voltage testing infrastructure to compete for a larger share of the global market.

As countries around the world upgrade their power grids, India is well positioned to become an increasingly important supplier of grid equipment, benefiting from both strong domestic demand and a growing global need for reliable power.

C) The Third One Is Energy Security

India is taking steps to reinforce its domestic oil and gas industry and reduce its dependence on foreign energy supplies. Recent reforms, including the Oilfields (Regulation and Development) Amendment Act, 2025 and updated Petroleum & Natural Gas Rules, 2025, aim to make exploration and production more attractive for companies by creating a simpler and more stable regulatory environment.

Boosting Domestic Oil & Gas Production.

The new framework makes approvals easier, provides longer and more flexible petroleum leases, and reduces uncertainty for operators. These changes are expected to encourage more investment in exploration, improve the use of existing resources, and support higher domestic production over time.

This comes as India remains heavily dependent on energy imports, bringing in around 89% of its crude oil and 47% of its natural gas needs. With domestic production remaining largely unchanged over the past decade, increasing local output has become a key priority for India’s long-term energy security.

If you want to see more of our work on everything related to the oil market:

D) The Last One Is Healthcare

Making Healthcare More Accessible Through Insurance.

India’s healthcare system is becoming easier to access as insurance adoption increases. In 2025, the Insurance Regulatory and Development Authority of India (IRDAI) and the General Insurance Council (GIC) launched a common insurance empanelment initiative to simplify cashless healthcare.

Today, hospitals need separate agreements with each insurance company to provide cashless treatment. This creates additional paperwork and different processes depending on the insurer. The new system aims to create a common network where hospitals approved by one insurer can be accessed by customers from multiple insurance companies. This should make the process faster, reduce administrative work, and improve access to healthcare.

The initiative is still developing, with discussions continuing around pricing and claim processes. Some smaller hospitals have joined, but major private hospital chains have not yet adopted the framework.

Indian healthcare companies are really attractive right now, but if you are looking for something well-run, based in the US, and still overlooked:

4. Retail Investors Keep Faith in India Equities

Domestic investors continue to provide strong support to Indian equities.

After a temporary slowdown in May, equity mutual fund inflows recovered in June, with net inflows increasing 26% month-on-month to US$3.1B. This extended the streak of positive monthly inflows to 64 consecutive months.

While buying activity increased, some investors also took profits as markets recovered. However, the broader trend remains unchanged, with retail participation in Indian equities continuing to grow.

A major driver behind this has been the rapid adoption of systematic investment plans (SIPs), where investors regularly invest a fixed amount into mutual funds. Monthly SIP contributions continue to reach record levels, growing at more than 30% annually since the pandemic.

This shows that Indian households are increasingly investing their savings in financial markets, making domestic investors a larger source of support for equities. Earlier this year, foreign investors remained cautious due to weaker market momentum, limited exposure to AI-related themes, and the impact of Hormuz on energy prices and sentiment. However, we think many of these pressures are temporary. Commodity cycles tend to normalize over time, and corporate earnings should recover as economic conditions improve.

India also enters this period of market uncertainty with strong external fundamentals. The country holds around US$697B in foreign exchange reserves, providing a significant buffer against potential external shocks.

5. The Presence of Hedge Funds in India

A thriving equity market is extremely important for a growing economy.

Deep and liquid capital markets attract more investors, improve capital allocation, and create stronger conditions for long-term growth.

In our research, we came across the 1998 paper by Levine & Zervos, which found that stock market development, including liquidity and integration with global capital markets, is positively linked with future economic growth, productivity improvements, and capital accumulation.

India’s equity market has been rapidly developing, and global financial institutions are taking notice. Recent regulatory reforms, including the SWAGAT-FI framework and amendments introduced in 2021, have simplified the process for foreign investors to access the Indian market. Large institutional investors can now complete registration within 48 hours and renew their paperwork every ten years instead of every few years. Eligible participants include sovereign wealth funds, pension funds, central banks, and other major institutions.

The shift of global financial firms toward India started decades ago. D.E. Shaw was one of the first major firms to establish a presence in the country, opening its Hyderabad office in 1996. The main drivers were India’s strong engineering talent and the cost advantages available at the time. Since then, many have followed.

For years, most of these operations focused on supporting global businesses through technology, quantitative research, operations, risk management, finance, and compliance teams. However, India is increasingly becoming more important for actual investment activity, especially with the rise of quantitative trading.

Today, firms such as WorldQuant, Tower Research, Qube Research, Squarepoint, and AQR have built significant operations in India, attracted by the country’s large pool of engineering and quantitative talent. The combination of a growing equity market, improving market infrastructure, and deep technical talent is making India an increasingly important hub for global hedge funds.

AQR Office in Bangalore, India

This growth has also attracted more regulatory attention.

The case involving Jane Street highlighted some of the challenges that come with a rapidly expanding market ecosystem. Indian regulators alleged that the firm’s trading activity around Bank Nifty derivatives gave it an unfair advantage, leading to regulatory action and the seizure of around US$570M in assets.

Despite these challenges, the broader trend is clear: global financial firms are building a larger presence in India as the country’s equity markets deepen, regulations improve, and investment opportunities continue to expand.

6. The Rise of Remote Talent in the AI Era

India’s biggest advantage has always been its large talent base, similar to China, and the AI wave is only expanding this opportunity.

For decades, global companies have relied on India for software development, engineering, and back-office operations due to its deep pool of technical talent and competitive costs. AI is now creating new demand across areas such as AI engineering, data infrastructure, cybersecurity, and enterprise automation.

The difference today is that companies can access this talent remotely without needing to build large physical operations. Digital collaboration tools allow global firms to work directly with Indian engineers and technology professionals, expanding the opportunity beyond traditional outsourcing models.

We spoke with a software engineer who studied in the US but returned to India to apply his skills in Mumbai at a major software company:

“India has changed a lot. In the past, many engineers felt they had to move abroad to work on global technology projects. Today, you can be based in India and still work on the same high-value projects with international teams. The talent is here, and the ability to collaborate globally has improved significantly.”

With one of the world’s largest pools of developers and technical workers, India is well positioned to benefit as companies continue investing in AI adoption. Global technology firms, startups, and enterprises are already expanding their presence in the country to build AI capabilities, and this should accelerate going forward.

Over time, India has the potential to evolve from a global outsourcing hub into a major center for AI development, implementation, and innovation.

7. The AI Debate in India

The bear case is simple. AI can automate parts of coding, reducing the value of outsourced developers. Indian IT stocks have declined over the past twelve months on this concern, while foreign investors shifted capital from India toward Korean and Taiwanese semiconductor and memory companies.

The bull case rests on a different point. India’s constraint has never been the number of workers; it has been output per worker. Closing that gap traditionally required roads, ports, and power infrastructure, which can take decades. AI can improve white-collar productivity without requiring the same physical buildout.

The early data supports this view. Anthropic’s Economic Index found Indian users completing an estimated 3.8 hours of work within 15-minute AI sessions, above global averages. At scale, AI could allow Indian engineers to deliver closer to the output of higher-cost markets while maintaining India’s cost advantage.

AI is a swing factor in both directions.

We believe it will ultimately be a productivity driver over the next decade rather than compressing the low billable-hour model that built the IT sector.

Importantly, we see this as a longer-term outcome. Our FY27 and FY28 forecasts do not depend on knowing exactly how this plays out.

8. The Growing Influence of Indian CEOs

India has produced a growing number of technology leaders who are now running some of the world’s most important companies. While we could have easily named at least 20 more, these five examples highlight the increasing influence of Indian executives across global technology.

1. Satya Nadella (Microsoft CEO)

Born in Hyderabad, India, Nadella studied at the Manipal Institute of Technology, the University of Wisconsin–Milwaukee, and the University of Chicago Booth School of Business. He joined Microsoft in 1992 and played a key role in the company’s transition toward cloud computing and Azure.

Since becoming CEO in 2014, Nadella has overseen one of Microsoft’s most successful periods, including its cloud expansion and disciplined AI investment strategy. Under his leadership, Microsoft’s stock has increased 10x, representing 20% annualized growth.

2. Sundar Pichai (Google CEO)

Born in Madurai, India, Pichai studied at IIT Kharagpur before earning an MS from Stanford and an MBA from Wharton. He joined Google in 2004 and rose through the product organization, leading key products including Chrome, ChromeOS, and Android. Since becoming CEO in 2019, Pichai has overseen Google Cloud expansion and major AI infrastructure investments. Alphabet’s stock has increased 450%, representing 21% annualized growth.

3. Arvind Krishna (IBM CEO)

Born in Andhra Pradesh, India, Krishna studied at IIT Kanpur before earning a PhD in electrical engineering from the University of Illinois.

He joined IBM in 1990 and became the driving force behind IBM’s $34B acquisition of Red Hat. Since becoming CEO in 2020, Krishna has repositioned IBM around hybrid cloud and AI infrastructure. IBM’s stock has increased roughly 113% under his leadership.

4. Sanjay Mehrotra (Micron CEO)

Born in Kanpur, India, Mehrotra studied at BITS Pilani before earning engineering degrees from UC Berkeley. He co-founded SanDisk in 1988 and led the company until its acquisition by Western Digital for $19B.

He became CEO of Micron in 2017 and has positioned it as a key beneficiary of the AI-driven memory cycle. Under his leadership, Micron’s stock has increased 27x, which is 43% annualized growth.

5. Nikesh Arora (Palo Alto Networks CEO)

Born in Ghaziabad, India, Arora studied electrical engineering at IIT (BHU) Varanasi before earning an MBA and MS in finance in the US.

After senior roles at Google and SoftBank, Arora became CEO of Palo Alto Networks in 2018. His focus on platformization and cybersecurity consolidation has transformed the company’s strategy. Under his leadership, Palo Alto Networks’ stock has increased 370%, representing 21% annualized growth.

9. In Conversation: Key Insights

First, we spoke with an investment research analyst currently working in India, who previously studied finance at Princeton University in the United States.

A Massive Consumer Market That Is Becoming More Digital

“They scale very easily over there. There’s 1.2 billion people, so any good idea that’s affordable scales quickly.”

India’s population creates a unique environment for businesses that can deliver affordable products and services at scale.

“The digital population is growing more prominent, so people in their teenage years into their 30s are ordering out a lot at little to no more cost than cooking at home.”

The younger Indian consumer is increasingly prioritizing convenience. Food delivery has become a fundamental trend as digital adoption rises and delivery networks benefit from India’s population density.

“Living in India for a summer, that’s what I did. Unless I went home to my grandparents’ place, the average person could just order out and it comes out to the equivalent of $10–15 per day to eat well. What we’d consider a nice restaurant that would run you $50–100 in the US, you could get for like $20 over there.”

Affordable services are a key driver of adoption in India. The combination of low costs and improving digital infrastructure is allowing new consumer habits to develop quickly.

Consumer Behaviour: Price Over Time

“The average Indian consumer is willing to wait 30 extra minutes for an Uber rather than pay an extra $2 for one right now.”

India remains an extremely value-conscious market. Consumers are often willing to sacrifice convenience to get a better price, creating a strong advantage for companies that can operate efficiently and maintain low costs.

2. We also spoke with an investment analyst from WestBridge Capital, a major global investment firm managing over $7B and focused on private and public markets in India.

Healthcare: A Market Entering Modernization

“Big shift in health insurance, but as more Western medications and remedies are being taken up in the market, people realize it’s not inexpensive, so health insurance policies are definitely starting to increase. The insurance base is kicking up.”

Healthcare adoption is accelerating as incomes rise and consumers become more exposed to modern treatments. However, the market still has significant room for improvement.

“People are highly trusting of what a doctor tells them to do. Almost 10 out of 10 times a person will just do what the doctor tells them.”

Healthcare remains highly relationship-driven, with many consumers relying on local doctors and pharmacists for medical decisions. This creates opportunities for companies improving healthcare access, diagnostics, and treatment quality.

South vs North India: Different Economic Profiles

India’s development is not uniform across the country.

“South India is more developed, North India is more emerging.”

Southern cities such as Bengaluru have become major technology hubs, attracting global companies and highly skilled workers. Many Indians returning from overseas choose southern cities because of their stronger technology ecosystem and more developed infrastructure.

AI: Huge Opportunity, Difficult Execution

India offers significant AI opportunities due to the inefficiencies that remain across many industries. However, adoption will require careful execution. With such a large technology workforce, companies must balance automation opportunities with workforce considerations and reputation risks.

India’s Pharmaceutical Opportunity

India has become a global pharmaceutical leader, with companies such as Sun Pharma, Dr. Reddy’s Laboratories, Divi’s Labs, Biocon, and the Serum Institute of India playing major roles across generics, APIs, biosimilars, and vaccines.

The sector faces export-related risks, including potential tariff pressure, but domestic healthcare demand is becoming an increasingly important growth driver as insurance penetration rises and healthcare consumption expands.

3. We also spoke with an investment banking analyst currently working in India, who previously studied at an Ivy League university in the United States.

Policy Remains a Key Investment Factor

He pointed out a major difference between India and the US:

“The government’s influence on Indian financial markets is much larger compared to the US. If you want to have high confidence investing in India, you need to understand policy. Government decisions, regulations, and priorities can have a much bigger impact on specific sectors and companies, so understanding where policy is heading is extremely important.”

10. Indian Equity Basket

We built a diversified equity basket focused on companies that we believe offer the best combination of quality, upside potential, attractive timing, and exposure to India’s long-term growth story.

Investors can implement it on Plutus here.

The basket, including positions and weights, is available to Aurelion Research’s paid subscribers. Names are traded on liquid, well-known global exchanges (U.S., London, etc.) to provide access for global investors. The basket can be viewed or downloaded directly from this report after upgrading.

11. What Could Go Wrong?

The biggest risks to India remain external shocks and execution risks.

Geopolitical tensions are still a key risk, particularly if they lead to a renewed spike in energy prices. Given India’s dependence on imported crude, a sustained increase in oil prices could put pressure back on inflation, the current account deficit, and corporate costs. However, this is not something we expect to happen.

The second risk is policy execution. India has announced ambitious reforms and investment plans, but the ability to successfully implement them will be critical in determining how much economic growth can accelerate.

India’s young population is still a major long-term advantage, but creating enough quality employment opportunities will be increasingly important. A more protectionist global environment could make this more challenging.

Finally, the impact of the recent FX package will depend on the scale and durability of foreign inflows. While it can improve liquidity conditions in the short term, the longer-term impact will depend on whether these inflows translate into sustained investment and broader economic activity.

12. Final Thoughts on India

We believe India has many of the key ingredients needed to continue its development path as an emerging economy. A young population, rising domestic consumption, infrastructure investment, manufacturing growth, and ongoing reforms provide strong foundations for long-term growth.

Short-term challenges have created volatility, but they do not change the broader story. As energy pressures ease, financial conditions improve, and investor confidence returns, India is well positioned to recover, regain its previous momentum, and continue its long-term growth trajectory.

View how the portfolio is positioned here: Aurelion Index link.

The Aurelion Team

Questions? Reach us directly on Substack or at contact@aurelionresearch.com.

Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

Listed in the U.S. on the NYSE, today we are adding a new company to our portfolio, the “Aurelion Index”.

It is currently our highest-conviction name in the Aurelion LATAM Basket.

We have followed this business closely for some time, but have been waiting for the right moment. After a period of underperformance, the stock has recently regained momentum, creating what we argue is an attractive entry point.

We believe this is a company with significant growth potential, exposure to key trends across Latin America, and an attractive valuation.

It has proven its business model, being one of the largest banks in LatAm. In our view, the market is overlooking the quality & long-term potential of the business.

Table of Contents

1. Why Now?

   1.1 Long-Term Growth Runway

   1.2 Macro Environment & Market Sentiment

   1.3 Our Belief That the Business Is Undervalued

   1.4 An Attractive Entry Point

2. Investment Thesis

3. Company Overview

4. Financials

   4.1 Why We Believe the Valuation Is Attractive

   4.2 The Path to Sustainable Growth

   4.3 Outperforming Traditional Banks

   4.4 Fee Growth: Another Competitive Advantage

5. Asset Quality: Addressing the Bear Case

6. How We Value the Company

7. What Could Go Wrong

8. Our Final Thoughts

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Expectations are at all-time highs for most sectors while a rate hike is looming over the markets.

We’ve recently removed and added a few companies from the portfolio (we comment regularly in the Substack chat) to be well positioned for the season.

A reminder of our philosophy; we do not hold any “old stocks” that have run up too far or where the thesis is no longer intact. If we did, we would have exited and communicated it. Every company we hold is one we would buy today, making the portfolio a collection of high-conviction ideas.

We invest in companies with long-term merits: quality business, good management, and long-term trends or themes supporting the company. However, we do enter and exit more frequently to capture short-term returns.

With 19 companies, we focus on value-add information. For stocks we added longer ago, you’ll know why we still like the stock despite an increase/decrease. Links to the full in-depth reports are included.

Our portfolio, that we called the “Aurelion Index”, is periodically updated and available to paid subscribers here.

Below is the performance of the Aurelion Index from Plutus, an SEC-registered investment advisor that allows investors to invest in our portfolio.

Performance can be viewed in real-time here

Performance in April and May was weaker than the indexes, given that our portfolio did not benefit as much from the AI rally, but it was stronger in July, with a few companies performing well.

Diversification

Our portfolio of long-only stocks is diversified across sectors and regions. Most companies are listed in the U.S., Europe and Canada.

We are playing the long game, and diversification is important to us to perform across market cycles.

Fed Rate Risk

The expectations for interest rates in the U.S. have significantly changed since the start of 2026. They went from a strong environment with expected rate cuts to a situation where rates are now expected to rise, given inflation concerns.

Percentage Chance of a Rate Cut on the July 29, 2026 U.S. Fed Meeting

The Fed is now in an increasingly tougher spot, and it’s fair to say uncertainty around policy has increased.

This is why it is worth looking at how the portfolio is exposed to an environment where interest rates rise. Below are the portfolio’s returns on the days of Fed decisions since the start of 2026.

Or, presented another way:

The portfolio is clearly in good shape if U.S. federal rates are increased, with a low reaction and high alpha generated on those days. We look at a single company name further below.

We also provide a few companies on our shortlist that we currently find interesting.

Table of Contents

1. Aurelion Index Weights & Positions

2. August Earnings Calendar

3. Evaluating U.S. Interest Rate Exposure

4. Thoughts on Each Holding

5. Current Shortlist

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As you probably know, it is one of the most challenging areas of the market to analyze. You can pick the best stock, have the strongest thesis, and produce the most in-depth analysis, but if your timing is wrong, none of it matters.

Which brings us to today’s piece.

It has been a while since we last covered mining, and even longer since we took a deeper look at metals. Today, we will dive into gold, silver, and copper.

First of all, we are in the middle of a commodity race.

But what does that mean exactly?

It means we are witnessing a race between different metals, each competing for a role in the next wave of demand. Every critical mineral, along with major base metals such as gold, silver, aluminum, copper, tin, and zinc, is competing for capital, investment, and a place in the evolving industrial landscape.

There is also meaningful demand growth expected for metals like nickel and lithium, but today we are focusing on gold, silver, and copper, three metals that we believe offer some of the most interesting dynamics within the mining sector.

Each is influenced by different fundamental trends, from monetary uncertainty and investment demand to energy infrastructure, electrification, and the expansion of AI-related infrastructure.

Among them, copper has emerged as one of the metals receiving the most attention heading into the next industrial cycle, given its critical role in power generation, grid expansion, data centers, and broader electrification trends. However, the outlook remains dependent on factors such as supply growth, demand timing, and capital investment across the industry.

Copper: The Key Drivers of Future Demand

As data centers, power grids, and energy infrastructure continue to expand, copper demand is expected to benefit from these long-term trends. At the same time, supply growth remains constrained by long project timelines, declining ore grades, and a limited pipeline of major new discoveries. This combination of rising demand and constrained supply dynamics is creating a market that will likely require significant investment and new capacity over time. As a result, copper remains one of the key commodities to watch in the years ahead.

Table of Contents

1. Looking Back at What Happened in Mining

2. Gold & Silver: Time for a Comeback?

3. Copper: Does China Still Hold the Key?

4. Our Final Thoughts

1. Looking Back at What Happened in Mining

Right now, several different market dynamics are evolving at the same time, making the commodity landscape increasingly complex. But we always welcome a challenge. To make things as simple as possible, let’s start with what happened.

Before March 2026, the mining sector was performing well. Most metals were moving in the same direction, with prices trending higher across the board.

But then, a major geopolitical event emerged unexpectedly: the Iran-US conflict, which eventually led to the closure of the Strait of Hormuz.

This significantly changed the market environment. Following these developments, expectations shifted toward a more hawkish Federal Reserve outlook, with markets pricing in higher real rates and fewer potential rate cuts.

At the same time, stronger-than-expected U.S. economic data added further pressure on precious metals. A resilient economy reduced expectations for aggressive monetary easing, pushing interest rates higher and providing additional support to the U.S. dollar.

Since gold and silver do not generate cash flows or pay interest, they become relatively less attractive compared with yield-generating assets when real rates rise, increasing the opportunity cost of holding precious metals.

Together, we believe these factors explain a significant portion of the recent weakness across gold, silver, and other metals. However, it is important to distinguish between short-term price movements and longer-term fundamentals, as some of the forces weighing on metals may prove temporary.

The key question now is whether these headwinds are temporary or here to stay. That’s exactly what we aim to determine in this piece.

2. Gold & Silver: Time for a Comeback?

Right now, the dynamics in the mining space are unusual.

Gold & silver are being pulled in several different directions at the same time.

Gold’s traditional relationship with oil has become more difficult to interpret, the higher interest rate environment continues to create pressure, and central bank gold buying has moderated as stockpiles have increased. This creates a more complex environment. Historically, rising uncertainty and market stress have often supported gold, but the current cycle has played out differently so far.

Central Bank Net Cumulative Purchases (Tonnes)

Recently, oil prices have swung in both directions, while gold and silver have largely failed to follow. We think this divergence is what makes the current setup particularly interesting. Several forces are influencing the market at the same time, and our goal is to determine which factors are temporary and which could represent a more lasting shift in the mining landscape.

We know this may sound bearish at first, but there are also reasons to remain optimistic. More recently, we have seen several trading sessions where both gold and silver moved higher alongside crude oil prices.

This is the type of price action we want to see, as it could suggest that the relationship between these markets is beginning to evolve. Historically, gold has been primarily driven by interest rates and movements in the U.S. dollar, but recent price action suggests that other factors may be starting to play a larger role.

While gold & silver have been trading differently compared with previous cycles, we believe the setup could represent an important moment for precious metals.

The relationship between interest rates, currencies, and gold remains a key factor. However, the market may be entering a phase where these traditional drivers become less dominant, while other forces such as central bank demand, fiscal concerns, and broader commodity trends play a larger role.

If this shift continues, it could signal a change in how precious metals respond to the broader economic environment, with performance increasingly influenced by a wider range of factors beyond traditional macro drivers.

But this also highlights one key lesson from history:

Traditional drivers do not always hold. That is exactly what we are seeing today. While speculative positioning remains high and short-term moves in interest rates or currencies can continue to create volatility, we believe broader forces will play an increasingly important role over the long term.

Over time, one of the most important driver for gold is the continued expansion of U.S. government debt. As debt levels continue to rise, this remains a key factor supporting the long-term case for mining.

What makes us think gold could be approaching an important moment?

One indicator we always watch closely is CFTC positioning data from the U.S. Commodity Futures Trading Commission. By tracking how different market participants are positioned in the futures market, this data provides valuable insight into investor sentiment and potential shifts in market behavior.

Gold CFTC Managed Money

Right now, despite the recent volatility in gold prices, managed money is holding little to no short positions in 2026. In simple terms, this means investors are not aggressively betting against gold despite uncertainty across markets. This also suggests bearish sentiment remains limited, with fewer investors positioned for a decline and potentially less downside pressure from new short selling.

However, we do not think CFTC data should be viewed as a standalone timing indicator. While limited short interest reduces potential downside pressure from bearish bets, it also means there is less fuel for a potential short squeeze to accelerate gains. Overall, current data suggests that investors remain willing to maintain exposure to gold despite recent volatility.

The key question is whether improving fundamentals can attract additional demand and support a sustained move higher in gold.

Another indicator we monitor closely is gold ETF flows, which are showing a more positive picture than recent price action suggests. Despite volatility in gold prices, ETF holdings have continued to see net inflows, suggesting that investor demand for gold exposure remains resilient. While ETF flows are not a perfect short-term timing tool, sustained inflows can signal continued investor interest and provide an additional source of demand over time.

Gold ETF Monthly Flows

On the inventory side, gold ETF holdings have continued to increase, suggesting that investors are gradually rebuilding exposure to gold. While these flows alone do not determine prices, they provide an important signal that demand remains present despite recent volatility. Looking ahead, we believe the balance between supply and demand could become more favorable if interest rates decline and broader market conditions continue to improve. However, the timing and magnitude of any potential move will depend on how these factors develop.

Overall, we remain positive on the long-term outlook for gold and silver, while recognizing that the path higher will be uneven. We believe the current setup is more favorable than recent market sentiment suggests, with improving fundamentals likely to become increasingly reflected in prices over time.

We are not buying gold mining equities at the moment, as we believe the timing is not yet right. Historically, gold has often moved inversely to oil, and we would become more positive on gold if oil enters a sustained decline. For now, we are waiting for a full and lasting reopening of the Strait of Hormuz before changing our view, as the previous reopening was short-lived.

3. Copper: Does China Still Hold the Key?

Despite concerns that an AI-driven equity sell-off could weigh on copper prices in the short term, we believe the long-term fundamentals remain firmly intact.

LME Copper Price Performance

As shown above, copper prices are on the right path, with the overall trend still pointing higher. While we do not know exactly what the future holds for copper, we believe the 2026-2027 outlook remains easier to analyze. Looking much further ahead becomes increasingly difficult and would require more speculation.

Currently, copper inventories are declining so far in 2026, with stockpiles trending lower across major exchanges. While inventory levels can fluctuate, we believe the ongoing drawdown is an important indicator to monitor.

Global Copper Inventories

One important point to clarify is that while data centers have become one of the fastest-growing sources of copper demand, they still represent only a small portion of total electrification-related consumption. The much bigger drivers remain the expansion of power grids, electric vehicles, and the broader shift toward electrification, which is something that is often overlooked.

Grid Investment: A Key Copper Demand Driver

In our view, what makes this cycle different is that copper demand is not being driven by just one industry. Multiple sectors are requiring more copper at the same time. Data centers require significant amounts of power and connectivity infrastructure, but the energy transition is also creating massive demand for transmission networks, renewable energy, and electric transportation.

Projected Global Copper Demand by Sector

This combination of growing demand and limited supply is what makes copper one of the most important commodities to watch in the years ahead.

Then there is China.

As with many Chinese markets, it is important not to take every data point at face value. We reached a similar conclusion in our oil research. While China remains a major driver of global copper demand, we believe the market often overestimates how much additional demand is actually coming from the country.

So far, copper demand in China has remained relatively resilient despite a slower economy. Operating rates at cable and wire manufacturers have improved, while inventories have continued to decline. However, we do not expect demand to move in a straight line. A weaker property market, slower industrial activity, or softer renewable energy investment could temporarily weigh on demand.

Overall, we remain positive on China’s role in the copper market, but we believe a broader view is needed rather than focusing on any single data point. While the path may not be linear, the long-term outlook remains supported by continued investment in electrification and power infrastructure.

While new wind and solar installations may slow this year, China is shifting more attention toward upgrading its electricity grid. Investment in transmission networks, grid modernization, and energy storage remains a key priority as the country continues to increase electrification. The impact is already visible.

Capacity utilization at cable and wire manufacturers has recovered, while copper inventories have continued to decline, suggesting that demand remains resilient despite weakness in some areas. Overall, China’s copper demand story is evolving instead of weakening, with grid investment and electrification remaining key long-term drivers.

Regardless of the final outcome, we believe the fundamental challenge remains unchanged: copper supply growth is constrained, while demand continues to expand across electrification, power infrastructure, and the next industrial cycle.

Another important point is that the copper forward curve is positive, suggesting the market expects tighter supply conditions in the future.

1 Year Copper Forward Curves

In our view, short-term policy decisions may impact prices, but the long-term supply and demand dynamics remain the key driver of the copper market.

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4. Our Final Thoughts

Metals are never easy to forecast, analyze, or, most importantly, time.

That is one of the key reasons why we wrote this piece: to provide our readers with the tools needed to better navigate the commodity market and understand the metals that could play an important role in the next AI infrastructure wave.

While we are positive on the long-term outlook for gold and silver, we do not expect a major move higher in the near term. For now, we are comfortable staying on the sidelines and not owning these assets, while continuing to monitor how fundamentals develop.

On copper, we see a stronger long-term setup. As a key metal supporting the global infrastructure buildout, copper is expected to benefit from rising demand linked to power generation, data centers, and electrification. At the same time, supply growth remains challenging due to long project timelines and limited new capacity, creating the potential for a tighter market over the coming years.

Latest article on commodities:

View how the portfolio is positioned here: Aurelion Index link.

The Aurelion Team

Questions? Reach us directly on Substack or at contact@aurelionresearch.com.

Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

The C-suite is bullish on the stock (that’s usual), but is backing it by buying a significant number of shares, representing a large number relative to their net worth.

With 67% revenue growth this year and 38% EBITDA margins, the company trades at 12x EBITDA. What stands out to us is that their (extreme & non-AI) growth is durable for the coming years. In our view, its profitability is misunderstood due to the current high capital expenditure requirements.

We recommend watching this video to understand what they do in 1 min:

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Bears see stretched valuations, rising competition, and signs that the AI boom is being repriced. Both sides have compelling arguments, and whenever new information supports one side, markets react sharply.

Neither side is winning the argument, so the market keeps switching sides.

Predicting where markets will be one month from now is a fool’s game.

Kimi K3 could turn out to be another DeepSeek moment that briefly shakes the market before AI stocks recover. Or the next breakthrough model could challenge the entire investment case again.

What we can analyze is what these events reveal about markets and how investors should position their portfolios.

We see 5 takeaways from the recent turmoil:

1. The S&P 500 is no longer diversified. Owning it is a bet on AI.

2. The next AI winners will be the companies using AI, not the ones selling it.

3. The old portfolio hedges are breaking down. Gold is proving it.

4. For 2 years, every market panic was a buying opportunity. The odds say this one is too.

5. Electricity is a safer way to bet on AI. It wins no matter who builds the best model.

What happened, what it means, 5 takeaways, and how to position a portfolio in these volatile times.

A strange scoreboard

For the week ending July 17: the S&P 500 fell 1.6% and the Nasdaq 2.9%.

The action was underneath. Tech stocks dropped 5.5% on the week.

Chip stocks fell nearly 10%, bringing their one-month loss to about 18%. And yet energy gained 4.7%, real estate 2.2%, consumer staples 1.3%. Eight of the eleven sectors in the S&P went up in a week the index went down.

Because a handful of mega-cap tech stocks dominate the index, their decline dragged down the entire benchmark. The equal-weight S&P barely moved, down only 0.5%.

One more strange detail: the VIX, Wall Street’s fear gauge, stayed in the high teens all month. The market was near record highs, investors were calm, and the decade’s most popular trade was slowly starting to break down.

July 1: Meta breaks the scarcity story

The month opened with Bloomberg reporting that Meta is building a cloud business, internally called Meta Compute, to sell its spare AI computing power to outside customers. That puts Meta in direct competition with Amazon, Microsoft, and Google. Meta’s stock jumped almost 9% on the news.

Why did one company renting out spare servers shake the entire market?

Because the whole AI infrastructure trade rested on a single assumption: computing power is scarce.

The four giants that run the world’s biggest data centers have been spending historic amounts on that assumption. Meta alone will spend $125 to $145B this year on data centers and chips, roughly double last year. And then it told the world it has more capacity than it needs.

There is a direct precedent. Amazon Web Services, today a business generating over $100 billion in annual revenue, started two decades ago when Amazon began renting out the excess computing capacity it had built for its own online store. Meta is now running the same play.

The signal it sends today is what counts: when the hungriest buyer in the market becomes a seller, everything priced on scarcity has to be repriced.

The chain reaction took hours. Micron, which makes the specialized memory chips AI processors depend on, fell more than 10%. CoreWeave and Nebius, smaller firms that rent out computing power and count Meta as a major customer, dropped 10% to 15% during the day. Their biggest client had just announced it might become their competitor.

The paradox is that total spending is not falling. The four giants together will spend $650B in 2026, up about 70% from last year.

What changed is the scarcity narrative. Meta is buying massive amounts of compute while also preparing to sell some of it. If the biggest buyers become sellers, the companies priced for endless shortages face a tougher question: will demand actually keep up with supply?

July 16: the second DeepSeek moment

Then China did it again. Moonshot AI, a Beijing lab, released Kimi K3, a model that immediately tested near the top of global rankings and beat the leading American systems outright in blind coding competitions.

The detail that moved markets: K3 is “open weight.” On July 27, Moonshot publishes the entire model for free. Anyone on earth will be able to download and run near-frontier AI without paying an American lab a cent.

Open weight means the company releases the core model itself, allowing anyone to download and run it on their own hardware.

Moonshot can still charge for its own hosted version because most users and businesses do not have the servers, chips, and engineering teams needed to run a powerful AI model themselves.

Markets have seen this movie before. In January 2025, a then-obscure Chinese lab called DeepSeek released a shockingly cheap model and wiped roughly $590B off Nvidia in a single day, the largest one-day loss for any company in history.

Kimi K3 ran the sequel. TSMC, the Taiwanese company that physically manufactures nearly every advanced AI chip on earth, fell 7% just hours after reporting a 77% jump in profit. SoftBank dropped 9%. Japan’s market fell 5%. Nvidia briefly lost its title as the world’s most valuable company to Apple.

Two details make this bigger than a price war. First, Moonshot priced its service near American levels.

Second, the model was built despite US restrictions on selling advanced chips to China. The restrictions were supposed to keep China years behind.

The UK’s AI Security Institute now measures the gap between free Chinese models and paid American ones at four to seven months, down from six to ten a year ago.

Great earnings, falling stocks

Samsung’s quarterly profit rose more than 1,800% from a year ago. The stock fell 7%. TSMC printed record results and raised its investment budget. Punished for it. Chip stocks lost 18% in a month when the companies inside the index reported the best numbers of their existence.

SK Hynix, the memory champion at the heart of the AI supply chain, listed on the Nasdaq on July 10 to huge fanfare, then swung 8% up and 11% down on back-to-back days.

The Kospi, Korea’s main index, fell into a bear market on July 16 after the country’s central bank raised rates for the first time since early 2023. It has moved more than 5% in a single day 27 times this year, a frequency that research firm Capital Economics points out has only ever appeared inside genuine bear markets: the Asian crisis, the dot-com bust, 2008.

And in a detail future historians will enjoy, Korean regulators just banned the leveraged single-stock ETFs they had approved in May, after concluding the products were fueling the chaos.

And the macro is not helping

Normally, a market drop like this gets support from a central bank signaling easier policy. Not this time. Since taking over in May, Fed Chair Kevin Warsh has stopped giving investors clear hints about what the Fed will do next.

The data keeps sending mixed signals. June consumer prices fell 0.4%, the biggest monthly decline in six years, bringing inflation down to 3.5% from 4.2%. But consumers kept spending and jobless claims fell to 208,000. Markets saw an 85% chance of the Fed keeping rates unchanged on July 29. A strong economy, cooling inflation, and a divided Fed have created uncertainty around interest rates.

Then there is the Gulf. The June ceasefire with Iran collapsed in early July. Tankers were attacked near the Strait of Hormuz, and oil moved back up after a wild five-month swing from $74 to $113 and then down to $69. Meanwhile, America’s emergency oil reserve is at its lowest level since 1983.

Our view on oil remains unchanged from what we explained 8 days ago:

Gold broke below $4,000 on July 17, down about 28% from its January high near $5,600. During an active war. We will come back to that, because it changes how portfolios should be built.

The Five Takeaways

1. The S&P 500 is no longer diversified. Owning it is a bet on AI.

8 of 11 sectors rose while the index fell, because a few giant tech names dragged everything down.

For the average investor, the standard advice for decades has been “just buy the index, it’s diversified.”

Today, the top of that index is a concentrated wager on a single theme. If AI spending disappoints, millions of “diversified” investors will discover they were making a tech bet all along. If it delivers, they got lucky rather than prudent.

Real diversification now has to be intentional. A resilient portfolio is built from exposures that are driven by different forces, not by the same handful of companies. That includes equal weight equities, mid cap companies, international markets, underrepresented sectors such as energy, materials, and industrials, and investment themes that are independent from one another. The goal is simple: no single trend or narrative should determine the outcome of your entire portfolio.

2. The next AI winners will be the companies using AI, not the ones selling it.

Put the month’s two big stories side by side. Meta has too much computing power it wants to sell the extra. China is giving away a near-frontier model for free, with paid versions at a third of American prices (Kimi is now the exception).

Same conclusion: the price of intelligence is collapsing.

Now apply an old rule of investing. When the price of an input falls, the companies selling it suffer and the companies buying it win. When oil gets cheap, you do not buy the drillers; you buy the airlines.

The sellers of computing and models are watching their pricing power erode. The buyers get a tool that grows more capable and cheaper every single quarter, without spending a dollar on research.

So who are the buyers? Businesses drowning in labor-heavy, repetitive, paper-pushing work: insurance, logistics, healthcare administration, bank back offices, professional services. Companies where wages are the biggest cost line and where AI can convert those costs into profit margin.

A company spending 60% of its revenue on administrative work does not need to build a model or own a single GPU to be an AI winner. It just needs the price of intelligence to keep falling. July told us, twice, that it will.

What makes the opportunity real is that few are really positioned for it. Three years into this boom, the market is still fighting over the sellers, while the buyers trade at ordinary prices. The tough part is finding the companies that actually capture AI savings, because nowadays every company claims it will.

3. The old portfolio hedges are breaking down. Gold is proving it.

For twenty years the defensive playbook was simple: when trouble arrived, investors moved into gold and long-term government bonds. They increased while stocks fell.

July challenged that. A war in the world’s most important oil region, and gold still fell 28% from its January high.

The chain reaction explains why. War in the Gulf pushes oil higher. Higher oil raises inflation concerns. That makes the Fed less likely to cut and pushes yields toward 5%. When government bonds pay a meaningful yield, gold, which pays nothing, becomes less attractive. The same events that once sent investors into gold now push them away from it.

The second leg failed for the same reason. Long-duration Treasuries are supposed to rally when equities fall, but rising yields are precisely what makes them lose value. Investors holding a conventional 60/40 should understand that both halves of the defensive side can be pressured by the same event.

So what protects a portfolio now? Three things.

Cash and short-term Treasury bills paying over 4%. For the first time in fifteen years, waiting is a paid position.

Energy. Oil producers, tankers, and related equities can benefit from the same shocks that pressure traditional safe havens.

Diversification across independent themes. That is what we do at Aurelion Research.

None of this means gold has lost its long-term role. Central banks keep accumulating it as a reserve asset, and that trend remains intact. But as a short-term crisis hedge, it just failed its first real test

4. For two years, every market panic was a buying opportunity. The odds say this one is too.

The record here is fairly clear. In January 2025, DeepSeek wiped $590 billion off Nvidia in a day and the headlines said the AI trade was over. It was back within weeks. In April 2025, the White House announced the biggest tariffs since the 1930s, the S&P fell more than 10%, and almost everyone thought the damage would stick. The market got it all back and then ran about 40% higher.

In June 2026, the Magnificent Seven dropped 12.7% in a month, and record highs followed 3 weeks later. You do not have to like the pattern, and plenty of smart people find it annoying. But with strong earnings, a lot of cash sitting on the sidelines, and steady monthly flows into index funds, dips keep getting bought. Betting against that has been expensive.

How we handle these situations is simple. We write down the companies we already know and the prices we would be happy to pay before panic starts. Then, when the market sells off, if the company remains fundamentally unaffected, it creates a great buying opportunity.

Importantly, the pattern fails exactly once: at the top. That is why this rule only works when paired with the first takeaway: appropriate diversification.

5. Electricity is a safer way to bet on AI. It wins no matter who builds the best model.

Run the scenarios from this debate to their conclusion. American labs win, or Chinese labs win. Models remain expensive, or they become nearly free.

Computing stays scarce, or capacity floods the market. No matter how it plays out, data centers are likely to be built. As AI usage grows, electricity demand is also likely to increase.

That is the part of the AI story that is least dependent on which company or model comes out ahead.

The more durable beneficiaries could be the companies supplying the infrastructure behind the buildout: electricity producers, grid equipment manufacturers, transformer suppliers, and the uranium and nuclear fuel value chain. Nuclear is particularly well positioned because it is one of the few carbon-free energy sources capable of delivering reliable and large scale power.

The opportunity is that much of this sector is still priced for the old world. While semiconductor companies spent the last 2 years being valued for near-perfect execution, many utilities, grid suppliers, and nuclear companies still trade at more traditional industrial valuations. This is increasingly being challenged.

What Comes Next

Moonshot publishes the full Kimi K3 weights on July 27, which will show whether independent evaluations confirm the benchmark claims or whether the initial reaction was overdone. The Fed meets on July 29, where markets expect no change but Warsh’s tone will set expectations for the rest of the year.

And the hyperscalers report second quarter results shortly after, which is where Meta either gives Meta Compute a name, a price, and a timeline, or does not. That last one matters most. The entire July 1 repricing rests on a Bloomberg report rather than a confirmed product.

How to Position a Portfolio

Here are some general rules we think about when managing the portfolio during volatile periods:

1) To outperform indexes, invest in companies with specific investment theses

A simple and timeless tenet.

2) Diversify across themes

If a portfolio only holds the S&P 500, a few semiconductor companies, and some Magnificent Seven stocks, it is not only volatile but also highly exposed if the AI trade loses momentum.

By diversifying outside of the AI theme, which already drives many equities, and investing across different themes and geographies, investors can create exposure to more uncorrelated returns.

It becomes more dependent on the investor’s ability to identify the right themes at the right time. However, when done correctly, thematic diversification can be a source of higher returns with lower downside risk.

3) Buy the dip if nothing has changed fundamentally.

This requires a strong level of judgment, but investors who applied this approach well over the last 3 years have seen incredible performance.

4) Position for the debate to stay unresolved

The most important portfolio decision right now is refusing to bet the book on either AI outcome.

Bulls and bears both have real evidence, and the market will keep swinging violently between them. Our answer is exposure that wins across both scenarios.

For example, we own a SaaS company that we believe does not deserve to be punished by AI fears due to its differentiated position. But we also own an AI company helping manufacture chips. Both companies move in completely opposite directions and help balance the portfolio. Whether the AI trade cools down or continues to accelerate over the next few years, we expect both companies to become larger, generate more cash, and maintain strong positions.

How we are thinking about our portfolio, the “Aurelion Index”

If the AI buildout continues, we own the inputs: physical uranium, land and surface rights where power infrastructure is being built, and the metals needed for grids and transformers. All of it gets consumed regardless of whose model wins, and none of it trades at semiconductor multiples.

If China closes the gap, we hold a position in China’s domestic chip equipment push, which the Kimi K3 headline helps validate.

July showed that gold no longer provides the same protection against geopolitical shocks. Shipping tankers do: every disruption around Hormuz that lengthens shipping routes pushes rates higher.

If the economy cracks, our meaningful defensive exposure provides protection: consumer health, senior housing, pharma supply, and thrift retail, which have historically performed better when consumers are under pressure.

And some of the portfolio simply does not correlate with any of it:

LATAM, European retail automation...

Positions, weights, recent changes and reports are available for paid subscribers.

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View how the portfolio is positioned here: Aurelion Index link.

The Aurelion Team

Questions? Reach us directly on Substack or at contact@aurelionresearch.com.

Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

Earlier this year, we published our Latin America Primer, laying out why the region was entering the early stages of a multi-year bull market.

Since then, much has changed.

Recent elections have provided greater clarity, and several catalysts we identified are beginning to play out. The timing to enter the region now looks much more compelling. However, that is not true for every country.

We have created the Aurelion LATAM Basket, which consists of 30 high-quality equities positioned to benefit from the region’s re-rating. All are Latin American companies that trade on U.S. exchanges, giving global investors easy access to the region. It also provides strong diversification from U.S. tech stocks.

We also provide a chartbook, containing all charts from this report, along with additional charts on the basket, in one place and in higher quality:

Chartbook - LATAM: Go Big Or Go Home

3.17MB ∙ PDF file

Download

Download

Latin America can be a difficult market to understand from the outside.

The region is made up of different countries, economies, and political environments, each with its own opportunities and challenges. Our focus is on Colombia, Chile, Argentina, Peru, Mexico, and Brazil.

That is why we leveraged our expertise to make this market easier to understand. One of our main goals as analysts is to go beyond the headlines, understand the complexity behind each market, and ultimately simplify it for our readers.

For this report, we dedicated significant time to analyzing the region, understanding the key trends shaping these markets, and speaking with analysts, economists, and portfolio managers based in Latin America. We believe these local insights are essential, as understanding a market goes beyond just looking at data. It requires understanding the people, businesses, and dynamics driving it.

Table of Contents

1. The Next Capital Destination

2. Equity Markets: A Decade of Opportunity?

3. Macro: The Pulse of LatAm Economies

4. Peru: The Cinderella Story of LatAm

5. Colombia & Argentina: Our LatAm Favorites

   5.1 Colombia: At an Inflection Point

   5.2 Argentina: The Turnaround Story

6. Brazil: Too Early to Call

7. Mexico & Chile: Waiting for Their Moment

   7.1 Mexico: Caught Behind the Border Wall?

   7.2 Chile: The Quiet Market

8. LATAM Equity Basket

9. Our Final Thoughts

Before starting, the most important thing to understand about LATAM is that being bullish on the region does not mean being bullish on every country.

Far from it. Each market has its own cycle, political environment, and investment drivers. Our view on the region is based on several structural trends that we believe are still underappreciated. We see a major mining and commodity cycle developing in the coming years, driven by the massive demand for the materials required to build global AI infrastructure.

At the same time, Latin America is benefiting from broader structural changes, including strong population growth, rising wages, and the expansion of its middle class. These trends could support capital inflows into the region as global investors look for new opportunities outside crowded markets.

The region is also going through a period of significant political change, with several elections already completed and more ahead. While this creates uncertainty in the short term, it also creates opportunities as markets often overreact to political noise.

To us, sentiment toward Latin America remains mixed, and that is precisely what creates the opportunity. The story is not obvious, but we believe the market is underestimating the potential across select countries.

1. The Next Capital Destination

To us, Latin America stands out within a broader diversification trend that is still underappreciated. Since 2025, some institutions have started reducing their concentration in U.S. equities and Big Tech, reallocating capital toward emerging markets, particularly Latin America.

From our conversations with investors, the message is mixed.

Some funds remain comfortable staying heavily invested in US equities and continuing to ride the AI wave, while others are starting to look for diversification, taking some profits from crowded technology positions and exploring markets that have been overlooked. This has started to create more interest and liquidity flows into Latin America, a trend we believe should continue as investors reassess risks in areas such as US private credit.

First, let’s have a look at what is going on with fund flows in Brazil.

The ANBIMA data shows that investors are already positioning for uncertainty ahead of Brazil’s 2026 election. June saw broad-based outflows across fund categories, reflecting a risk-off mindset. However, we believe the market may be underestimating the opportunities that could emerge once political noise fades.

Looking more closely, most outflows came from hedge funds and pension funds, while ETFs and private equity funds continued to attract capital. We view this as a positive signal. Short-term investors are reducing exposure, while longer-term capital remains committed. From a market perspective, this creates a healthier ownership base, supported by more stable and patient investors.

Now, looking at cumulative inflows into LatAm funds, there are no real surprises. Even though flows have slowed over the past couple of months, Brazil remains the most popular destination. Meanwhile, Mexico has been relatively stable, without much excitement, and is now starting to lose some momentum.

Mexico is not in the worst position, but it is certainly not in the best one either. Uncertainty surrounding its relationship with the US, combined with ongoing tensions with Trump, has created additional pressure on the economy.

Then, looking at foreign cash inflows since 2025, we can see that the trend was consistently improving until May. However, since then, oil market turmoil driven by uncertainty surrounding Hormuz has put some pressure on LatAm, as markets became more cautious given the region’s exposure to energy markets.

That being said, we do not expect this downtrend to last for long. In our view, this is more of a temporary pullback driven by short-term uncertainty rather than a shift in the broader investment trend, so it is not a major concern for us.

An interesting view comes from BlackRock’s LatAm team, which sees a significant valuation gap between the US & LatAm:

“We continue to see Latin America as one of the most mispriced regions globally. Early action from LatAm central banks has created high real yields and room for rate cuts, providing a strong setup for domestic equities that US growth portfolios cannot replicate.”

On our end, we have always been selective when it comes to Latin America, but we are ready to increase our exposure when the right opportunities emerge. We do consider the country and political environment when thinking about timing, but our main focus remains finding great businesses, as it always should be.

In Brazil, for example, we can still find world-class defensive businesses with dominant market positions, strong ROEs, and high double-digit dividend yields, opportunities that are increasingly rare in the U.S.

Many of these companies still trade at single-digit earnings multiples, allowing investors to get paid while waiting for sentiment to improve. Do not be misled by the discouragement of global investors with LatAm due to short-term political noise and elevated interest rates, particularly in Brazil.

Lazard’s global strategy team highlights Latin America as an important diversifier for portfolios heavily concentrated in US tech:

“LatAm equities offer low correlation to the mega-cap tech trade dominating Wall Street. With investors seeking diversification, the region’s mix of commodities and undervalued businesses makes it an attractive allocation for 2026.”

2. Equity Markets: A Decade of Opportunity?

Let’s look at the most important markets in LATAM.

We can clearly see two groups emerging. Argentina, Peru, and Colombia have been leading the charge, delivering impressive gains since 2025.

Meanwhile, Brazil, Chile, and Mexico are still playing catch-up, with their markets remaining below their previous highs in 2025. The race has already started, and so far, only two countries are out in front: Peru and Argentina.

The key thing to remember is that Latin America is not one single market. Correlations across the region are generally much lower than what investors are used to seeing in the US or Canada. Each country has its own economic cycle, political environment, and policy decisions that can push markets in different directions. With elections happening at different times across the region, each market also creates its own unique catalysts and opportunities.

Here is a recent quote about Latin America that we particularly liked:

“The broader community of investors often sees emerging markets as chaotic, and that has traditionally also been the case for Latin America. But when you see structural changes, like the more market-friendly government in Argentina today and better-functioning institutions, that is the fuel for markets to start climbing.” - Franco Di Nicola, CFA, PM at Bishop Capital (July 2026)

We believe this creates an interesting opportunity: instead of treating LatAm as one single trade, investors can move from one market to another depending on where the next opportunity emerges. For example, if Brazil is heading into an election and we believe the outcome could be positive for equities, we can position ourselves accordingly. Then, a few months later, if Chile becomes the market with the next major catalyst, we can shift our focus there.

3. Macro: The Pulse of LatAm Economies

We are witnessing a setup that is still in its early stages.

Across Latin America, the outlook will depend on a combination of factors. Some variables are easier to anticipate, while others remain unpredictable and outside of our control. As analysts, we have to accept that uncertainty and focus on the key constraints and catalysts that are beginning to align.

Three key factors tie the whole story together:

1. Debt is at historical highs. Governments are carrying high debt levels, leaving them with less room to support their economies through spending.

2. Stock valuations are near historical lows. Markets have been depressed for so long that many investors are pricing in a scenario where nothing changes.

3. Investment growth is the missing piece. These countries cannot rely only on consumption or commodity exports. A new cycle of investment and capital spending is needed to restart stronger economic growth.

And we believe that process is already beginning. GDP growth may not fully reflect it yet, but the underlying signals are there. The timing feels right, and we believe the next few years could mark a meaningful shift for Latin America.

The key is understanding that an economy is more than just numbers.

Inflation can be high, growth can be weak, and a president can be unpopular. These things matter, but only to a certain extent. What counts most is understanding where a country is heading, its ambition, and its potential.

That is why we spend time speaking with local experts. We want to develop a real and tangible understanding of the markets we invest in, something that goes beyond the data and allows us to truly feel the opportunity.

Let’s look at some numbers. Unemployment is one metric we always pay attention to, as it provides a simple but powerful view of what is really happening in an economy. It may not be the most exciting data point, but sometimes the less obvious indicators reveal the most important trends.

• Mexico is at 2.5%.

• Peru is at 5.0%.

• Brazil is at 5.6%.

• Argentina is at 7.8%.

• Colombia is at 8.0%.

• Chile is at 9.4%.

If there is only one thing we want you to take away from this section, it is that in Latin America, unemployment rates tell you a lot about where a country is in its economic cycle and where its financial markets could be heading.

Take Chile as an example. Chile was ahead of many of its regional peers, with a more developed economy and stronger growth profile. However, the economy has been cooling, and the labor market is now reflecting that, with unemployment reaching 9.4%. The situation could improve under President Kast, as markets are expecting a more business-friendly environment.

Mexico tells a different story. With unemployment at 2.5%, it looks more like a mature economy such as Canada, where the labor market tends to be more stable through different cycles. This does not mean there are no challenges, but it highlights a country with a stronger economic foundation.

The rest of the region is more mixed. In our view, Argentina and Colombia both have significant room for improvement, and we believe their unemployment rates should trend lower as their economies continue to recover.

4. Peru: The Cinderella Story of LatAm

Peru is a market that is often left behind, forgotten, or simply overlooked, whatever word you want to use. It is a country that almost no one talks about. Yet, it is up 19% YTD, nearly 80% since last year, and more than 277% since 2021. Clearly, the Peruvian equity market (EPU) deserves far more attention.

Peru (EPU) Has Been One of LatAm’s Best Performers Since 2021

More recently, Peru held its elections in early June 2026, with a market-friendly candidate coming out on top. She is the daughter of former President Fujimori, and her campaign focused on two main priorities: restoring security through a tougher approach to crime and maintaining Peru’s market-oriented economic framework, which has supported private investment and business growth for the past three decades. Although the margin of victory was very narrow, we were told that institutional investors have reacted positively so far.

Let’s get to the good part: despite significant volatility and domestic political uncertainty during the first half of the year, we believe Peru’s economic fundamentals remain solid. Private demand is holding up, export conditions are improving, and the mining sector is emerging as a key driver of growth.

Mining & Metals: Strong global prices for copper and gold are keeping the country’s terms of trade strong and supporting a significant current account surplus, which reached 4.3% of GDP earlier this year, the highest level since 2006.

The Peruvian economy continues to build momentum. Business activity remains strong, cement sales are at record highs, and new vehicle sales reached an all-time high for the month of June. The data continues to point in the right direction.

Inflation remains well under control. Headline inflation came in at 0.23% in June, while core inflation was just 0.08%, both remaining in line with the central bank’s target on an annualized basis. Inflation expectations also continued to move lower, giving the central bank more room to support the economy.

As always, there are risks.

1. El Niño (H2 2026): Looking ahead, one of the main risks for the second half of the year is a potential severe El Niño event, which could put pressure on key sectors such as agriculture and fishing, and drive inflation higher.

2. Illegal & Informal Mining: A significant portion of gold exports may come from informal or illegal sources (a negative for Peru), though the exact size is difficult to measure due to limited traceability. Some estimates suggest that, out of the $23.2B in gold exports in 2025, only $10.7B came from formal companies, with the remainder linked to informal or untraced production.

5. Colombia & Argentina: Our LatAm Favorites

You saw the title, these are our two favorite ones, where we believe there is the most upside and where equities are the most compelling right now.

5.1 Colombia: At an Inflection Point

First, Colombia. The elections just happened in June, and the candidate we believed would be the most positive for equities came out on top. Abelardo de la Espriella is now the key figure for the Colombian market going forward.

We are already starting to see that reflected in the market, and we believe Colombia is one of the countries where the story is finally changing. There is something going on there, and we believe it is something good.

We expect the coming years to be bright for Colombia, both economically and in the markets. As investors, that is exactly the combination we want to see.

Colombia Equity Market Performance Since 2021

To better understand where Colombia is heading after the election, both politically and from a market perspective, we spoke with a Colombian analyst working at a hedge fund in Bogotá, who shared valuable insights on the market.

In Conversation: Colombian Analyst

He began by pointing out that although the right secured the presidency, the narrow victory shows Colombia remains deeply divided. The Espriella administration is expected to be more supportive of businesses, particularly in energy, mining, and financials. The main question now is whether it can secure enough congressional backing to implement its agenda.

He added that sentiment among both local and foreign investors in Colombian equities is better than it was before the elections. After years of uncertainty, investors now have more visibility on what to expect, making them more willing to allocate capital to equities instead of staying focused on fixed income.

In our view, Colombian equities are highly attractive right now.

We were waiting for an Espriella victory, and now that it has happened, we believe the timing is right to get allocated to this market. Valuations are compelling, and investor sentiment around the country has improved.

5.2 Argentina: The Turnaround Story

For Argentina, the story is different. When Javier Milei first entered office, let’s say it was loud. The market reacted immediately, investors got excited, and equities started booming as the country entered a new phase. However, that momentum faded over time as investors started waiting for real progress and confirmation that the reforms could translate into stronger economic conditions.

Trump Meets with Argentina’s President Javier Milei

Now, we believe this momentum is starting to return. Argentina remains one of the highest risk/reward opportunities in the region: the upside could be substantial if reforms continue to progress, but investors need to be patient as the economic recovery takes time to translate into stronger fundamentals.

ARGT Is Among LatAm's Best Performers Since 2021

Our Conversation with a Political Analyst:

We spoke with a political analyst who mentioned that the slowdown in economic activity and the increase in inflation earlier this year had a negative impact on Milei’s approval ratings. However, he also believes that this could improve as inflation continues to come down and growth starts to recover, which would support Milei’s chances heading into the next election.

He also highlighted that the government will likely need to build stronger relationships with governors to improve governability and push its agenda forward. Overall, there is a broad view that, regardless of who wins the 2027 elections, Argentina should be in a much stronger position than four years ago, with better export dynamics and a greater focus on fiscal discipline.

Also, something to consider with Argentina is that its economy is less tied to the US manufacturing cycle compared to countries like Mexico. Argentina’s growth story is being driven more by domestic reforms, energy, agriculture, and improving economic conditions. The country is increasingly following its own path, and so far, that direction has been positive for the economy.

In our view, Argentine equities are attractive right now. While commodities are not where we see the biggest opportunity, we believe banks, utilities, and telecom are the areas to be positioned in.

6. Brazil: Too Early to Call

Brazil is the most unpredictable market among all the countries we focus on. The upcoming October election is the biggest variable, but the truth is, we simply cannot predict the outcome between Bolsonaro and Lula. It is impossible to know.

And this uncertainty will remain an important factor going forward.

When investors do not have visibility on what comes next, they usually become more cautious. That said, it is important to remember that the Brazilian market was performing very well before the Hormuz situation and the energy market turmoil. The market had been on a strong run since the end of 2024.

So what do we do from here? We believe the key is to focus on quality businesses that can move on their own, without being too affected by the broader Brazilian market. That is what we like about Brazil right now: many companies are still trading at depressed valuations, creating attractive opportunities. The banking and energy sectors are probably the only areas we would be more cautious on for now, but outside of that, there are plenty of names worth looking into.

7. Mexico & Chile: Waiting for Their Moment

We covered our two favorite markets earlier. Now, it is time to look at the two that are more difficult to assess. This does not mean we are uncertain about them, but rather that the investment case is much more nuanced.

Both markets offer interesting opportunities, while also facing a more complex set of challenges. One is often described as America’s backyard, while the other operates almost as a world of its own. Let’s take a closer look at each of them.

7.1 Mexico: Caught Behind the Border Wall?

Mexico is a country we look at a little differently compared to the rest of Latin America. Its biggest advantage is its proximity to the US, but the story goes beyond geography. Over the years, Mexico has become a major manufacturing hub, producing goods that are eventually exported to the US.

Mexico plays an important role in the growth story of the US because it helps supply many of the goods and resources needed to support the “Trump economy.” When the U.S. economy is strong, Mexico is usually one of the countries that benefits the most, although the relationship is not always that simple.

Mexico has a strong economy, high-quality businesses, and many factors working in its favor. However, we believe one should be careful about becoming too comfortable, as the relationship with the U.S. can change quickly.

Our Conversation with a Mexican Fund PM:

The biggest concern is the USMCA, the free trade agreement between the United States, Mexico, and Canada. With the agreement now set to be reviewed every year, many businesses are delaying new factories, expansions, and other investments until there is more clarity. As long as companies do not know what the future trade environment will look like, many are choosing to wait.

Another topic that came up was Mexico’s manufacturing future. Autos have been the country’s biggest success story for decades, but investors are now asking whether AI and IT hardware could become the next major growth opportunity.

On our end, we believe it is still too early to tell.

That said, Mexico remains home to some of the highest-quality companies in Latin America, and we have given them a special place in our LatAm Equity Basket, which we will explore in the next section.

Just one month ago, we published a report on one of our Mexico holdings: a company we believe is a hidden beneficiary of the upcoming World Cup. It is a great example of the type of opportunities we look for: high-quality businesses with unique catalysts that the market may be underestimating.

7.2 Chile: The Quiet Market

For Chile, there is not as much to say compared to the other markets we cover. It is the “boring” one in Latin America, and that is not necessarily a bad thing. It is a more stable country, with stronger institutions, and it generally does its own thing without being heavily affected by regional noise. For us, the challenge is that there is less of an investment edge. Chile is not a place where you typically see major surprises or dramatic changes, which also means the upside is likely to be more limited than in some of the other opportunities across the region.

We believe Chile can continue to grow over time, but we see the upside as more limited compared to markets like Colombia or Argentina, where the investment story is earlier and the potential rerating could be larger.

Another challenge with Chile is accessibility. Unlike other markets in the region, fewer Chilean companies trade through U.S. ADRs, which can make it more difficult for international investors to build meaningful exposure.

That said, Chile remains a quality market in Latin America.

It may not be the market with the biggest near-term catalysts, but it offers stability, strong businesses, and a more predictable environment, which still has value in a region where uncertainty is often the biggest risk.

8. Latam Equity Basket

We built a diversified equity basket focused on companies we believe offer the most compelling combination of quality, upside potential, and exposure to the Latin American growth story.

Investors can implement it on Plutus here.

There are certainly other companies we would have liked to include; however, we decided to focus exclusively on U.S. ADRs. This not only ensures accessibility for most investors but also provides greater liquidity.

In Latin America, some of the biggest upside opportunities are often found in banks. Once political uncertainty clears and elections are behind them, banks are usually among the first sectors to react, and they can move quickly. Utilities are another area we find particularly attractive, offering strong businesses, reliable cash flows, and dividend yields that are difficult to find in US equities today.

Here below, you can find the tickers included in the basket by country:

As you can see, there is a strong presence of Brazilian and Mexican companies in the basket. Some might ask: if we were not the most bullish on these two markets in the report, why include so many companies from them?

The answer is simple: in Latin America, some high-quality companies behave differently from their home markets. They are influenced by their country, but only to a certain extent. Many of the best businesses in the region have diversified operations, international exposure, and revenues coming from multiple markets.

Aurelion LATAM Basket

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Basket Constituents & Company Financial Metrics

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Brazil and Mexico are also the two largest equity markets in Latin America, which naturally means they are home to many of the region’s strongest companies. A company can be listed in Brazil or Mexico while still benefiting from growth across the entire region. For us, the focus is where a company’s business is actually coming from, rather than simply where it is based.

Below, you can see an overview of the forward P/E and EV/EBITDA multiples for every company included in the Aurelion LATAM Basket. As you can see, most of these companies are trading at attractive valuations.

We also included P/E multiples compared with historical revenue growth and ROE. We thought these were particularly interesting because they give a different perspective on the companies in the basket. Some names are already established, high-quality businesses, while others are earlier in their story and could offer more upside if the market starts recognizing their potential.

Here is the full Aurelion LATAM Basket, presented in a different format.

As always, you can search through the table and navigate it to explore each company in more detail.

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9. Our Final Thoughts

Latin America is not an easy market. It is complex, volatile, and often uncomfortable to own. But for investors who understand the region and position themselves correctly, the opportunity can be substantial. We wrote this piece to serve as a practical playbook for navigating the region, separating the noise from the opportunities. Today, Colombia and Argentina represent our highest-conviction markets, where we see the most attractive risk-reward.

We see Mexico & Chile as less compelling markets today, but that does not mean there are no attractive companies in these countries. It simply means the current risk-reward is less favorable compared to other opportunities across the region.

View how the portfolio is positioned here: Aurelion Index link.

The Aurelion Team

Questions? Reach us directly on Substack or at contact@aurelionresearch.com.

Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

After quite a success with Marex Group, we are pivoting to another capital markets company. This company has been on our radar for a while, and following our meeting with management on July 13, we decided the timing was right to add this compounder.

“If we did not have futures contracts today, we would need to invent them in order to move forward and progress.” — Milton Friedman, speaking to Terry Duffy (CME Group CEO), 2002

The global exchange ecosystem is instrumental to capitalism as we know it. By facilitating the trading of stocks, derivatives and enabling the transfer of risk, exchanges drive global commerce in a massive way.

As a result of their durable and nearly indefinite earnings power (exchanges are among the longest-lived businesses in existence), exchanges have historically traded at rich valuation multiples. However, so far in 2026, the love affair with exchange multiples has cooled off.

Since the recent launch of perpetual futures by crypto trading platform Hyperliquid, dominant U.S. exchanges have faced a rare level of scrutiny from investors. Three of the big four (ICE, CME, NDAQ, and CBOE) are down meaningfully this year as concerns grow around competition from new trading products.

Some investors worry that new trading products like perpetual futures and tokenization could take market share away from traditional exchanges.

Our pick today is smaller and less discussed than the large exchanges, but it has been caught in the same crossfire.

However, the company is not an exchange and we believe its position remains highly secure regardless of perpetual futures adoption or potential tokenization.

The company operates primarily in highly attractive asset classes with very durable long-term growth tailwinds in which it enjoys dominant market share.

Like many trading businesses, incremental margins are very high, but unlike most, capital requirements are extremely low. The business operates with negative working capital and generated a 30%+ ROE in 2025 when adjusting for non-operating intangible assets on the balance sheet. FCF conversion is also very strong, with margins above 45%. Low capex requirements (~5% of revenue) and a largely fixed cost base drive operating leverage, allowing excess cash flow to be returned through strategic M&A, dividends, and buybacks.

Revenue has grown at a double-digit pace for decades, with no down year since inception. Since 2022, revenue has grown at a 20% CAGR while free cash flow margins expanded, and we believe long-term growth can remain in the low-to-mid teens.

Today the business trades at 22x free cash flow, the lowest valuation it has seen since October 2022. Management is using the decline as an opportunity to repurchase shares at accelerated rate compared with repurchases in prior years:

We think the stock has dislocated from fundamental intrinsic value. Quarter-to-date, we’ve purchased nearly $100M of stock. We have over $400M left on the authorization.” — Company CFO at a conference in June

Table of Contents

1. A Digital Market Infrastructure Platform

2. Dominating the Rates Market

3. Building the Future of Credit Trading

4. The Economics of the Business

5. Strategic M&A as a Growth Driver

6. Valuation: A Compelling Entry Point

7. What Could Go Wrong

8. Our Final Take on the Company

Read more

In this case, this was one of the most interesting discussions we have had in a while, with this $50B semiconductor behemoth. Cerebras, a Silicon Valley-based AI computing company, IPO'd in May and is at the forefront of the industry.

In early July, we discussed with Sean J. Dorsey, Head of Investor Relations and Senior Director of Strategic Finance at Cerebras. Sean has been at Cerebras for five years and works directly with the CFO. Before joining Cerebras, he was a VP in equity research and investment banking, covering semiconductors at major banks. An ex-Wall Street guy, as he described himself.

Off topic from Cerebras; he gave us his thoughts on independent research and how much emphasis they put on leading Substacks. It’s simple, Substack is becoming the place to be for independent investment research:

Sean: “Major companies’ IR teams and management are increasingly approaching independent research platforms like Substack and X in a similar way to how they approach traditional sell-side analysts.

The reason is simple: independent research has become increasingly important, with the ability to influence investor perception and market sentiment. Management teams are listening and reading the research that is published on Substack.” (adapted and interpreted for context).

He brought up (SemiAnalysis) and (publications we highly respect) as examples of why they want to engage more with leading Substacks because, he said, some forecasts were very different from what the company expected.

We begin with the company’s story, dive into our conversation with management, explore what it means for the broader AI infrastructure race, break down the bull and bear cases, and finish with our view on valuation.

We usually aim to give an actionable investment idea on a theme or a market. This is not the case for this report, but you’ll get some interesting insights on the AI trade, Cerebras, and independent research.

Methodology: we independently reaches out to company management teams. Aurelion Research does not receive compensation from any company covered. The answers from interviews are based on our notes and have been adapted and presented for clarity. They may not reflect the speakers’ exact words. We have selected the sections below that we believe are the most relevant parts of our discussion. All information discussed is believed to be publicly available. This content is for informational purposes only and is not investment advice or a recommendation to buy or sell any security.

Table of Contents

1. Company Intro: A Different Approach to AI Computing

2. In Conversation with Sean Dorsey

3. Implications for the AI Trade

4. The Debate: The Promise and the Challenges of Cerebras

   4.1 The Bull Case: A New Path for AI Computing

   4.2 The Bear Case: The Challenges Behind the Ambition

5. Valuation: An Analyst’s Nightmare

6. Our Final Thoughts on Cerebras

1. A Different Approach to AI Computing

Cerebras is a semiconductor company that builds chips designed for AI processing. It went public in May 2026 and trades under the ticker CBRS.

Its main product is the Wafer-Scale Engine 3 (WSE-3), a massive AI chip built as one large piece instead of many smaller chips working together.

Traditional AI systems use many separate chips that need to constantly share information, which can slow things down. Cerebras takes a different approach by putting everything together in one place, allowing information to move faster and helping customers run large AI models more efficiently. The WSE-3 is designed to handle AI workloads that would normally require many traditional chips.

How Cerebras Is Riding the AI Compute Wave

The Silicon Valley company has two main revenue streams:

1. Direct Hardware Sales (57%)

The company sells its AI chips and computing systems directly to customers looking to build and operate their own AI infrastructure for large-scale workloads.

2. Cloud & Services (43%)

Cerebras Systems operates its own global network of AI data centers.

It offers cloud services, allowing customers to access its computing power without owning the hardware. Customers can either reserve dedicated computing capacity or pay based on the amount of computing power they use.

An important point to mention: just one year ago, the revenue mix was quite different. Around 70% of revenues came from hardware sales, while 30% came from its cloud offering. So, what happened?

The change came from rapid growth in its cloud business, accelerated by a massive multi-year inference deal with OpenAI that began ramping in early 2026, combined with an Amazon cloud partnership. Instead of only selling the infrastructure, it is increasingly monetizing access to that infrastructure.

Customers can now use Cerebras’ computing power through the cloud without needing to purchase, install, and manage expensive AI hardware themselves. This should create a more recurring, service-based revenue stream while allowing Cerebras to benefit directly from the growing demand for AI compute.

The timing is also important because the AI industry is entering a new phase. Early AI spending was largely focused on training increasingly larger models, but we are now moving into an entirely new wave that is expected to be driven by inference as these models transition into real-world applications.

Here’s an interesting quote from AWS VP Compute & ML Services, David Brown.

“Inference is where AI delivers real value to customers, but speed remains a critical bottleneck for demanding workloads like real-time coding assistance and interactive applications. What we’re building with Cerebras solves that by splitting the inference workload across Trainium and CS-3, connected through Amazon’s Elastic Fabric Adapter. The result will be inference that is an order of magnitude faster and higher performance than what’s available today.”

Amazon and Cerebras are combining two different AI chips, with each one doing the job it is best at. By working together, they can generate AI responses much faster than traditional systems, making applications like coding assistants more responsive for users. This creates a win-win situation for both companies.

2. In Conversation with Sean Dorsey

Aurelion Research (AR): ‘‘Could you walk us through your role at Cerebras, your background, and how you got to where you are today?’’

Sean Dorsey

“I’ve been at Cerebras for five years, so I was here well before the company became public. I work closely with the CFO on financial matters and have also taken on investor relations responsibilities, which gives me a unique perspective on both the business and how investors view the company.”

Thoughts

Before joining Cerebras, Sean spent time on Wall Street, working in Equity Research and Investment Banking and covering the semiconductor industry at several major banks. In other words, he went from analyzing chip companies from the outside to helping build one from the inside, giving him a unique perspective on the industry.

AR: ‘‘How does Cerebras think about its customer strategy, and what drives customers to adopt its technology and build long-term partnerships?’’

Sean Dorsey

‘‘Our customers today are massive companies, like Amazon and OpenAI. These are not your typical customers. They are so large that, in some ways, you could almost think of them as resellers or distributors because of the scale at which they operate. We have a small number of very large customers, and that makes our go-to-market strategy quite unique. We do not need a massive sales force because we are focused on a handful of strategic accounts.

The advantage is that we know these customers extremely well, understand their needs, and can work closely with them. Because of that, we can operate with a relatively lean sales and marketing organization and allocate more resources toward engineering and product development.

We believe this is a competitive advantage for Cerebras. We also believe we have built a strong market engine. Even though we are a much smaller company, we have managed to position ourselves in the same conversations as some of the largest AI infrastructure companies in the world, including Nvidia.”

Thoughts

Cerebras’ customer strategy is interesting because the company is prioritizing depth over volume. Instead of trying to sell to thousands of customers, it is focusing on a small number of very large ones. This allows the company to stay lean and focus more resources on improving its products. The key question will be whether this strategy can continue to work as Cerebras grows.

AR: “There has been discussion around whether Cerebras’ approach to handling memory could face limitations as AI models continue to grow. How does the company think about this potential challenge, and how would it adapt if the industry shifts toward using more external memory solutions?”

Sean Dorsey

“I think some of the discussion around our architecture comes from people looking at Cerebras from the outside without having spent significant time using our compute or understanding all the nuances of the technology. They are doing their best to understand the product and the value proposition, but there are limits when you are not directly working with the system.

A recent example is the assumption that Cerebras would not be able to support very large models. We were a day-zero launch partner with OpenAI for its latest multi-trillion-parameter model, delivering it at up to 750 tokens per second, which is significantly faster than GPU-based alternatives. So clearly, there are still some misconceptions around what our architecture can and cannot do.

Building a wafer-scale chip was something that many people believed was not possible for decades. We proved that it was technically viable, and now we are proving that it can also be commercially viable. We have real customers making significant commitments to our technology, and our focus is to continue proving the doubters wrong over time.”

AR: ‘‘How does Cerebras think about attracting and retaining top talent, especially when competing against much larger semiconductor companies?’’

Sean Dorsey

“I think we’ve had a lot of success hiring people because we’re still the small guy that’s growing quickly, with a lot of momentum and opportunity ahead of us. Generally speaking, that is a very attractive position to be in compared to a much larger company that is trying to innovate in new markets.

We’re able to attract talent from some of the biggest technology companies in the world. We have people here from AWS, Meta, Apple, Google, Nvidia, and AMD. There are obviously many benefits to being a large company, but talent retention can also be a challenge when you’re operating at that scale.

I think the current environment has also created opportunities for us. While AI and semiconductor companies continue to invest and grow, other areas of technology have seen more pressure, which has created a strong talent pool for companies like Cerebras. Today, we have roughly doubled our headcount over the past 18 months and are approaching 1,000 full-time employees.

What’s also interesting is the composition of the team: around 80% of our employees are engineers, and 80% of those engineers are software engineers.

So despite competing against much larger companies, we’ve been able to attract strong technical talent because people want the opportunity to have a bigger impact, take on more responsibility, and help build something at an earlier stage.”

Thoughts

Talent is often overlooked when analyzing semiconductor companies, but we believe it can be a major competitive advantage. In AI infrastructure, where technology evolves quickly, the ability to innovate and execute depends heavily on the strength of the team behind the technology.

Cerebras remains much smaller than industry giants, but its ability to attract experienced engineers from leading technology companies shows that it has created an environment where people see an opportunity to make an impact. The key question is whether this advantage can continue as the company grows.

Then came the most interesting part: the new wave of research.

We mentioned this earlier in the article’s introduction. We learned that management teams at large companies like Cerebras are increasingly paying attention to research published on Substack and by influential accounts on X.

Why? Because they agree that research produced outside of the traditional sell-side ecosystem has become increasingly important, which is something we rarely hear from companies. This means that the work being done on these platforms is being read by major companies and market participants.

AR: ‘‘Do you think independent research platforms like Substack and X have become increasingly influential in shaping market sentiment?’’

Sean Dorsey

“I think it’s something that we’re all trying to rethink in terms of where we allocate time. We should probably be spending more time with the Substack community because whether or not we like it, whether they’re right or wrong, they have the ability to influence the market. We’ve spent so much time with some of the largest institutional investors in the world because they have the ability to move stocks as well. But so do people on X.

They have a microphone, and we should probably think about them in the same way that we think about top institutional investors like BlackRock.

They really understand our technology and our story, but just because some researchers don’t fully understand it today, that doesn’t mean we shouldn’t engage. We need to continue having thoughtful conversations, educating the market, and creating opportunities to explain why they may have missed something. Having that healthy debate in the market is usually a very good thing.”

AR: ‘‘How does Cerebras approach working with independent researchers when there are disagreements about the company or its technology?’’

Sean Dorsey

“It’s a fine line. You don’t want to insert your words on top of theirs or take ownership of their work. But if we can educate them on certain aspects, we want to do that. When SemiAnalysis was preparing its report ahead of our IPO, they sent us a 50-page document and gave us an opportunity to provide feedback.

We left a lot of comments around areas where we thought things were not quite right, lacked context, or were simply incorrect. The challenge is figuring out the right way to engage. If a Morgan Stanley analyst sent us a report, we wouldn’t edit their report. We would try to help improve their understanding of the business and technology.

That’s the same approach we want to take with Substack authors and writers on X. We can’t give preferential treatment just because someone is on Twitter. The same standards should apply to everyone.”

Thoughts

We found this particularly interesting given SemiAnalysis’ strong reputation within the semiconductor industry. Cerebras is also a well-known company in AI infrastructure, making this debate more about differing views on the technology rather than a lack of information. Hearing this perspective directly from someone who has been with CBRS for years provided valuable context and helped us better understand the other side of the discussion, the one we do not usually hear about.

AR: ‘‘What are some of the biggest misconceptions investors still have about Cerebras?’’

Sean Dorsey

“For 10 years, people have questioned whether what we were trying to do technically was possible. People said you wouldn’t be able to build the chip, you wouldn’t be able to cool it, power it, run large models on it, or scale the architecture. None of that is new. We will never convince every doubter, but we will continue to prove them wrong over time.

We have a fundamentally different architecture, and you can’t apply the same assumptions used for traditional chip design to what we are doing. I think we can do a better job educating people about that as we continue to grow.”

AR: ‘‘When well-known researchers misunderstand Cerebras’ technology, how do you think about addressing those misconceptions?’’

Sean Dorsey

“I think everyone’s got a point of view based on their own experience and how they’ve arrived at it. Dylan recently told us that his mental model of Cerebras and our architecture was wrong after speaking with our CTO and our CEO.

I’m a glass-half-full kind of guy, so I see that as an opportunity. If we can continue educating researchers like SemiAnalysis and other independent writers with large audiences, it’s an opportunity not only to improve public understanding of our architecture, but ultimately how the market values the company.”

Of course, we want to make clear that Dylan has been right far more times than wrong and is an exceptional voice for semiconductor analysis.

3. Implications for the AI Trade

Here are simple implications and inferences from the conversation.

1) Inference Is the New Race

For readers new to the AI market, it helps to understand the two phases of AI computing. Training is the process of building an AI model. A company feeds enormous amounts of data through thousands of chips over weeks or months, and the model learns from it. It is a one-time, upfront cost, similar to building a factory.

Inference is what happens after: every time you ask ChatGPT a question, generate an image, or use an AI coding assistant, the finished model is running a calculation to produce your answer. That is inference. It happens billions of times a day, and every single request consumes computing power.

The first wave of AI spending went into training ever-larger models. But a model only creates value when people actually use it, and usage is exploding.

Inference is expected to represent roughly two-thirds of all AI compute in 2026, up from one third in 2023. Unlike training, inference is a recurring cost that grows with adoption, which is exactly why speed and cost per request have become the new battleground. This is the wave Cerebras is positioned to ride: its chips are built to run models faster than traditional GPUs, and its deals with OpenAI and Amazon are inference deals, not training deals.

2) Nvidia’s Monopoly Is Starting to Weaken

For years, buying AI chips meant buying Nvidia. There was no real alternative, and that scarcity let Nvidia charge premium prices and earn exceptional margins.

That is starting to change. Amazon, one of the largest chip buyers in the world, now runs AI workloads on a combination of its own in-house chip (Trainium) and Cerebras hardware, using each one for what it does best. When the biggest customers start mixing and matching suppliers instead of depending on a single vendor, that tells you something.

Nvidia still dominates the market and its software ecosystem remains a huge advantage. But the “there is no alternative” premium that supported its valuation gets harder to justify when credible alternatives exist.

The winners from this shift are the challengers: specialized chipmakers like Cerebras and Groq, and the custom chips that Amazon, Google, and OpenAI are designing themselves. The AI chip market is moving from a monopoly toward an oligopoly, and that creates opportunities further down the food chain.

There was simply no way one company could make AI chips for the entire planet.

3) Customer Concentration Is a Feature of the AI Trade and a Systemic Risk

Sean described customers so large they’re “almost resellers or distributors.” The entire AI supply chain now hangs on a handful of buyers (OpenAI, Amazon, Meta, Google). If one slows spending, the shock propagates through every supplier simultaneously. Correlation across AI names is so high, probably higher than the headline suggests.

4) The Talent Migration Is Immense

Cerebras doubled headcount in 18 months, pulling engineers from AWS, Meta, Nvidia, and AMD, while “other areas of technology have seen more pressure.” Human capital is concentrating in AI infrastructure the way it concentrated in internet infrastructure in 1999. That’s bullish for near-term execution.

Yes, this is a classic late-cycle signal worth monitoring when comparing it to the dot-com bubble. However, at that time, cash flows were basically zero.

Now, the large companies in the AI trade, like Nvidia and the hyperscalers, are printing cash. If technology improves and more cash is generated over the long term, that’s not a bubble. When you have hundreds of thousands of the smartest brains in the world working on one new technology, it is simple to expect significant improvements in that technology.

5) Information Asymmetry in AI Names Is Shrinking

Management teams now treat top Substack and X researchers in the same way as institutional investors. When a company reviews a 50-page SemiAnalysis report pre-IPO and leaves comments, the edge is compressing.

Alpha in AI infrastructure will come less from information and more from interpretation, timing, and valuation discipline. Which is why we believe good research and contrarian thinking matter even more.

6) Valuation Is Narrative-Driven Until Cash Flows Arrive

That is an obvious one. With profitability not expected before 2027 and free cash flow in 2028, prices in this cohort trade on news flow and sentiment.

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4. The Debate: The Promise and the Challenges of Cerebras

4.1 The Bull Case: A New Path for AI Computing

The bull case for Cerebras is built around one main idea: as AI models become larger and more complex, the industry may need new approaches to computing. Today, most AI systems rely on GPUs, but scaling these systems requires connecting many chips together, which can create performance limitations.

Cerebras takes a different approach by combining computing and memory on a single large chip, which bulls believe could help address some of the challenges created by increasingly complex AI models. The Silicon Valley-based company is competing in a rapidly growing AI infrastructure market alongside companies such as Nvidia, Groq, and SambaNova.

While Nvidia benefits from a strong software ecosystem built over many years, bulls believe Cerebras’ hardware design could give it an opportunity in areas where speed and efficiency are especially important.

The company is also expanding beyond hardware sales through cloud services, allowing customers to access its systems without purchasing the infrastructure themselves and potentially creating a more recurring revenue stream over time.

4.2 The Bear Case: The Challenges Behind the Ambition

The bear case for Cerebras is built around three main concerns:

1. Customer concentration

2. Software Ecosystem

3. Long-term scalability

First, Cerebras currently depends on a small number of large customers. While the company is working to expand its customer base, bears argue that relying on a few major contracts could make future revenue less predictable.

Second, Nvidia’s advantage extends beyond its chips. Its CUDA software platform, which allows developers to build and run AI applications on Nvidia hardware, has been developed over many years and is widely used across the AI industry. Bears believe this could make it more difficult for Cerebras to convince customers to switch to a different ecosystem.

Finally, some investors question whether Cerebras’ technology can continue to support the increasing demands of future AI models. Dylan Patel from SemiAnalysis has raised concerns around whether the company’s current approach can scale as AI systems become more complex. These questions remain an important part of the long-term debate around Cerebras.

5. Valuation: An Analyst’s Nightmare

The company’s revenue growth is gigantic, expected to 20x over the next 4 years.

Wall Street expects this company to turn profitable in 2027 and for cash flows to be positive in 2028. On the positive side, the company has enough cash on the balance sheet to cover upcoming needs. The EBITDA forecast could make sense.

However, we are less confident about the cash flow forecast. The need for continuously investing and staying at the forefront of the AI race will persist, and we think the company will prefer to spend to continue trying to develop leading technologies rather than having cash generated and distributed to shareholders.

Is this company worth $20B, $50B, or $100B? Usually, it is quite easy to triangulate toward a valuation range when the company generates cash, but in this case, valuing the company with any confidence is tough enough that it makes the share price mainly dependent on short-term news.

6. Our Final Thoughts on Cerebras

The reason we are not currently adding Cerebras is that, while it operates in a highly attractive and growing sector, it has not yet proven that it can generate the level of free cash flow and profitability needed to justify its current valuation.

We believe Cerebras has built an impressive product with significant potential, but we would like to see the company demonstrate that it can successfully scale its business and translate its technology into sustainable financial results.

Another important factor is timing. At Aurelion Research, we are not only looking for great companies; we are also looking for the right moment to invest.

While we clearly see a compelling long-term opportunity, we believe it is still early in Cerebras’ journey as a public company. It has an interesting position in the AI infrastructure market, but the timing is not right yet.

The Aurelion Team

Questions? Reach us directly on Substack or at contact@aurelionresearch.com.

Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

It has now been 1 year since we officially launched the Aurelion Index.

The goal has not changed since day one: to create a portfolio that outperforms over the long term while limiting risk through appropriate diversification.

What has changed is how it can be used. The Index started as a table to read. Today, many replicate it automatically through our partner Plutus (runplutus.com).

Aurelion Index Fact Sheet June 30, 2026

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We are long-term investors who largely sat out the AI trade, avoided or missed, depending on who you ask. Not every call worked, and publishing every trade means being wrong in public. The good news is that this year, we’ve been right far more often than we’ve been wrong. What we didn’t expect, however, was how much your feedback would shape our work. Thank you!

What pleases us most about the performance is how many different trades drove it: mining, tankers, Canadian defense, life-science tools, and chemicals…

It was an active year: 57 trades since the portfolio was set up.

That number is higher than we would like. We are long-term investors at heart, but when a short-term opportunity appears, we tend to act on it.

We took the time to go back through our calendars and counted 43 meetings with management teams over the past year. These included CEOs, CFOs, and investor relations teams at public companies.

We also had a team member travel to Japan, we visited company facilities across Canada and the US, and attended investment conferences to source new ideas.

This is not a long report because we are focusing on what’s ahead.

That includes our Trades of the Year 2027, which will be released in December. It’s a familiar concept, but we believe it provides exceptional value and is a great exercise for positioning for the year ahead.

We also have more thematic reports and stocks in the pipeline.

We only publish them when the timing is right, so we continue speaking with public companies. Those conversations help so much in understanding individual businesses while also identifying emerging trends that could become tomorrow’s investment themes. Some interesting companies are on our schedule:

Our growing reach and contacts (as well as new website, check it out here: aurelionresearch.com) allow us to talk to the biggest public companies in the world, so we are looking to develop this series.

We also discuss below our current stance of the market and portfolio.

And something fun we had to do…

A note on methodology: 2025 performance was calculated in-house from our published trades and verified by Plutus. Since early 2026, it comes directly from Plutus, in real time, from actual invested accounts. Every trade behind these numbers is in the archive if you want to reconstruct it yourself.

As you might know if you have been following us for a long time, we put a high weight on investment themes to select companies.

Below is a look at all the themes we discussed last year:

Some of those themes have now been exited (like gold & silver, when we sold our mining equities in January 2026).

It's been nice watching these themes unfold in the news:

And now something fun we had to do…

We are fully conscious that this is not a good comparison, but you’ll get the picture.

Below, we compare all mutual funds from Morningstar (biggest fund data provider) that are within either the “Global Small/Mid-Cap,” “Small-Cap Blend,” or “Mid-Cap Blend” categories, which amount to 1,023 funds across the world.

The Aurelion Index consists of 20-25 small and mid-cap companies, ranging from approximately $100M to $15B in market capitalization. As a result, the companies we invested in over the past year directly overlapped with the investment universe of these 1,023 funds.

And with no surprise…

Another important point is that these are generally after fees. Some funds charge quite a big chunk of fees, while if you replicate the Aurelion Index on Plutus (runplutus.com), you are only paying a 1% fee per year on assets, with no performance fee. Also, the Aurelion Index has not been investable for the entire year using Plutus, making the comparison not ideal.

Of course, we do not face the same trading fees or liquidity constraints as some of those funds, both of which would have negatively impacted returns.

However, given the companies we invested in over the last year, we believe it is fair to say that even after accounting for those factors, the picture would look similar. And obviously, past returns don’t predict the future.

That is for you to decide!

If you are curious, we have attached the procedure we used to get the numbers and funds using Morningstar below.

Aurelion Index One Year Anniversary Fund Comps

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Moving on from this not-so-perfect comparison;

Drivers

Biggest Losers

Thematic:

• Nickel: prices are down about 10% since we first expressed our positive stance on the commodity in April 2026. Though much of the thesis is long-term.

• Fertilizer: Our prediction of where fertilizer stocks would go following the reopening of the Strait was wrong. We realized the trends were moving in the opposite direction and sold shortly after, with the position down 15%. Since then, the stocks have continued to decline.

Single Company:

• PTAL: -29%. The company abruptly suspended its quarterly dividend and announced lower production forecasts for 2026.

• CNC: Although we made >100% with the stock in 2025, recent performance after increasing our weight has been poor, down about 25%.

• IFOS: -26%. Fertilizer.

• VU: -19%. Short-seller attack on the stock.

Those were the main misses.

Biggest Winners

Thematic:

• Chemicals: Went against consensus by pinpointing the exact month of the sector’s cyclical turnaround after a five-year bear market.

• Tankers: Made 100%+ returns with several names by predicting renewed investor interest in the space and the cash generation of the companies.

• Space: Expressed a bullish view through MDA in January, up 60%.

• Gold & Silver: Sold in January at the peak of the market.

• Aluminum: Predicted the early innings of the bull market; our pick CENX is up >100%.

• Canadian Defense: Played the theme through two specific holdings, up >50% in a few months.

• Japanese Equities: Rode the up-cycle since early 2026.

• Rare Earths: ETFs are up 80% since our bullish stance.

Single Company:

• GURU: +150%

• ECO: +112%

• GG: +130%

• BOGO: +102%

• KRY: +102%

• MRX: +96% (in 4 months)

• CGY: +61% (low risk stock)

• RNG: +39% (in 1 month)

We did not rely on a few single outsized winners. Instead, we generated returns across multiple companies, taking profits and continuously reallocating capital into new opportunities to compound returns throughout the year.

If you want more discussion of the performance, we published quite a few articles that you can find here.

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Current Positioning & View of the Markets

Currently at 20 stocks, we are looking to expand the list to 25, with new stocks being added over the coming weeks/months.

Given that we have exited a few themes, here are the themes the companies in the Aurelion Index currently benefit from:

How We Currently See the Market

Since the reopening of the Strait of Hormuz, markets have been acting in a very unpredictable way. Every day seems to feel different from the previous one, which makes our job a little harder. You think you have the right timing on a theme, but the next day stocks are down 5%, and the day after they are back up 5%.

When markets are behaving in a way that we believe is less rational, we tend to become more cautious in our approach. Right now, we are adding fewer new companies to the Aurelion Index and being more selective when entering new themes that we find compelling.

The latest development is renewed tension between the US & Iran, with Trump threatening new strikes and a potential US blockade, while Iran has again raised concerns around the Strait of Hormuz. As a result, oil is up more than 4% as we publish this.

At the same time, shipping tanker rates are also rising, which is positive for our tanker holdings. It is difficult to know exactly what Trump’s plans are or what is driving his decisions, but the important point is that we believe the Aurelion Index is well positioned to perform across different market environments.

We still see great undervalued opportunities and continue to monitor them closely. We will probably be adding new positions later this month. Sectors that look interesting to us right now are LATAM, tankers, IoT, utilities, and pharma. We like some AI themes but are cautious of the short-term sentiment.

Within LATAM, we believe we might be at a turning point. We have seen similar situations before, where periods of high tension and uncertainty in the US market create attractive opportunities in markets that are less directly impacted by global issues. There are also several important elections that have recently happened or are coming later this year, including Chile, Peru, Brazil, Argentina, and Colombia.

And of course, paid subscribers can always view the positions and weights of the Aurelion Index here.

We often get asked what our favorite theme or stock of the moment is, so here it is:

Current highest conviction theme:

The sentiment around the sector is improving sharply, with emerging signs that the theme is taking shape.

We were the first to discuss that theme. No media or investment research publication had discussed it. It is slowly starting to get more attention. Pharma companies are increasing spending, and drugs are being discovered faster with the help of AI. Wall Street is starting to raise price targets, and we think sentiment has reached its bottom.

Current highest conviction stock:

This is definitely the most volatile stock in the portfolio, but we think it has been down recently due to weak sentiment around chipmakers. They are reporting earnings at the end of July, and we expect them to be strong again. So, higher risk, but certainly higher reward.

Otherwise, if you want something non-AI, Chartwell Retirement Residences (CSH) is a Canadian name we like a lot, more here.

The Aurelion Team

Questions? Reach us directly on Substack or at contact@aurelionresearch.com.

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Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

Plutus is registered as an SEC investment adviser, and for users, investment advice is provided by Namsoft Advisors, LLC. We are compensated for making our model portfolios available on the platform. Questions should be directed to Plutus. Aurelion Research does not provide financial or investment advice, and this page, or any other mention of Plutus, should not be interpreted as an endorsement or recommendation. We act solely as a research and model portfolio provider under a data licensing agreement with Plutus, with no access to client identities, financial information, or personal data.

We had been waiting for the right moment.

Today, that changes, as we believe the country is (finally) reaching a turning point. While this has nothing to do with our timing, yesterday was Canada’s National Day. And what better way to mark it than with a thematic equity basket?

After being the country with the worst inflation in the G7, a housing crisis, and shrinking purchasing power for most citizens, investor expectations had fallen to the floor. Yet Canada is becoming an increasingly compelling place for capital markets… and Carney, our new Prime Minister, is changing things.

The three following charts show why the country’s economy has underperformed other G7 countries over the past decade:

First, since 2020, Canada’s GDP growth has been the lowest, and in fact declined before Carney came in. Unlike the United States, it did not recover quickly.

Second, Canada experienced the largest change in general government gross debt as a share of GDP, at 25%, and that is never something economists like to see…

Finally, Canadian inflation for the selected items shown below has been well above the 2% annual target, significantly affecting consumers.

We think sentiment toward Canada is at the bottom. While clear evidence and indications of this are still relatively weak for now, our experience suggests this could be the starting point for more and more positive policies to come.

In our view, when it comes to expressing a bullish view on the Canadian market, buying the broad index is very unproductive. More on that below.

Our thematic basket includes only the “asymmetric” trends across AI energy demand, renewed defence spending, materials, and much more.

While you can have a bullish view on Canada, you need to be allocated to the few specific sectors and companies that will actually see tangible benefits.

Table of Contents

1. The State of the Canadian Market

2. Why We Are Bullish on Canada

3. Growth Driver 1: Canada’s C$470 billion Defence Plan

4. Growth Driver 2: Importance of Canadian Pension Funds

5. Growth Driver 3: AI’s Power Problem Is Canada’s Opportunity

6. The State of the Canadian Economy

7. In Conversation

   7.1 CIO of a Multi-Billion Dollar Canadian Fund

   7.2 Buy-Side Financials Analyst

   7.3 Canadian Portfolio Strategist

   7.4 Banking Risk Analyst

8. Canadian Equity Basket

9. Key Risks

10. Our Final Take on Canada

1. The State of the Canadian Market

Currently, if investors look at Canada’s benchmark index, the S&P/TSX Composite Index, they might think they’ve already missed the move.

But there is a catch that we intend to exploit.

Based on our discussions with market participants, most investors believe the recent surge has been driven almost entirely by rising gold and silver prices, and that is true. However, this is precisely where we believe the opportunity lies.

The market believes the TSX is overvalued, but that is far from the case.

In fact, the remaining upside lies in companies outside of commodities. Buying the broader index also means taking on heavy, unpredictable exposure to commodity markets, which we view as a poor way to express this theme.

That is why we have built an equity basket designed to benefit from improving country dynamics. The Canadian Equity Basket is composed of 20 high-quality companies we have been following for the past five years, and in some cases with management teams we have met, each also trading at attractive standalone levels on a company-specific basis.

2. Why We Are Bullish on Canada

We believe that under the new government (Carney), a range of positive developments is emerging. From improved investment policies and a diminishing impact from U.S. tariffs, to increased defence spending and easing inflation.

These factors have only just begun to have a modest effect on the broader index.

We are seeing a new Canadian market, one with strong momentum and one that is increasingly viewed by investors as a relatively safe place to allocate capital.

This may be a controversial view, but when it comes to banks and financial institutions, we believe Canada deserves far more credit than it receives. Canadian banks are smaller than their U.S. peers, yet they have historically been more stable. The system is highly concentrated, tightly regulated, and has proven resilient across multiple economic cycles.

That is why we believe the “too big to fail” concept arguably applies even more to Canada than to the US. Canada’s major banks have consistently maintained strong balance sheets, durable profitability, and steady growth, making the Canadian financial system one of the most stable globally.

Beyond this, we also see additional tailwinds emerging. Higher pension fund allocations to domestic equities could become a meaningful source of demand for Canadian assets. At the same time, stronger defence spending would benefit industry and manufacturing. We also see rising power demand from data centers and AI-related infrastructure, which should support Canadian utilities.

3. Growth Driver 1: Canada’s C$470 billion Defence Plan

Canada’s federal Defence Industrial Strategy (DIS) announced a plan to invest C$470B in total defence-related spending over the next decade, including C$180B in procurement and C$290B in infrastructure.

How Defence Spending Is Increasing

This represents C$47B per year in new investment, with Canada also expecting a C$125B boost in economic activity and the creation of 125,000 jobs by 2035.

This is a major change in policy. We are seeing a country and government investing in the growth of its own economy (for once) while also moving toward greater military independence. This is a meaningful development.

Canada has only recently reached NATO’s 2% of GDP defence spending benchmark. Moving toward the 5% target by 2035 would imply about 11% annual growth in defence spending (which would be a lot) over the coming years.

The policy goals are ambitious.

But what are the Canadian government’s main targets?

1. 70% domestic share of defence procurement

2. 50% increase in defence exports

3. 85% increase in defence-related R&D

4. More than 240% growth in industry revenues

We believe the policy direction under the Carney government points to an early-stage comeback, with a clear push to expand Canada’s domestic defence sector.

The setup is improving. Rising geopolitical tensions, increased Arctic activity, cyber risk, and the growing use of AI in military systems are all driving higher defence spending across NATO. In Canada, this is being used both to improve security and to support domestic industry, with effects across manufacturing, technology, and critical resources.

For example, Canada is working to break supply chain bottlenecks and improve trade flows. Carney’s goal is to double non-US exports by 2035. This will require infrastructure expansion, regulatory changes, and removing process bottlenecks, but broader reforms are already starting to take shape.

4. Growth Driver 2: Importance of Canadian Pension Funds

Canada is far above its weight in the pension world.

Canadian pension fund assets rank third globally in size and second only to Switzerland relative to GDP, at roughly 165% of the country’s economy.

That’s a system large enough to move markets.

Much of this comes down to structure. Canada’s largest funds, known as the Maple Eight, collectively control roughly CA$2.7 trillion in assets and run what’s called the “Canadian model”: direct investment, managed in-house instead of outsourced. That gives them the flexibility to write large checks directly into infrastructure, private equity, and real assets, both at home and abroad.

Canada’s pension pool is so large because saving into it is not optional. Nearly every working Canadian contributes to the CPP at a mandatory 11.9% combined rate, a figure that has climbed steadily since it started at just 3.6% in 1966.

All of that money is invested in-house by professional teams instead of being handed to external managers, which keeps costs low and allows policy to influence where capital is allocated. The result is one of the best-funded pension systems in the world relative to the size of the economy, and it means Canada has an unusually large amount of patient, long-term capital available to deploy.

Employee Compensation Matters

Canada’s pension compensation for finance professionals is high and sometimes higher than the private sector. For example, in addition to better working hours, an entry-level analyst will make the same (~$160K) working at a leading private equity firm as at a pension’s private equity fund.

At pensions, in “front office” roles such as hedge funds, infrastructure, real estate, trading, etc., a 30–35-year-old vice president will make $500K+ while working 9 to 5. This is basically unseen in finance (and in the rest of the corporate world). That data comes from some of our friends in those exact positions for 2025.

We have seen several U.S. or European leading managers (Goldman, BlackRock, etc.) get recruited into leadership positions in Canadian pensions.

This system has led Canada’s pensions to actively pick single stocks, allocate by country, etc. This is extremely rare for pensions. The summary is that Canada’s pension compensation, reputation, and work-life balance attract top-tier talent across the world, which has led to a dominant system, large enough that its investments significantly move capital flows in the country.

A Massive Negative Driver in the Last Decade

The Foreign Property Rule kept money in Canada until 2005.

From 1971, pension funds were legally required to hold 90% of assets domestically. That limit was gradually loosened, dropping to 80% in the 1990s and 70% around 2000-2001, before being eliminated entirely in 2005.

The Canadian model shifted the entire strategy, worsening the geography shift. Rather than sitting in public equities at all, Canada’s largest funds moved heavily into private equity, infrastructure, and real assets, managed in-house and increasingly deployed globally. Public equities, especially Canadian, became a smaller slice of these portfolios as private markets took a growing share.

Canada’s Pension Plan, one of Canada’s leading pension funds, shows this clearly.

A Changing Tone

Federal and provincial governments are actively pushing large Canadian pension funds to redirect more of their massive capital pools back into Canada. Driven by rising trade barriers (U.S., mainly), and a desire to boost domestic productivity, the push involves a mix of policy shifts and voluntary commitments.

Mark Carney Unveils Historic $115B Strategy at Canada–UAE Investment Summit

Mark Carney’s (Prime Minister) “Canada Strong” approach is focused on improving Canada’s weak productivity and investment cycle by attracting more long-term capital into domestic growth opportunities.

A key part of the context is that Canadian pension funds manage large pools of capital but allocate a relatively small share to Canadian public equities, preferring deeper and more liquid foreign markets like the U.S.

For now (while it could eventually become), the policy idea is not to force a change in allocation, but to make Canadian listed companies and domestic investment opportunities more attractive on a risk-adjusted basis.

That means improving conditions for capital formation, scaling domestic firms, and increasing the number of large, investable Canadian public companies through better economic policy and market development.

If successful, this would gradually increase the weight of Canadian public equities in pension portfolios. As domestic markets become deeper, more liquid, and more competitive globally, pension funds would naturally rebalance toward Canada without breaching their diversification mandates. We believe the shift would be driven by better opportunities instead of regulatory pressure.

Especially over the past year, during conferences in Montreal and Toronto, our conversations and hearing from key allocators in Canada have consistently highlighted a common theme: investing more domestically.

What stands out is that this is not just political rhetoric.

A portfolio manager at a pension fund telling us directly that they plan to increase allocations to Canada over the coming years carries far more credibility than policy discussions alone, and suggests a higher likelihood that these commitments actually translate into action.

Quantifying the Potential Impact (estimates)

If pensions moved allocation from 4% to 8%, that’s roughly $180B of fresh buying pressure entering, about a 5% increase in the total pool of capital chasing Canadian equities. On its own, that number is not dramatic.

But markets don’t move in a straight line with flows, a few percentage points of new demand can trigger a much bigger reaction:

Mainly, it could attract outside capital. Global asset allocators watch domestic flows as a signal. If Canada’s own pension funds, widely respected as sophisticated, patient capital, start buying back into the local market, that’s a credibility signal to foreign institutions who’ve been underweight Canada for years.

It could pull in passive money automatically. Index funds tracking MSCI / FTSE allocate to countries based on market size and performance, not discretion or preference. If pension buying pushes Canadian stock prices up, Canada becomes a bigger slice of global indexes, and passive funds have to buy more just to keep pace. The buying happens automatically.

It could disproportionately help smaller, less liquid names. The TSX is dominated by a handful of giant banks and energy companies. New buying doesn’t spread evenly. Mid/small-cap names, chronically underfollowed and thinly traded, could see an outsized price reaction from even modest new demand. It doesn’t take much volume to move a stock nobody is paying attention to.

It could lower the cost of capital for Canadian companies. In addition, with Carney’s measure, higher valuations and more buyers mean companies can raise equity more cheaply, and fund growth. They would have less reason to list or relocate abroad in search of deeper capital pools, a complaint that’s driven several Canadian companies to the US in recent years.

It could become self-reinforcing. Higher prices and stronger performance attract more attention from global managers and media, which brings in more capital, which supports prices further. Flow-driven markets can build real momentum once they get going, even from a starting point that looks small on paper. A perfect example is the Japanese market since the start of 2025.

5. Growth Driver 3: AI’s Power Problem Is Canada’s Opportunity

AI is turning into an electricity story in Canada.

Data centers need enormous amounts of power, running around the clock, and the world doesn’t have enough of it. That’s creating a new kind of constraint, and Canada is one of the best-positioned countries to supply it.

Canada has cheap hydro power, abundant natural gas, and the highest-grade uranium deposits on the planet, roughly 100 times richer than the global average. Most countries have one or two of these advantages. Canada has all three.

This is already showing up in how the market is behaving. Tech companies that used to only care about chips and cloud contracts are now negotiating directly with power producers and uranium suppliers, locking in electricity years in advance because they know supply will be tight. Power is becoming a bottleneck for AI growth, and whoever controls reliable supply has real pricing power.

Data Center Buildout

Alberta is at the center of it. Active data centers in the province already total 1.6 gigawatts (GW) of capacity, but planned projects would increase that to 13.2 GW, about eight times more. As of early 2026, more than 30 AI data center projects were waiting for approval in the province.

Alberta has made itself the destination of choice by offering cheap natural gas power, a deregulated electricity market, and fast-tracked permitting, going as far as launching a dedicated “concierge team” to help investors get projects moving.

According to Mordor Intelligence, the Canadian data center market was valued at around $11.5B in 2025 and is expected to reach nearly $25B by 2031, a compound annual growth rate of about 14%. We see this as conservative. It includes the whole data center industry, not just AI-related projects, and forecasts like this are often revised higher as new hyperscale projects are announced.

Just for example the Alberta minister aims for C$100B.

Not every province is participating equally. Quebec, Ontario, and British Columbia have all started restricting new grid connections because they simply can’t keep up with demand, which is part of why so much of the new construction has shifted to Alberta instead. The AI buildout, in other words, is chasing whatever power is available fastest, not just the cleanest or cheapest.

We have seen that the usage of data center electricity is currently drawn from available sources. That shows that costs and political backlash are much lower because it does not raise electricity prices for the whole region yet.

For a market that’s spent the last two decades being defined by banks and energy exporters, having a genuine infrastructure growth story tied to the most talked-about theme in global markets is a real shift.

How We Think About Our Equity Basket

A year ago, Canadian utility names were seen as boring, defensive dividend payers. That’s changing. Companies that generate or distribute electricity are now in the middle of one of the biggest capital spending waves in history, as AI infrastructure gets built out globally and needs somewhere to plug in.

Names in our basket tied to power generation, utilities, and uranium are becoming growth exposure to AI, just approached from the supply side instead of the software side. That’s a meaningfully different investment case than the one most investors are still pricing in, and it’s a big part of why we think parts of this market are still undervalued relative to where the puck is going.

What’s great about them is that you get a mix of dividend income and potential upside from a thematic trend playing out in the stock price.

6. The State of the Canadian Economy

Sentiment toward Canadian equities has shifted from cautious optimism in late 2025 to a more volatility-aware, defensive tone in mid-2026, even as capital continues to flow into the asset class. To put this in context, we believe it helps to look back at how the TSX has performed since before COVID.

Since Carney won the election and became Prime Minister, and as we entered the year after significant value appreciation in 2025, large asset manager ClearBridge noted that it had adopted a more defensive strategy, even while expecting Canadian businesses to benefit from pro-growth government policies.

On that same note, the federal government maintained a positive tone in its most recent Spring fiscal update, noting that improved sentiment is supported by the country’s relative tariff advantage, federal incentives, and increased investment in infrastructure. This optimism, however, has been tested by macro-induced shocks.

A mining sector capital flows report from March 2026 described stagflation, energy fragility, and liquidity risks tied to Middle East macro exposure.

The report also noted that this environment drove retail and institutional capital out of technology and AI names into real assets like gold and critical minerals, where Canada is structurally overweight.

In June, a market outlook piece showed the prevailing mood as cautious optimism, with opportunity mixed with volatility due to Canada’s concentration in energy, mining, and dividend payers rather than US-like megacap tech.

Despite volatility, there has been record-breaking demand for Canadian equity products. Canadian ETFs saw more than $20B in capital inflows, more than double the average 2025 monthly flow, according to NBC Data.

This momentum persisted through the first half of 2026, with assets in Canadian ETFs reaching over $700 billion and year-to-date inflows exceeding $75B.

This is reinforced by capital formation trends. The Spring Economic Update shows Canada leads the G7 in per capita investment inflows, and the 2025 Kearney FDI Confidence Index ranks Canada second among 25 markets.

7. In Conversation:

This section summarizes our discussions with analysts, portfolio managers, and industry experts, and the key insights we took away on current market sentiment.

Read more

We have seen several major changes in global markets:

• Oil prices have fallen sharply, from over $100 to below $75.

• Gold and silver have also declined significantly.

• The Strait of Hormuz has partially reopened.

• The shipping market has been fading (for now).

The ceasefire is now (somewhat) in place.

We picked up a lot of good insights from our discussion with Svein Moxnes Harfjeld, CEO of DHT, arguably a legend in the tanker industry. He scaled DHT from a small tanker leasing firm into a leading crude tanker operator.

In shipping, you have to deal with everything happening at the same time.

Macro factors, geopolitical conflicts, risk premiums, catalysts, and politics all interact and can move the market in either direction. To navigate it successfully and avoid getting burned, we believe it is essential to analyze and continuously monitor the small details that, collectively, can shift this massive market.

These dynamics ultimately affect our daily lives because almost everything we consume is transported by a container ship, bulk carrier, or tanker.

‘‘One thing to remember in shipping: you should never fall in love with a ship.’’

Table of Contents

1. The Current Situation in the Strait of Hormuz

2. Understanding Shipping Market Dynamics

3. In Conversation: CEO of DHT Holdings Inc

   3.1 The Situation in the Strait of Hormuz

   3.2 VLCC Insurance Rates

   3.3 What the Market Is Missing About Tankers

   3.4 Tanker Owner Behavior: Today vs. Past Bull Cycles

   3.5 How to Spot the End of the Tanker Cycle

4. In Conversation: Shipping Analysts & Industry Experts

5. Our Favorite Investment Ideas Across Shipping

6. What Could Go Wrong?

7. Our Outlook for the Shipping Market

1. Current Situation in the Strait of Hormuz

Every day, new headlines report how many ships have transited The Strait or how many tankers have loaded cargo and are now heading toward their destinations.

The problem is that shipping data is fundamentally different from most financial or commodity data. If you look at oil inventories, production, or futures prices on a Bloomberg Terminal, you can generally assume the data is highly accurate, but with shipping, it is a completely different story.

Almost no data provider, even the most expensive ones, has a complete real-time view of global vessel movements. We believe that is one of the main reasons why so many investors misunderstand the shipping market.

As market participants, we rarely have the full picture, and the truth is that we never will. This applies to analysts, investors, economists, and even industry professionals. The information available at any given moment is always incomplete, especially during periods of intensified geopolitical tension.

Even the best commercial data providers, such as Kpler, cannot capture every vessel movement in real time. Their data is among the most complete available, but it is still not perfect. That is also what makes shipping interesting, isn’t it? Yes, shipping is a cyclical business, but one that can deliver substantial returns.

Kpler even acknowledges this itself:

To us, the takeaway is simple: whenever we analyze shipping data, we should always assume there are more ships moving than what we can see on our screen. The dark fleet is difficult if not almost impossible to track.

A Closer Look at a Russian Shadow Fleet Crude Oil Tanker

The market has always agreed that the signals from these clandestine ships (the shadow fleet) can be delayed, disabled, or even cut off, and reporting takes time to filter through the system. Vessel tracking data should be treated as a strong signal of market activity instead of a complete picture of it.

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The name suggests it covers only micro caps, but in reality several small-cap companies were present. We were there mostly for the small-caps, where trading volumes and liquidity are higher, which matters to us. Most companies were U.S., with a few Canadian ones.

We attended the Toronto edition last year and found several interesting ideas there, so we expected this trip to be worth it.

It was very much so.

Out of 138 companies, we narrowed the field to 14 through initial research and conducted 1-on-1 meetings with the CEO or CFO. From there, 6 names stood out as most compelling.

This piece is for investors looking for new ideas. While you should always do your own research, this should give you useful insights gathered from a week of research and in-person meetings with management.

Importance of being critical toward management

Being able to talk directly with management at these conferences is invaluable.

After a few years of doing this, we have developed a few techniques to get them to talk more on what they actually expect from the business. Last year, after the 1-on-1 meetings at Planet MicroCap Toronto, we classified the companies we liked and the ones we dismissed. You can find them here:

For transparency, the 5 companies we identified as compelling have returned an average of 35% since the conference in October 2025, compared to -20% for the 7 we dismissed.

The most important thing is to stay away from promotional CEOs. Last year at the Toronto conference, we fortunately saw right through ZOOMD.

Their goal appears to be to increase the stock price in order to then raise capital… The company (addtech business) ended up losing two major clients without new demand to fill those, which led to a -76% return over 8 months.

We are not adding any of the companies discussed in this piece to our main portfolio, the Aurelion Index, yet.

At this smaller company stage, much of the analysis comes down to whether management is outright promotional or whether they can actually deliver. Most of them were pitching us the dream. We asked several questions designed to keep them accountable and we’re now waiting a quarter or two for proof, alongside additional research on our side, before potentially adding one or two.

For micro and small-cap companies, the risk is generally higher, but some below can honestly become multibaggers.

Some readers may want to buy their favorite names here and be earlier than us, which is a completely fair approach as well. Last year, we used that same process (conference, then further research) and this is how we ended up finding a company in our portfolio.

To the best of our knowledge, everything we discuss is public information.

Structure

We start by ranking all the companies using charts based on:

1. Our estimated risk-reward

2. Short-term versus long-term attractiveness

3. Market capitalization

4. Revenue growth versus EV/EBITDA multiple

We then present the 6 companies.

We also discuss the 8 we dismissed after taking to management. However, we think that depending on your investment style, some may still be a fit, so we have still detailed them. If you want to get the most out of this article with limited time, the best approach is to read the 6 ideas, then quickly skim the dismissed companies in case you find something interesting.

As always, feel free to let us know your thoughts on the companies.

Table of Contents

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If you’re new here and haven’t really looked into CLBT yet, no worries, we’ve included our initial report below, followed by an updated version so you are fully up to date and have a better understanding of what we are discussing in this post.

Before starting our recap of the call with the company, below is what we will cover. We kept it brief and focused on the most relevant points.

Table of Contents

1. Go-to-Market Strategy & Sales Model

2. AI Revenue Potential & Monetisation Strategy

3. Competitive Positioning & AI Disruption Risk

4. Market Perception & Operational Execution

5. Revenue Mix Evolution

6. Long-Term Risk Assessment in an AI Context

7. Our Updated Price Target

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We have seen a number of reports suggesting ways to benefit from the 2026 Football World Cup. Most of them focus on GDP growth or broader economic impact for the three host countries (Canada, the US, and Mexico, or even potential winning countries), or on more speculative ideas such as trading futures, betting markets, or sports betting apps. But we are not traders, and we are not looking at betting-related themes or anything of that sort.

Instead, we identified a company that we expect to benefit not only from the World Cup, but also from other factors that support the long-term story, rather than a one-off event, which is also what makes the opportunity compelling.

Before getting into the company itself, here are a few things that stood out to us.

We believe it is significantly misunderstood by analysts covering the stock and by the market more broadly, and that is where we strongly disagree.

We can understand the sentiment, given that it is a company that was historically highly leveraged with a large debt burden, but that profile has been improving meaningfully over time, and in our view it is now a very different story that the share price has yet to reflect. We believe the setup is compelling for two reasons.

First, the World Cup acts as a near-term catalyst.

Second, it sits alongside our view that Latin America is still in the early stages of a broader bull cycle. That combination is what we find most attractive.

Table of Contents

1. Introducing the Company

2. Investment Thesis

3. World Cup as a Key Catalyst

4. What’s Going On With the Company?

5. Where We Differ From the Market

6. How We Value the Company

   6.1 Valuation Metrics

   6.2 Price Target

7. Key Investment Risks

   7.1 Downside Risks

   7.1 Upside Risks

8. Our Final Take

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However, this can come with a downside, as sometimes you miss local expertise and what is actually being said on the ground. While we like calling someone in that geography, it is never as good as being there multiple days and seeing it with your own eyes.

We have already highlighted Japan in three articles this year (mainly the capital markets side, we go into many other sectors here) and since then, their index and markets are up significantly YTD. Despite the recent increase, we believe the timing is right to enter more significantly Japanese equities given the improved visibility on what is setting up as a fabulous coming years for the country.

This is not just some travel notes. We discuss:

• Why Japan is such a strong opportunity

• Attractive sectors in Japan and well-positioned companies

• Our complete Japanese equity basket

If you are only interested in the concise, actionable part of this thematic equity primer, you can have a look at the more detailed table of contents below. However, you’ll better understand in this intro why the opportunity in Japan is so compelling that we sent our analyst there.

Sadly we do not have Goldman Sachs’ million-dollar travel budget, so why Japan?

Japan is known for a more reserved investor relations culture. Many smaller public companies do not provide English translations. The focus is strongly long term, which makes timing investments more difficult. It may be one of the most widely invested markets globally that local investors have a substantial informational advantage over foreign investors. Right now, Japanese households are increasingly allocating capital to equity markets, which is another reason, in addition to macro factors we discuss below, why the country is well positioned.

The Tokyo Stock Exchange is now forcing companies to improve their financial metrics. While every company claims they are complying on paper, many smaller firms lack English investor relations teams. Being there in person allows you to meet management teams directly to see which company has created plans just to comply and which ones have actual plans to drive shareholder returns.

Global mega-funds have poured billions into Japan over the last year, but they have crowded into the same few massive, famous ones. Hundreds of smaller, highly profitable companies are completely ignored by foreign analysts. International investors are starting to enter Japan, and companies are beginning to shift their marketing and communications toward English:

Our analyst has been learning Japanese for a while and wanted to visit the country, so that makes for a great two-in-one. Also, you should expect another article related to Japanese equities (maybe a stock added to our portfolio), as we have quite a few meetings with Japanese companies coming up.

We also want to note that we are not adding a stock to our main portfolio, the Aurelion Index, but rather creating an equity basket to express our bullish view on sectors in the country. The main reason is that most of the Japanese stocks below exceed the minimum investment on Plutus, where the platform is hosted. We also have meetings coming up with other Japanese equities (that have lower minimum investments) that could potentially be added.

Our analyst landed in Tokyo on June 4, 2026, has spent a few days there, and is now in Osaka, the second-largest city and, according to him, much more friendly than Tokyo. He says the most important thing to do when visiting the country is to arrive with an empty stomach since the food is just so good.

For some of the companies discussed below, he was able to visit their headquarters and sometime speak with employees (in his limited Japanese).

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Table of Contents

0. Japan Research Trip: Introduction

1. Thematic Approach: Top-Down & Bottom-Up

2. Theme 1: Automation & Robotics

   2.1 Stock Idea: NSK Corp. (6471-JP)

   2.2 Stock Idea: Nabtesco Corp. (6268-JP)

3. Theme 2: Glass & Ceramic (Materials)

   3.1 Stock Idea: Nichias Corp. (5393-JP)

4. Theme 3: Banks & Financials in Transition

   4.1 Stock Idea: Mizuho Financial (8411-JP)

   4.2 Stock Idea: Suruga Bank (8358-JP)

   4.3 Stock Idea: Nomura Holdings (8604-JP)

   4.4 Stock Idea: Ichiyoshi Securities (8624-JP)

5. Japan’s Economy: Where Does It Stand Today?

6. Japanese Equity Basket: Top Ideas from the Ground

7. On-the-Ground Findings

8. Key Risks

9. Our Final Take on the Japanese Market

1. Thematic Approach: Top-Down & Bottom-Up

Our investment process combines top-down macro analysis with bottom-up fundamental research. The goal is to make sure every position is supported by a strong long-term theme while also meeting strict valuation and company quality criteria. We treat both approaches as one framework to identify high-conviction ideas, focusing on areas where shifts are still underpriced by the market.

The top-down stage focuses on identifying large macro trends and fundamental shifts in the economy. This includes areas where investment has been limited for years, or where new technology is creating strong demand for specific physical components. Examples include automation, semiconductor equipment, and industrial logistics. In Japan, these trends are especially important given the country’s deep industrial base and role in global supply chains. This step helps narrow the investable universe to sectors with clear long-term tailwinds.

Once a theme is identified, we move to bottom-up analysis.

This focuses on individual companies, looking at financial strength, cash flow generation, market position, and management quality. In Japan, this often highlights firms with strong balance sheets, niche global dominance, and improving capital allocation through dividends and buybacks.

We prefer businesses that sit in critical parts of global supply chains and are starting to shift toward higher-value products or services.

By combining both approaches, we aim to avoid overpaying for hype and instead focus on companies that are both structurally supported and financially strong.

2. Theme 1: Automation & Robotics

Everyone loves hyping up the artificial intelligence boom and smart factory software. Writing the most brilliant code on earth becomes completely useless the moment a robotic arm shakes while trying to tighten a bolt. The entire automation boom actually bottlenecks at the physical joints and gears.

Evaluating this sector requires drawing a strict line between the companies that assemble the final robots and the companies that forge the internal parts.

For decades, Japanese brands defined the modern factory floor by building massive, single purpose industrial arms. Today, that legacy manufacturing business faces significant challenges. The big money is rapidly pivoting away from machines that blindly repeat one programmed motion. The global market is chasing general purpose robots powered by advanced artificial intelligence. We are talking about agile systems that learn from experience and perform a wide range of tasks across completely different settings.

The numbers show a growing challenge for traditional robotics manufacturers. Industrial robot demand is expanding at a relatively modest pace compared with the broader intelligent automation market, projected to reach $370B by 2040.

China continues to invest aggressively in manufacturing scale and cost competitiveness, while the US is directing significant capital toward AI and software development. In this environment, Japanese robot manufacturers will need to strengthen their software capabilities and AI integration to maintain their competitive position as automation systems become increasingly intelligent.

We believe this dynamic creates a challenge for investors seeking exposure to automation. Rather than focusing on companies competing to sell the final assembled robot, we prefer to focus on specialized component suppliers.

For Japanese equities, these businesses provide exposure to the growth of automation and robotics while benefiting from a broad customer base and limited dependence on any single platform. We see the most compelling opportunities in companies producing precision gearboxes, linear motion guides, and heavy-duty bearings. These components translate digital commands into precise physical movement at the mechanical level.

Precision Gears for Robotics

The durability of this model is based on physical constraints.

Unlike software, precision hardware cannot be updated quickly; it requires long development cycles, specialized metallurgy expertise, and highly capital-intensive manufacturing. These components also operate under constant mechanical stress, often running 24 hours a day, which places strict demands on reliability.

As a result, once a supplier proves consistent performance, particularly in components such as harmonic drives or strain wave gears, relationships tend to last due to strict qualification requirements and high switching costs.

Beyond core motion systems, component manufacturers are expanding into higher-value areas such as planetary roller screws, multi-axis force sensors, and tactile sensors that enable robotic feedback. This reflects a gradual shift from standalone parts toward more integrated subsystems that combine hardware and built-in control functions. These companies also benefit from strong positions in high-reliability end markets such as healthcare, elder care, and defense, where purchasing decisions prioritize proven performance over cost.

High-Precision CNC Manufacturing for Humanoid Robots

Ultimately, advanced robotics systems cannot function without ultra-precision mechanical components. While global competition is intensifying in robot platforms and software systems, the underlying motion hardware remains highly specialized. China may lead in scale, and the U.S. in software, but both still depend on high-precision mechanical suppliers to build working systems.

And this is where Japan enters the game. This supports focusing on the component level, where exposure is linked to the broader expansion of industrial automation rather than competition between individual robot manufacturers.

We now turn to our first stock idea, which best represents this core thesis.

2.1 Idea: NSK Corp. (6471-JP) - Machinery

NSK is a compelling industrial transformation story, sitting at an inflection point between its legacy automotive-heavy business and a growing exposure to robotics and advanced motion systems. While bearings remain the core profit base today, it is gradually repositioning toward higher-value applications in actuators, integrated motion systems, and product lifecycle management (PLM).

We see the key investment case in the gradual upgrading of its product mix. Demand is shifting toward more precise and intelligent motion systems, particularly in robotics and advanced manufacturing equipment.

Actuators, which function as the mechanical “muscle” of robots, are a key focus of this transition, alongside system-level solutions that integrate motion and control rather than individual components. At the same time, NSK is developing PLM capabilities that extend the business model beyond one-off hardware sales toward longer-term service relationships, including monitoring, maintenance planning, and replacement cycles. This increases the connection between installed equipment and recurring revenue streams over time.

PLM (Product Lifecycle Management) Model

Overall, we view NSK as being at an early-stage inflection where its stable but mature bearings business continues to generate cash, while incremental exposure to robotics and advanced automation creates a longer-term re-rating opportunity.

We believe this shift is important because it moves the business model from selling individual parts to providing more complete motion solutions. Bearings remain the main source of stable cash flow, but are increasingly viewed as a mature, lower-growth segment that helps fund the transition.

Here is an example of the products they manufacture, which include core mechanical components such as bearings that are widely used in robotics, machine tools, and a broad range of industrial applications.

Main Catalysts Ahead

The most important catalyst is the planned integration with NTN Corporation. Announced in May 2026, the companies signed an agreement to create a joint holding structure, with completion expected in October 2027. The combined group would generate over ¥1.7T in annual revenue.

We see this as a major consolidation step in the Japanese bearing industry, aimed at reducing direct competition, improving scale efficiency, and strengthening the combined group’s ability to invest in next-generation motion technologies such as robotics and advanced industrial systems. The main objective is scale and efficiency: reducing overlap, improving procurement, and increasing investment in next-generation technologies such as robotics and predictive maintenance.

Another key initiative is the partnership with Accenture.

This focuses on improving efficiency through automation and artificial intelligence across manufacturing and internal operations.

“Partnering with Accenture represents a bold step in NSK’s evolution toward a management model that continuously drives structural reform and growth investment in tandem,” said Akitoshi Ichii, President and CEO of NSK. “At its core, this collaboration is about management reform that unlocks the full potential of our frontline workforce. Through talent development and skills advancement, we will strengthen operational capabilities.”

The goal is to reduce costs and redirect resources toward higher-value product development. Finally, NSK is simplifying its business structure. We believe the separation of the automotive steering business into a standalone unit reflects a gradual move away from lower-growth legacy activities, allowing the company to focus more on robotics, actuators, and advanced motion systems.

The Financials: Funding the Transition

The near-term financial outlook shows a stable business, providing a reliable cash base to support its long-term transformation. Management expects net sales of around ¥1T and operating income of ¥42B for the upcoming year. This should generate sufficient cash to fund investment in new growth areas, while demand in traditional machine tool markets continues to stabilize globally.

The core operation of making bearings and heavy mechanical parts is acting like a steady, predictable cash machine right now. Instead of borrowing money or taking on heavy debt to kickstart their robotics pivot, they are completely self funding the entire operation. They are taking the predictable profits from their old school factory clients and using that cash to build out the high tech supply chain of tomorrow. This financial cushion gives them a secure runway to shift toward higher margins without worrying about near term market disruptions.

Medium-Term Management Plan (2028)

NSK’s plan outlines a clear push to reshape the profitability profile of the business by FY2028, with a focus on turning scale into higher-quality earnings.

Profitability: Operating margins are expected to more than double from 4.1% to above 8.0%. The main driver is the industrial machinery division, where margins are targeted to rise from 3.3% to ~10% as higher-value automation components gain share. The automotive segment is also expected to improve, moving from 4.3% to 7%, supported by a continued exit from lower-margin products.

Capital efficiency: The focus is on making capital work harder. ROE is targeted to rise from 3.5% to 8%, while ROIC increases from 2.6% to 6%, reflecting more disciplined capital allocation and improved returns from core operations.

Financial discipline: This improvement is expected to be achieved without stretching the balance sheet. Net debt-to-equity is expected to remain below 0.4x, keeping the company flexible while it executes this transition.

What About Valuation?

NSK currently trades at an NTM EV/EBITDA of 3.3x, a level we view as reasonable given the company’s transition toward higher-value robotics and automation exposure. This valuation is further supported by a very conservative balance sheet, with minimal net debt and a solid cash position. In our view, this creates an attractive risk-reward setup, with limited downside given the balance sheet strength and meaningful optionality from the ongoing business mix shift.

Our Final Take on NSK

Overall, we see NSK as an industrial business in transition, with a stable bearings base continuing to generate cash while incremental exposure builds in robotics, actuators, and more advanced motion systems. The opportunity lies in this gradual mix shift, where improving capital efficiency and optionality in next-generation applications support the longer-term equity story.

2.2 Idea: Nabtesco Corp. (6268-JP) - Heavy Robotics

We think Nabtesco plays a critical role within the robotics ecosystem. Nabtesco is an industrial equipment company currently going through a massive transformation. The core of their business is making precision reduction gears for heavy robotics. To put it simply, these gears act as the joints of a robot arm.

They take the fast spinning of an electric motor and turn it into smooth, heavy lifting power that can stop exactly where it needs to down to the millimeter. Because these parts require extreme precision, Nabtesco holds a massive global market share and faces very little direct competition.

The main reason we are looking at them now is a major change in what they sell. On January 1, 2026, management finalized a deal to move 70% of their older, less predictable hydraulic equipment division into a joint venture with Italy based Comer Industries. By removing this volatile construction machinery segment, Nabtesco becomes a much cleaner and highly focused robotics company.

We expect this deal to free up cash and management focus, allowing the company to concentrate more on the higher-value automation market.

The financial results are already showing that the business is turning a corner. On April 30, Nabtesco reported first quarter revenue of ¥83B, beating market expectations easily. Their operating profit jumped nearly 70% to reach ¥8.2B.

The most important detail from that report was the gear division, which saw sales grow by ¥4.8B in just three months. This growth tells us that the long period where customers were just burning through old inventory is officially over. Factories are finally spending money again and ordering new parts.

They are also preparing for the coming era of physical AI, which in our view is already at the door. The company has developed a Monocrank product, a series of compact precision reduction gears designed for high-precision motion control.

These systems are engineered to deliver high rigidity and strong load capacity in compact formats, making them suitable for advanced robotics and automated machinery where accuracy and durability are critical.

Looking ahead, management expects to bring in ¥327B in sales and ¥27.7B in operating income for the full year 2026. Because they dominate their specific niche, their operations generate enough cash to fund their own growth.

They do not have to rely on expensive debt to build new factories or develop new technology. They have a very clean balance sheet, and the market is still pricing them as a slow moving industrial conglomerate rather than a focused automation play. We view this as a great opportunity to own a critical piece of the global robotics supply chain right as factory demand is waking back up.

What About Valuation?

Nabtesco currently trades at a next twelve months EV/EBITDA multiple of 10.3x, which we view as reasonable given its ongoing business mix shift. The company holds a strong position in critical motion control components used in factory automation, placing it within an important part of the robotics supply chain.

While software and cloud businesses continue to trade at higher multiples, we believe long-term value also exists in the physical infrastructure that enables automation. At current levels, investors gain exposure to core robotics hardware at a relatively modest valuation. In addition, the separation of the legacy heavy machinery division reduces cyclicality and simplifies the business profile.

This makes Nabtesco easier to understand as a more focused automation components company. Overall, we see a stable setup, supported by solid cash generation and some optionality if the market begins to re-rate the business toward its automation exposure.

Our Final Take on Nabtesco

Nabtesco generates stable industrial cash flow while gradually increasing its exposure to precision components used in factory automation. The business remains tied to mature end markets, but its role in robotics-related systems gives it a clearer direction over time. Recent simplification of the business improves visibility and reduces cyclical noise. Overall, we see a steady industrial name with optionality linked to automation demand over the medium term.

3. Theme 2: Glass & Ceramic (Materials)

The global expansion of artificial intelligence infrastructure is accelerating a critical transition within the glass and ceramics sector. While software and applications capture public attention, we believe the physical bottleneck remains centered on advanced hardware production. The market focus slowly but surely is shifting away from speculative software models and moving directly toward the specialized materials essential for manufacturing next generation processors. We expect the accelerating buildout of data centers to eventually translates directly into surging demand for semiconductor production equipment (SPE) components.

Why We Believe This Theme Is Compelling

We see this theme as a compelling investment case, offering a pure “picks and shovels” exposure to the AI buildout. Designing faster chip architectures is of limited value if fabrication facilities cannot physically manufacture the silicon at scale. As semiconductor geometries continue to shrink toward increasingly advanced nodes, the manufacturing process requires higher levels of thermal stability and chemical purity. Glass and ceramic material suppliers play an important role in enabling this technological progress.

Specialized materials, including high-purity quartz and advanced technical ceramics, are essential inputs used in the extreme environments of modern lithography and etching equipment. By focusing on the material layer, we gain direct exposure to the billions of dollars flowing into data center infrastructure while avoiding the binary risks tied to software platforms or individual chip designers. These suppliers benefit from strong underlying advantages, high switching costs, and meaningful pricing power, which supports their ability to capture a durable and highly profitable share of the technology cycle.

Current Inflection & Macro Drivers

The transition from factory construction to active equipment installation marks a key catalyst for the sector. Global semiconductor manufacturing capacity is experiencing a major geographic expansion, with large-scale capital expenditure turning into physical tool orders. Like we said earlier, these specialized glass and ceramic parts are consumable elements that degrade during production, meaning a larger installed base of equipment directly triggers a compounding replacement cycle. We are witnessing an inflection where volume demand accelerates as advanced manufacturing facilities scale up operations.

Automation in Semiconductor Manufacturing

The Industrial & Energy Baseline

Complementing this growth, the defensive portion of the sector is supported by shifting global utility frameworks, particularly the accelerating momentum behind nuclear power plant restarts. Nuclear energy infrastructure operates under strict regulatory mandates that dictate scheduled component updates irrespective of macroeconomic trends. We believe this dynamic creates a reliable consumption cycle for premium seals, specialized gaskets, and insulation. This baseline provides a great counterweight to the cyclical semiconductor market, stabilizing overall corporate cash flow and protecting aggregate margins.

3.1 Idea: Nichias Corp. (5393-JP) - Thermal Insulation

Nichias aligns well with our investment thesis in the glass and ceramics sector. It operates across five segments: plant construction and sales, industrial products, high performance products, automotive parts, and building materials.

While legacy activities provide a stable earnings base, the main growth drivers are concentrated in the high performance and industrial segments. These divisions position the company to benefit from demand in advanced Semi manufacturing as well as nuclear energy-related maintenance and restart activity.

Key Product Categories

Semiconductor Equipment & Material Advantage

Within the high-performance products segment, Nichias is exposed to the Semis equipment supply chain through high-purity seals and precision thermal insulation used in production tools. However, it is not a direct pure-play, which in our view adds a degree of diversification and reduces single-end-market risk.

As chip manufacturing shifts to more advanced nodes, process conditions become more demanding, which increases wear on these components and drives a replacement cycle linked to fab utilization rates. This positions Nichias within a consumable part of the Semi value chain, linking it to capital investment in chip manufacturing capacity and the ongoing expansion of data center infrastructure.

Energy & Industrial Plants Business (31.6% of Revenue)

This division stabilizes corporate earnings by turning heavy industrial engineering projects into a predictable maintenance service. The team specializes in thermal insulation work, meaning they wrap massive factory piping networks in heat trapping materials to prevent energy loss and reduce carbon emissions.

To minimize disruption for clients, technicians use a specialized heat retention recovery method to fix or replace insulation on active, fully running pipelines. They also deploy mobile service trucks that act as rolling fabrication shops, driving directly to a customer site to cut and fit custom seals immediately.

We think the primary driver to monitor here is the expanding schedule of nuclear power plant restarts in Japan. Nuclear facilities are subject to strict safety regulations that require routine component updates and insulation replacements on a fixed timeline, largely independent of economic conditions.

Through close integration with these high-security utility networks, we expect Nichias to secure long-term, high-margin maintenance contracts that help stabilize revenues even during broader economic slowdowns.

Industrial Products Business (19.6% of Revenue)

This business serves as the foundational cash cow that funds the company’s broader capital allocation strategy. The product catalog centers on everyday, high volume safety consumables that heavy factories require to remain operational.

This includes industrial gaskets, which are specialized sealing rings squeezed between pipe joints to stop high pressure steam, oil, or toxic chemicals from leaking out into a facility. It also covers rock wool insulation, created by melting natural stone and spinning it into fireproof fibers to protect industrial furnaces, as well as durable pipe linings that protect steel infrastructure from corroding when transporting abrasive fluids.

While we believe this segment does not offer the same growth pace as the semiconductor-related division, it provides a stable and defensive revenue base. Heavy manufacturing plants simply cannot operate without these sealing and safety products. They depend on them for continuous operation and safety compliance. Because these components must be regularly replaced as they wear out, the division generates recurring cash flows over time.

Advanced Products Business (16.8% of Revenue)

This segment is the company’s main growth engine and serves as a key partner to semiconductor equipment manufacturers. Instead of producing basic materials, it focuses on advanced components that chip factories need to replace regularly.

For example, it manufactures fluid transport systems made from PFA, a high-performance plastic designed to withstand very high temperatures and strong chemicals without breaking down or contaminating silicon wafers. It also produces piping heaters that keep process gases at stable temperatures to prevent blockages in production lines, as well as advanced chemical filters that remove microscopic particles before they can damage chips.

As semiconductor features continue to shrink, we expect the manufacturing environment to become more demanding. The specialized plastic and rubber components supplied by Nichias naturally wear out under these conditions, meaning they must be replaced regularly. This creates a steady replacement cycle, turning what would otherwise be a traditional industrial business into a more recurring revenue stream that grows alongside global data center demand, while reducing exposure to the boom-and-bust cycles of the broader technology sector.

Autoparts Business (20.7% of Revenue)

This is a mature legacy division that functions as a near term cash contributor rather than a target for future expansion capital. Nichias supplies major automakers with brake shims, air compressor seals, and heat resistant resin parts.

Brake shims are thin rubber or metal layers fitted onto the back of brake pads to dampen vibrations and stop cars from squealing when they slow down. The division also produces protective barriers that insulate delicate vehicle electronics from intense engine compartment heat.

Profitability remains stable today, supported by decades-long relationships with leading automotive manufacturers. However, the automotive industry is undergoing a gradual shift from internal combustion engines toward electric powertrains. Since EVs do not require conventional gas engines, complex air compressors, or traditional surrounding insulation systems, we expect part of this product range to face a shrinking addressable market over the next decade.

As a result, we view this segment more as a steady source of cash to be harvested and reinvested elsewhere, rather than a driver of future equity upside.

Building Materials Business (11.3% of Revenue)

This division is the least critical element of the core investment framework, operating as a localized domestic business inside Japan. The portfolio includes fireproof ceiling and wall panels for commercial buildings, flexible fireproofing wraps for structural steel beams, and raised access flooring systems.

We think this segment faces growth limitations as it is closely tied to commercial office construction and renovation cycles within a highly mature Japanese real estate market. This limits its global scalability and pricing power compared with segments such as semiconductors or nuclear energy.

Its primary role within the corporate structure is to keep local factories operating at high utilization and absorb manufacturing overhead, rather than to act as a meaningful driver of future earnings growth.

That said, there is one positive: it provides a stable, predictable base of activity that helps overall group operations through the cycle. This includes products such as raised flooring systems, which are widely used in corporate offices and data centers to create underfloor space for power and data cable management.

Capital Allocation & Enhanced Returns

Nichias is currently shifting its business mix from a stable industrial player toward a higher-margin technology supplier. For FY2026, the company targets net sales of ¥270B, representing an increase of ¥18.1B YoY. Growth is primarily driven by the advanced products segment, which contributes ¥13.9B, offsetting softer trends in legacy automotive and building materials businesses.

This shift supports stronger operating leverage, with operating income forecast at ¥45B, up ¥8B versus FY2025, helping absorb rising domestic labor costs.

Nichias has structured this expansion within a disciplined two-year capital framework of ¥83B. This is funded by ¥66B in operating cash flow and ¥17B in cash on hand. Capital is allocated across three areas:

1. Growth investment (¥24B): Capacity expansion and recurring capex to support demand visibility.

2. Strategic investment (¥29B): R&D and automation initiatives, including infrastructure such as its liquid hydrogen experimental facility.

3. Shareholder returns (¥30B): Direct returns to investors through dividends and buybacks, with ¥18.4B already distributed through FY2025.

For FY2026, management is increasing distributions.

The company is guiding to a total annual dividend of ¥65 per share, consisting of a ¥58 ordinary dividend and a ¥7 special dividend linked to its 130th anniversary. In addition, Nichias is launching a share buyback program of up to ¥5B.

This mix shift is already flowing through the income statement. Operating income is forecast at ¥45B, up ¥8B versus FY2025, giving the company more flexibility to absorb higher costs while continuing to invest in growth areas.

Expected Recovery Across Key Segments

The Energy & Industrial Plants segment remains the stable earnings base of the business. The main focus, however, is the FY26E recovery profile across the rest of the group. Following a weaker FY25, both Advanced Products and Industrial Products are expected to rebound, while Building Materials and Auto Parts continue to show steady, gradual improvement.

That said, the assumptions for Advanced Products are demanding. A near doubling in returns within a single year is a high bar, and it will depend on whether demand actually picks up as expected. At this stage, delivery on execution and demand trends matter more than the upside shown in the model.

A Look at Valuation

The stock trades at 11.5x NTM EV/EBITDA and 20.4x NTM P/E. While the EV multiple looks reasonable for an industrial transitioning into higher-value components, the earnings multiple reflects that a lot of the re-rating is already priced in. At this level, returns depend less on multiple expansion and more on execution in the advanced products segment and continued margin delivery.

4. Theme 3: Banks & Financials in Transition

We believe the narrative for Japanese financials is shifting away from a simple recovery trade toward a more durable margin expansion story, driven by Bank of Japan rate normalization. In simple terms, rates are moving up from extremely low levels toward more normal conditions after years of near-zero policy, which allows banks to earn more on loans and reinvest cash at higher yields.

A terminal policy rate of 1.25% and 10-year JGB yields above 2.0% by early 2027 would meaningfully improve earnings for megabanks, as higher domestic yields feed directly into lending spreads and reinvestment income. Under a 1.5% policy rate scenario, and excluding volatile equity gains, this translates into stronger net interest income and improved profitability.

The key point is operating leverage: as interest rates rise, revenue increases faster than costs. This supports a path for ROE to move toward the 13% range, which in turn could justify higher price-to-book multiples above 2.0x over time.

This improvement is also happening alongside a clear pickup in domestic lending, with Japanese bank loan growth rising to over 5% YoY in 2026.

The key shift is that banks are increasingly relying on real loan growth rather than financial market income or portfolio effects. In other words, they are deploying more capital into a growing domestic credit market, where higher interest rates also improve returns on each loan they make.

At the same time, household financial behavior is changing in a more supportive direction for banks. Cash &deposits have fallen below 50% of total financial assets, while investment trusts and equities have risen above 20%. This gradual reallocation supports higher fee income through wealth management platforms and increases the importance of distribution and advisory businesses within Japanese banks.

There are still transitional challenges. Banks will need to actively manage large JGB portfolios as the Bank of Japan reduces its market presence, which can create short-term volatility in earnings. However, this impact is increasingly offset by stronger core lending income and growing fee-based revenue.

Offshore risks remain an important offset, particularly exposure to the US credit cycle, private credit markets, and areas such as data center financing. These segments can introduce earnings volatility if global credit conditions tighten.

However, we believe the domestic setup continues to look strong, supported by rate normalization, improving loan growth, and a steady shift in household capital allocation toward investable assets.

4.1 Idea: Mizuho Financial Group (8411-JP)

Mizuho FG’s share price has come under pressure recently due to (1) declining expectations for a BoJ rate hike and (2) reports of insider trading involving employees at Mizuho. We view this weakness as an attractive entry point to accumulate the stock. We expect EPS growth to continue outperforming market expectations, supported by ongoing share buybacks and upside in net profit.

Within the megabank space, Mizuho retains strengths in large corporate banking and global investment banking, while combining relatively high sensitivity to interest rates with a conservative credit profile. Although the recent misconduct-related headlines have weighed on sentiment, we believe the market reaction is excessive when viewed against historical precedents. Continued buybacks and earnings upside should support further EPS growth and drive positive estimate revisions, leaving additional upside potential from current levels.

4.2 Idea: Suruga Bank (8358-JP)

Suruga Bank is in the middle of a turnaround, moving from restructuring into a more stable growth phase. The key driver is its Mid-Term Business Plan (April 2026–FY2028), where management targets a consolidated ROE of 11% or higher. Alongside this, the bank is strengthening shareholder returns, with a payout ratio expected to rise toward 40% or more, supported by ongoing share buybacks.

Several catalysts could support a re-rating. A potential removal of remaining FSA administrative actions would fully clear past regulatory overhangs and improve operational flexibility. At the same time, Suruga is expanding through partnerships, most notably with Credit Saison, aiming to build new retail channels, expand fee-based income, and reduce reliance on traditional lending.

Despite improving fundamentals, the stock continues to trade at a discount to book value. If management delivers on ROE targets, continues to clean up legacy credit costs, and sustains capital returns, the gap between valuation and earnings power should narrow over time. This makes Suruga a classic recovery setup, where execution on a clearer strategy is the main driver of upside.

4.3 Idea: Nomura Holdings (8604-JP)

Nomura Holdings is Japan’s largest brokerage and investment bank, combining domestic wealth management with global wholesale operations. Over the past year, it has benefited from stronger retail participation in Japanese markets, as households gradually shift savings from cash into investment products.

This provides a solid base for the wealth management business, although overall earnings remain cyclical and sensitive to market conditions and cost pressures.

For FY2026, results were mixed but solid. Net revenue rose 15% to ¥2.16T, with net income reaching ¥362.1B, translating into a return on equity of 10.1%, in line with long-term targets. However, momentum weakened in Q4, where net income fell 19% QoQ to ¥73.9B. Costs also increased, with full-year non-interest expenses up 15% to ¥1.62T, driven by higher compensation, acquisition-related costs, and an impairment in the investment management division.

Nomura currently trades at ~11x earnings and offers a dividend of ¥51 per share, implying a payout ratio of 41%. While the valuation and yield look reasonable, they also reflect the cyclical nature of the business and earnings volatility typical of global brokerage operations. International operations were notably weak in Q4, with pretax income from overseas down 82% QoQ.

Overall, the investment case depends on whether Nomura can control costs and stabilize its international business, while continuing to benefit from steady growth in domestic investment activity. We still see the setup as attractive.

4.4 Idea: Ichiyoshi Securities (8624-JP)

Ichiyoshi Securities is a Tokyo-based retail broker with a $259M market cap, currently trading at 11x trailing earnings. The business has been steadily shifting toward a “stock-type” model, closer to a wealth management structure, with recurring AUM fees now covering 80.2% of operating costs, up from 60% in 2023.

This brings the company closer to breakeven on fixed costs, where incremental fee income flows through at high margin. On profitability, it earns a TTM ROE of ~14.5% and trades at 1.7x book value, supported by a clean earnings profile with limited reliance on non-core income such as investment gains or interest income.

Dividend momentum has been strong. Payouts have increased from ¥17 per share in 2024 to ¥30 in November 2025, and most recently to ¥58 in March 2026, including an anniversary-related top-up. With a 50% payout target, the implied forward yield is around 6%, which remains attractive.

Looking ahead, rising participation in Japanese equity and investment trust markets should continue to support flows into retail brokers like Ichiyoshi.

With over two-thirds of revenue already coming from recurring wealth management fees and a strong ROE profile, we see scope for the stock to trade at a higher multiple than the current 11x earnings, with potential re-rating toward 14–15x if execution and market conditions hold.

Back in late April, we published a more in-depth report on the Banks & Financials transition (reallocation) theme, along with what we see as some of the best ways to position for this major shift in Japan’s capital allocation.

5. Japan’s Economy: Where Does It Stand Today?

Japan is often a difficult market to read. What looks strong at first glance is not always strong underneath, and in other cases the opposite is true. It is rarely a simple or linear story. The main questions today are how long the AI-driven rally in Japanese equities can continue, and what direction interest rates and Bank of Japan policy will take. These two factors are now central to market direction.

At the same time, Japan offers a broader set of investment themes beyond AI and Semis. These include rising interest rates, ongoing corporate governance reform, and growth concentrated in specific strategic sectors of the economy.

Within this, the AI and semiconductor cycle remains a key driver of sentiment and earnings. AI-related exports now account for roughly 20% of Japan’s total exports, placing the tech supply chain on similar footing with the automotive sector. Strength is also spreading across the value chain, from semiconductor equipment and memory to tighter bottlenecks such as optical components, testing tools, and cooling systems.

Japan’s Semiconductor Toolmakers

Corporate earnings are already reflecting this momentum, with domestic electrical equipment and precision instrument companies guiding for strong profit growth into FY2026. At the same time, capacity expansions in memory and related segments are expected mainly from 2028 onward, keeping supply conditions relatively tight in the medium term.

Overall, we see the durability of the AI-driven cycle as an important driver for Japanese equities going forward, alongside the path of monetary policy.

We believe the government agenda in Japan is only just getting started, or at least that is the hope. Over the past six months, activity has been dominated by budget work and election-related processes, which have limited visible policy progress. Attention now turns toward agenda-setting and execution.

Japan’s Prime Minister Takaichi

The post-election “honeymoon” period is fading, and the coming months will be an important test of follow-through from policymakers. The current growth strategy is increasingly shaping around industrial policy with a stronger defense component. We are witnessing a gradual shift toward using defense demand to support dual-use technologies, linking national security priorities with broader industrial innovation. Don’t be fooled, it won’t be all perfect.

Overall, policy is moving toward a more competitive and resource-focused approach, with greater emphasis on fiscal discipline and sovereignty. This marks a shift away from the more traditional, broad-based fiscal growth policies of the past, and we see this as supportive for investors and the market.

Then, of course, when we talk about the Japanese economy, one key point is energy security. Japan produces very little oil domestically, so it relies heavily on imports, making it more exposed to global supply shocks, particularly from the Middle East. Strategic oil reserves also offer only limited flexibility in a disruption scenario.

Japan Steps In Again as Yen Slides on Oil Prices

Recently, Japan’s crude inventories have moved away from historical patterns. While 2025 levels remained stable ~351M barrels, 2026 data shows a sharp and unusual decline. Following a significant drawdown of its SPR, inventories fell from March highs to ~276M barrels by the end of May.

That said, we are confident Japan will continue to diversify its energy sources. The country is already restarting and building new nuclear plants, while also scaling renewable energy capacity. Over time, this should provide a more balanced and resilient energy mix.

Now, on the economic growth level, that is where things can become more complex. There is still a meaningful degree of uncertainty around Japan’s growth outlook, which is also one of the key reasons we sent an analyst on the ground in Japan, to build our own view of how the economy is actually evolving in real time. The objective is to go beyond headlines and get a direct read on conditions as they are experienced on the ground.

Japan’s economy has held up relatively well despite several challenges in recent years. Growth is expected to continue at a moderate pace, supported mainly by consumer spending and domestic demand, even as global conditions remain less supportive. As wages and prices gradually rise after years of low inflation, policymakers face a balancing act between keeping inflation near the 2% target, maintaining fiscal stability, and supporting long-term growth in the context of an ageing population and a shrinking workforce.

On the positive side, Japan is in the process of gradually building what we believe will become a more resilient economy. This is being supported by targeted strategic investments designed to help offset potential risks such as demographic pressure, weaker purchasing power, and external shocks, including disruptions in regions like the Strait of Hormuz.

On the policy side, the government is actively supporting the development of large-scale data centers outside of major hubs like Tokyo and Osaka, with new projects emerging in regions such as Hokkaido and Kyushu. These programs are designed to reduce developer costs and can offset construction expenses by up to ¥30B, while also encouraging regional investment.

Hokkaido Data Center Development Map

Looking at near-term macro tailwinds for 2026, real wage growth is starting to materialize, with real wages now back above 2%. The Prime Minister’s accommodative fiscal and monetary stance is aimed at supporting domestic demand, while inflation remains relatively stable. Importantly, real wage growth has recently returned to positive territory over the past months.

Consumer Price Index (CPI) & Wage Growth

Finally, on the real GDP outlook, the picture is stable rather than exciting. Growth is expected to average around 1% in real terms over 2026 to 2028. It is not a high-growth environment of course, but this remains consistent with Japan’s profile as a mature, ageing economy with slower expansion.

The support comes mainly from domestic demand, particularly consumption and wage growth, while external demand remains more uneven. In this context, Japan is less about strong cyclical acceleration and more about steady, low but positive growth, which we believe will continue to be supported by policy stability and gradual improvements in real income conditions.

6. Japanese Equity Basket: Top Ideas from the Ground

We have built a 9-stock equity basket of Japanese companies that we believe are well positioned to benefit from a market that remains somewhat overlooked, but still offers significant pockets of value and opportunity.

You can download the spreadsheet here as well:

Aurelion Japanese Equity Index

9.79KB ∙ XLSX file

Download

Download

Detailing what we said in the introduction, we are not adding any of these stocks to the Aurelion Index, our main portfolio.

Readers may ask why, given our positive view on the country.

First, our analyst still has time on the ground engaging directly with company management, which remains important in refining conviction and identifying the strongest near-term setups.

In addition, adding certain Japanese equities on Plutus (where our portfolio is hosted) increase the minimum investment threshold for APAC names, and we prefer to keep accessibility as broad as possible. That said, we view this equity basket as an attractive way to express the improving backdrop in Japan.

It offers diversification across key themes, reducing the impact of company-specific volatility while maintaining exposure to higher-quality opportunities. In our view, it provides a more targeted and potentially more efficient way to play the cycle compared to broad index exposure.

(Readers can decide to automatically replicate this basket in their brokerage account through Plutus at runplutus.com)

Now let’s go through the companies we selected.

You’ll notice the 9-stock basket doesn’t carry every name we covered in depth. For Mizuho, we remain constructive on it, but the NEXT FUNDS TOPIX Banks ETF (20% of the basket) already holds Mizuho at roughly 16% of the fund, so we capture that exposure through the ETF instead of doubling up with a concentrated single-name position. The name we left on the sidelines is Nabtesco mainly because it creates a very high minimum investment for our Japanese equity basket. With those two exceptions, the basket reflects essentially all the ideas in this report.

It would be too repetitive to go through each company one by one, as we have already covered most of them either in this report or in our previous Japan Financials report. Instead, we will step back and explain the framework more broadly, which we think is more useful for readers. When it comes to finding investment ideas in Japan, the key is not to approach it like the US market.

The dynamics are different, and what works in one does not necessarily translate to the other. Japan does have a large number of net-nets (companies trading below net asset value), but that is not our main focus. Many of these names are also too small in market cap and liquidity for us to include in our portfolio.

As a result, our basket is deliberately diversified across sectors.

In automation and robotics, for example, we prefer not to own the most direct pure plays. Instead, we focus on adjacent companies that supply critical components needed to build these systems.

In glass and ceramics, Nichias is a good example. It is a large, diversified industrial company with exposure across multiple end markets. While diversification can sometimes dilute focus, in this case we see it as a strength, giving the company multiple levers of demand and stability across cycles.

Then, on the financial side, including insurers, non-banks, and banks more broadly, this is one of the largest sectors in Japan, alongside autos and other major industries. Given what is happening in the economy, the new political leadership, and the renewed upward pressure on interest rates, we think this area still has meaningful upside. In our view, there is fuel left in the tank.

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6. On-the-Ground Findings

Inflation in Japan appears to be in an early but noticeable phase after decades of near-price stability. A clear example is the restaurant sector, where ramen shops have historically anchored prices around the ¥1,000 level, effectively positioning ramen as an affordable “working-class meal.” Operators are now struggling to maintain this price point as input costs rise, forcing gradual menu adjustments and, in some cases, pushing consumers toward cheaper alternatives or reduced discretionary spending.

Food inflation is also visible in staples such as rice, which has seen sharp price increases. In response, the government has released portions of its national rice reserves to stabilize supply. This reflects a shift toward more active intervention after years of deflationary pressure and limited price dynamics.

Wage growth, however, remains limited. Based on local discussions, salary adjustments are not keeping pace with rising living costs, which suggests that real income pressure is beginning to build. The combination of higher prices and stagnant wages is creating a mild squeeze on household purchasing power, even if from a very low inflation base. Despite this shift, Japan remains significantly cheaper than Western economies on a broad basket of everyday expenses. Food, transport, and housing costs are still materially lower than in Canada.

However, imported or globally priced goods such as electronics (e.g., iPhones) stand out as disproportionately expensive relative to local income levels, highlighting the gap between Japan’s domestic cost structure and global pricing benchmarks. This also reinforces the pressure on household purchasing power, particularly for high-value discretionary items.

From a macro perspective, demographics remain a key constraint. The population is aging rapidly, increasing reliance on public spending and raising long-term fiscal pressure. At the same time, political sentiment on immigration appears to have shifted, with less openness compared to previous cycles, limiting one potential adjustment mechanism for labor shortages and population decline.

Energy security is another important consideration, but government support has so far helped limit the impact on households. Costs have remained manageable for citizens, and a large share of daily mobility relies on public transport rather than private car usage. Japan still maintains significant exposure to imported energy and has historically relied on diversified supply agreements and strategic reserves. While there are ongoing partnerships and efforts to diversify supply, dependence on imports remains a key vulnerability, particularly in the event of geopolitical disruptions affecting key shipping routes such as Hormuz.

Overall, the field observations point to a transition economy: moving away from prolonged price stagnation, facing emerging inflation pressures, constrained wage dynamics, and persistent demographic headwinds, while maintaining fundamental strengths in affordability and industrial organization.

7. Key Risks

The biggest risk scenario remains energy.

Japan has so far avoided a real supply shock, helped in part by its large oil reserves, which cover roughly 200 days of demand. At the same time, the government has stepped in to limit the impact on households, introducing subsidies to keep energy prices lower since March, including a US$19B supplementary budget to fund additional electricity and gas support during the summer peak period, as well as an extension of gasoline subsidies.

A Look at Shibushi National Oil Storage Station in Kyodo

This helps smooth the short-term impact on consumers, but it also highlights the underlying exposure Japan still has to imported energy. If global supply conditions tighten further, or if geopolitical tensions persist, the pressure on both inflation and public finances could increase. In that context, delays in Middle East peace talks, if prolonged, could become a more material risk for supply stability and pricing, especially given Japan’s reliance on imported energy inputs.

We can see below that Middle East tensions are weighing on the Reuters manufacturing confidence index. Not as severe as 2020, of course, but the trend is clearly weakening, with confidence falling at a steady pace in recent months. If the conflict between Iran and the US persists for too long (which remains uncertain), we believe the index could easily move below zero.

Lastly, another risk is that Japan’s 5-year inflation breakeven has been rising toward nearly 3%, up from around 2% before the recent Iran-related spike in energy prices. This suggests that medium-term inflation expectations are becoming higher and more sensitive to global commodity and geopolitical shocks. Nothing alarming enough to cause major concern at this stage.

That said, we view this more as something to monitor rather than a change in our broader outlook. From what we are observing from the ground, it is not a major concern, but it is noticeable.

8. Our Final Take on the Japanese Market

Overall, we are bullish on the Japanese market and economy.

At first sight, from abroad, looking at our screens, the picture was less clear, but with our analyst on the ground, we are more confident in our view that the market is no longer a simple recovery story. It is instead a mix of improving domestic demand, gradual policy normalization, and strong industry-specific growth pockets, particularly in AI-linked hardware and selected industrial segments. At the same time, macro conditions are becoming more balanced, with wage growth, inflation, and capital flows slowly moving in the right direction.

However, Japan is not a linear story. Energy exposure, global credit conditions, and the strength of external demand remain important factors. The key, in our view, is that Japan now offers a wider set of opportunities beyond traditional recovery trades, with more dispersion and more bottom-up alpha.

If there’s anything you’d like to learn more about in Japan, or any specific companies you’d like us to look into, let us know in the comments below. Our analyst will be there for some time.

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Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.