Our positions had more than doubled before the Hormuz situation, and now the sector has become even more mainstream. We believe the visibility of a continued upcycle in the industry has increased, making the sector a compelling investment.

This report is built on more than just sitting behind a Bloomberg desk.

We spent time on the ground conducting field research at a major North American port, speaking directly with the CEO of DHT Holdings (NYSE: DHT), the CFO of Nordic American Tankers (NYSE: NAT), and trusted industry experts to understand what is actually happening on the water.

Today we are re-entering TORM (NASDAQ: TRMD) in the Aurelion Index.

We have also created a Shipping Basket on Plutus, diversified among the best companies across the sector. We believe it is a strong risk-reward way to play the theme. You can access it here.

“Give me a ship and I shall move the Earth.”

Nearly everything we use, consume, or depend on has spent time on a ship. Shipping connects continents, carries economies, and keeps the world moving. It is the link between where things are made and where they are needed, and it never gets boring. That is why it is one of our favorite industries to cover.

This 2026 Shipping Primer is for investors who want to understand how this industry actually works, how shipping companies make money, and why the sector behaves so differently from most other businesses. More than that, it is a practical playbook for what is happening right now. The geopolitical disruptions reshaping global trade routes, the uncertain status of the Strait of Hormuz and the Suez Canal, and the macro forces driving rates and valuations all create real opportunities for those who understand the mechanics behind them.

Strait of Hormuz: A View From Space

One thing we want to establish early: in shipping, long-term value comes from how much cash a business generates for shareholders over time.

For decades, the industry has been fixated on Net Asset Value (NAV), which we think often leads companies to buy ships at peak prices with too much debt, treating shipping like a trading game rather than a business.

That mindset is part of why shipping companies remain small players in global capital markets despite moving the vast majority of world trade. We believe the companies worth owning are the ones that have moved past that approach.

Whether Hormuz and the Suez Canal normalize or remain blocked through 2026, this report is intended to give you all the tools you need to understand what is happening in the shipping market and how to position your portfolio accordingly.

Table of Contents

0. Introduction:

1. Iran is Running Out of Time

   1.1 The UAE Has Held Up Well

   1.2 The China Narrative Does Not Hold

   1.3 The Clock Is Running

2. Are Kharg Island’s Oil Docks Empty?

   2.1 What it Means for Oil

   2.2 What it Means for Shipping

3. Inside One of North America's Largest Ports

4. The Main Segments of the Shipping Industry

   4.1 Dry Bulk Shipping

   4.2 Tanker Shipping

   4.3 Container Shipping

   4.4 Specialized Segments

5. What We Learned From Speaking With Shipping Executives

   5.1 CEO of DHT

   5.2 CFO of NAT

6. 2026 Outlook for Shipping Market

   6.1 Crude Tanker Market

   6.2 Dry Bulk Market

   6.3 Product Tanker Market

   6.4 Container Market

7. 2026 Outlook for Shipping Rates

   7.1 Crude Tanker Rates

   7.2 Dry Bulk Rates

   7.3 Product Tanker Rates

   7.3 Container Rates

8. Our Favorite Shipping Stocks

   8.1 Top Idea #1: Okeanis Tankers

   8.2 Top Idea #2: TORM Shipping

9. Additional Stocks Worth Following

   9.1 Himalaya Shipping (Dry Bulk)

   9.2 Star Bulk Carriers (Dry Bulk)

10. Our Final Take on the Shipping Market

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1. Iran Is Running Out of Time

Before diving into shipping, we need to step back and look at the bigger picture. The situation in Iran is the single most important factor shaping global markets and the shipping industry right now, and we think the market is misreading it. Most people believe this conflict will last a long time. We do not, and here is why.

Before the conflict began, Iran's economy was already under severe pressure. Inflation was running above 40% annually, the rial had lost a significant portion of its value, and the country was running persistent budget deficits. The chart below shows just how long Iran has been borrowing to fund its operations, with primary deficits stretching back decades and government debt rising steadily.

Since the conflict started, things have gotten considerably worse. The IMF now projects Iran’s economy will shrink by 6.1% in 2026, with inflation approaching 70%. What makes this particularly telling is that despite all the geopolitical noise around Iran’s military capabilities, its defense spending as a share of GDP has actually been modest and declining for years, sitting at ~2% in recent years.

Stockholm International Peace Research Institute (SIPRI).

The 2026 figure is a research estimate adjusted for domestic inflation. Note that official figures exclude off-budget spending, including direct IRGC oil revenue allocations used to fund drone and missile programs.

The Limits of Iran’s Missile Stockpile

US intelligence estimates that Iran holds the largest domestic missile stockpile in the Middle East, including over 3,000 ballistic systems. However, a stockpile is only as useful as the industrial base behind it. Recent military strikes heavily targeted four critical production facilities, destroying the specialized industrial mixers needed to blend solid fuel. This operational damage effectively freezes Iran’s capacity to build new short and medium range ballistic missiles.

We believe financial constraints prevent a quick recovery. Replacing high precision mixers requires specialized imports that demand hard currency.

With oil revenues restricted, the regime must choose between military funding and internal stability. In our view, the legacy stockpile creates an immediate threat, but the lack of replacement capacity prevents a prolonged conflict.

More than 90% of Iran's international trade flows through the Strait, and the US blockade has cut off nearly 70% of the regime's export revenues. By restricting all commercial traffic traveling to or from Iran's Gulf coast, the naval action hits the country's primary economic source of income.

US Blockade of Iran’s Gulf Coast

Oil & Gas sales account for 60% to 80% of total government income. This revenue streams directly into everything from military deployments to basic social services for a population of over 91M people. We believe the regime cannot maintain its current military posture without triggering domestic instability.

In our view, the loss of hard currency forces a severe budget crisis, meaning Iran cannot keep the Strait closed without accelerating its own economic collapse.

For a more detailed analysis of the US-Iran conflict and its impact on the tanker market, we published two dedicated thematic research reports on the subject.

1.1 The UAE Has Held Up Well

The UAE air defense network has intercepted most of the 500 ballistic missiles and 2,000 drones launched by Iran. Casualties remain limited and infrastructure damage is manageable. In our view, this success proves that heavy investment in military hardware has protected core economic assets.

Saudi Arabia & UAE Move Oil Through Pipelines After Attack

We believe this security allows the country to maintain significant oil potential. Following its exit from OPEC, the UAE holds the largest volume of unused production capacity among recent departing members.

Output fell to 2.2M barrels per day during the conflict, but the country can pump close to 5M barrels per day. Pipeline logistics remain vital for bypassing naval threats. Saudi Arabia has sent 60% of its Gulf oil exports overland via the East-West Pipeline to the Red Sea port of Yanbu. Concurrently, the UAE routes crude through the ADCOP pipeline to Fujairah, avoiding the Strait entirely.

In our view, while localized drone strikes have targeted major refining complexes like Ruwais and Samref, these alternative transport routes are operating near maximum capacity, preventing a total collapse in regional export volumes.

While the Ministry of Energy states it will increase production in a gradual manner, we believe the actual return of this oil will be slow. The government will likely pace its extra volume to avoid driving prices down too quickly.

In our view, the UAE will most likely phase in this extra capacity over a full year, balancing global supply shortages against its own financial goals.

1.2 The China Narrative Does Not Hold

The idea that this conflict is primarily designed to weaken China does not reflect what is actually happening. China has continued buying Iranian oil throughout, sourcing discounted barrels through established networks, and the US threat of 25% tariffs on nations trading with Iran has not changed that behavior in any meaningful way. This conflict is about Iran’s nuclear ambitions and its broader regional influence. China is a factor in the sanctions picture, but framing the entire conflict as a move against Beijing misreads what is driving it.

1.3 The Clock Is Running

Restricting transit through the Strait of Hormuz is Iran’s main source of geopolitical leverage, but the strategy has hit a physical limit. With naval enforcement constraining tanker transit through Gulf exit routes, export throughput has collapsed significantly. Vessel-tracking data from Vortexa shows that departures fell by over 80% in late April compared to the March baseline.

Tankers Anchored in the Strait of Hormuz (April 18, 2026)

Because onshore storage facilities at Kharg Island and Sirri Island are filling rapidly, the regime has been forced to act. The U.S. Department of Energy confirmed that Iran has cut crude oil production by ~400,000 barrels per day.

We believe this infrastructure backlog severely shortens Tehran’s timeline.

While the country can distribute these cuts across multiple fields to prevent immediate, permanent damage to its reservoirs, the financial strain is immediate. In our view, these compounding economic and physical pressures will force a diplomatic resolution much sooner than the market currently expects.

2. Are Kharg Island's Oil Docks Empty?

Iran’s main oil export terminal at Kharg Island has gone quiet.

Satellite imagery from May 8, 9, and 11 shows no tankers at the facility, marking the longest stretch without activity since the conflict began. In the 73 days since attacks started on February 28, tankers were visible at the jetties on 33 days. While Iran previously loaded ships for floating storage, that activity has stopped.

Oil Slick Reported Off Kharg Island's West Coast (May 6, 2026)

The backlog is growing quickly.

The number of tankers anchored east of Kharg Island rose from 3 on April 11 to at least 18 by May 11, with others anchored off Chabahar. These ships cannot leave the Gulf without risking seizure or attack by the US Navy.

Satellite Comparison: Kharg Island Oil Tanks (April 6 & May 11, 2026)

With tanker loadings paused, storage tanks on Kharg Island are filling up. Satellite analysis of tank roof shadows shows spare capacity at the facility is approaching zero. Kpler estimates Tehran can only keep pumping until late May before running out of space entirely.

Once that happens, Iran must cut production at additional fields. While political posturing continues, the financial pressure only moves in one direction. A regime that cannot sell its oil, cannot store its crude, and is watching its tanker fleet pile up inside the Gulf has a massive incentive to resolve the conflict quickly.

2.1 What it Means for Oil

For oil, this supports our view that prices will not stay elevated over the long-term. The economic pressure on Iran is building to a point where a resolution becomes more likely than the market assumes. A country that cannot export its oil, cannot store its crude, and is watching its revenue dry up does not have the luxury of holding out indefinitely. We think that reality will force movement on the Strait sooner than most expect, quickly erasing the geopolitical premium from prices.

2.2 What it Means for Shipping

For shipping, the outlook is more interesting. When the Strait reopens, a large amount of stranded oil will move at once. As routes normalize, the shadow fleet loses its premium, and compliant tankers will capture the returning volume. The longer the blockade lasts, the more significant that rebound will be for the sector.

We also published a dedicated report on April 8 covering the broader Iran War playbook, including our views on chemicals, fertilizers, and two new high conviction stock ideas we added at the time.

If you want to understand how we were thinking about the conflict from an investment perspective beyond shipping, that report is worth reading.

3. Inside One of North America’s Largest Ports

We always like to prioritize on-the-ground research whenever possible. Whether it involves visiting retail storefronts or sampling every flavor of a new consumer brand, we prefer real-world data over desk analysis.

Shipping demanded a more comprehensive field study, and frankly, it was far more engaging. We spent time at the Port of Montréal in Québec (Canada), a major North American gateway and the home base for Aurelion Research.

As the largest container port in Eastern Canada, it handles massive volumes of dry bulk, liquid bulk, and containerized freight. Because its daily operations touch almost every key segment of maritime logistics, it offers a clear look at how global trade works and the broader challenges facing the market, which is exactly why we wanted to visit it firsthand.

Cape Redirection & Schedule Breakdown

Talking with port operators highlighted how deeply global logistics are shifting. Ongoing conflict in the Middle East and disruptions at vital choke points like Bab el Mandeb and the Strait of Hormuz have upended global shipping schedules.

Most container vessels moving from Asia to Europe or the North American East Coast now bypass the Suez Canal entirely, routing instead around Africa’s Cape of Good Hope. This detour adds ten to fourteen days of sailing time to a standard round trip, which ties up global ship capacity and pushes container freight rates higher worldwide. For the Port of Montréal, the breakdown of predictable weekly arrival schedules creates severe operational challenges. Terminals experience days of unnatural quiet followed by a sudden, heavy bunching of vessels. This uneven flow strains dock labor and terminal yard capacity, forcing rail operators like CN and CPKC to constantly adjust their freight handling on the fly.

Crude Volatility & Shipping Costs

Port workers also emphasized that with oil prices frequently crossing $100 a barrel this year due to tensions in the Persian Gulf, the cost of marine fuels like VLSFO and HSFO has surged. Shifting to longer routes around Africa on top of these high prices means daily running costs for shipping lines are skyrocketing. To protect their margins, companies are strictly enforcing emergency fuel surcharges and telling their ships to slow down to save fuel.

The Shift to Smarter Routing

The constant supply chain shocks of the last few years have forced managers to give up old, “just-in-time” delivery models that left no room for error. Companies no longer want to rely on a single path for their goods. Instead, they are spreading their freight across different coasts and ports. This helps them avoid getting stuck if one location faces problems, whether those problems are caused by politics, strikes, or low water levels, like we have seen in the Panama Canal.

Linking Ocean Alliances to Local Rail

We took these photos during our visit, showing Maersk and Hapag Lloyd containers loaded onto train cars right next to the docks. Seeing these two brands side by side highlights a major trend in global shipping. These companies operate under a massive partnership called the Gemini Cooperation, which was created to keep shipping schedules tightly managed and reliable.

When global tensions force ships to take the long route around Africa, those strict schedules fall apart. When delayed ships finally arrive at the port all at once, it puts immediate pressure on the tracks and rail cars shown here. It is a great example of how ocean delays quickly become land problems, forcing local rail systems to quickly adjust to handle the sudden flood of cargo.

4. The Main Segments of the Shipping Industry

The shipping industry comprises several distinct segments, each driven by its own unique supply and demand dynamics.

While some sectors provide predictable cash flows tied to long term contracts, others experience high volatility and depend entirely on fluctuating daily spot rates. Examining these individual sectors shows how different fleets operate and why certain segments are better positioned to handle shifts in global trade.

4.1 Dry Bulk Shipping

This segment handles the transport of raw, unpackaged commodities.

The market splits these goods into major bulks like iron ore, coal, and grain, and minor bulks like fertilizers, steel, and construction materials. Trade flows typically move from large producing regions in Australia, Brazil, and North America to major consumption hubs in China, Japan, and Europe. To handle these diverse cargoes, the global fleet varies significantly in size.

Handysize vessels are smaller, versatile ships that typically carry between 15,000 and 35,000 DWT. Because they have their own onboard cranes, they can operate in smaller ports or shallow rivers without loading infrastructure. This flexibility makes them the standard choice for regional trade and minor bulk commodities.

Capesize vessels sit at the largest end of the bulk carrier segment, usually carrying 150,000 DWT or more. They get their name because their size historically forced them to sail around Cape Horn or the Cape of Good Hope instead of using major canals. These ships do not have onboard loading gear and rely entirely on deepwater terminals to load and unload cargo. They primarily transport long-haul iron ore and coal.

4.2 Tanker Shipping

Tankers transport liquid cargo, focusing primarily on crude oil and refined petroleum products like gasoline, diesel, and jet fuel.

The segment also includes specialized vessels for chemicals and liquefied natural gas (LNG). To maintain operational efficiency, most tankers specialize exclusively in a single cargo type rather than switching between different liquids.

In the crude oil market, the industry relies heavily on Very Large Crude Carriers (VLCCs) to transport unrefined oil from major production regions to global refining centers. Product tankers serve the clean segment of the market, moving refined fuels from those refineries to international consumer markets. LNG carriers represent a growing share of the global fleet as the international trade of natural gas continues to expand.

To monitor the health and pricing dynamics of these segments, the industry tracks two core benchmarks. The Baltic Dirty Index (BDTI) measures the spot market strength for raw crude transportation, while the Baltic Clean Index (BCTI) tracks the rate environment for refined products.

4.3 Container Shipping

Container shipping moves manufactured and finished goods from factories to consumer markets. Everything from electronics to clothing is packed into standard steel containers and loaded onto vessels that run on fixed, predictable liner schedules, much like commercial airlines.

The busiest trade lanes connect manufacturing hubs in Asia to major consumer markets in North America and Europe. While ocean carriers historically focused just on moving cargo from port to port, the industry has increasingly shifted toward integrated logistics, with many lines now handling the inland journey all the way to the final warehouse.

Freight rates in this segment split between long term annual contracts and the immediate spot market. To monitor pricing trends and capacity demand, the industry relies heavily on benchmarks like the China Containerized Freight Index (CCFI), which tracks rate fluctuations across major global export routes.

4.4 Specialized Segments

Beyond the main bulk and container markets, several specialized segments rely on vessels designed for specific operational roles. These markets are driven by distinct economic factors and trade flows rather than standard freight cycles.

Offshore Vessels provide critical support to the marine energy sector. This segment includes a range of specialized assets such as deepwater drilling rigs, subsea construction platforms, and support vessels that transport crews and supplies to offshore fields. While historically tied to oil and gas, these assets are increasingly used in offshore wind and renewable energy projects.

Car Carriers are specialized vessels serving the global automotive industry. These include Pure Car and Truck Carriers (PCTCs) and Roll-on/Roll-off (Ro-Ro) ships, designed with multi-deck structures to transport finished vehicles efficiently from manufacturing hubs to consumer markets. The segment requires flexibility to handle shifting export flows and the growing share of electric vehicles.

Cruise Ships differ from cargo vessels as they transport passengers rather than goods. These ships operate as floating resorts, where onboard services and the travel experience are the primary commercial product. Demand is driven by leisure spending, seasonality, and route selection.

Ferries are key components of regional transport networks, particularly in coastal and island regions. Operating over short, fixed routes, they carry both passengers and freight, providing essential links where land is limited or unavailable.

5. What We Learned From Speaking With Shipping Executives

When you do a Primer on an industry, even if you know the space well, speaking with experts, management teams, owners, and analysts is always one of the best ways to get direct, on the ground insights on what is actually happening and what the people who work in the industry see every day.

That is exactly what we did for this shipping Primer.

We spoke with DHT CEO Svein Moxnes Harfjeld and NAT CFO Bjørn Giæver, two experienced operators who have been in this business for a long time and know it inside out. We will not quote them directly, but we will share the most important things they told us, in our own words.

5.1 Svein Moxnes Harfjeld, CEO of DHT

One of the first things that stood out to us about DHT Holdings is how seriously they think about the long-term sustainability of their business.

They engaged leading energy research firms to understand where oil demand is heading over the next few decades, asking hard questions about which technologies could realistically displace oil and at what cost.

In the tanker business, you are ordering ships that will be on the water for decades. If the demand picture changes materially, the economics of those assets change with it. Studying that question before committing capital is a rational and necessary step for any operator thinking beyond the next few years.

Their conclusion is that peak oil demand is likely to occur sometime in the mid-2030s, followed by a plateau of roughly a decade before any meaningful decline begins. That view directly shapes how they think about vessel investments.

They calculate the time charter equivalent earnings required to generate a 10% return on capital employed and compare that to historical earnings adjusted for fuel efficiency improvements. They only move forward when there is a clear gap between those two numbers. Simple, but disciplined.

On risk, DHT ranked global GDP and geopolitics as the two most important threats to their business, in that order. We think that is the right way to look at it.

The two are deeply connected. Geopolitical instability weighs on economic growth, and a weak global economy can itself create the conditions for conflict. For a business that depends on the volume of oil moving around the world, both factors hit in the same direction.

On capital allocation, DHT thinks the way we do. Models and frameworks are useful, but running a business well requires judgment and the confidence to act on experience when the numbers alone do not give you a clear answer.

We believe that is when management quality really makes the difference, and why the trust an investor places in a management team is so important over time.

Finally, DHT has a clean governance structure, and in shipping, that is worth highlighting. All services required to run the company are handled by people employed directly by DHT. No privately owned companies billing the public entity, no conflicts of interest. The board is independent, management are shareholders, and they act like it. That is not always the case in this industry.

That is what they told us, and it is something we also heard often from other shipping experts and industry participants we spoke with.

5.2 Bjørn Giæver, CFO of NAT

When we spoke with management, our first question focused on their strict commitment to a single asset class. Unlike competitors that diversify, NAT operates Suezmax tankers exclusively. This pure-play approach delivers distinct operational and commercial advantages, and we agree with their strategy.

From an investor perspective, a pure play fleet makes the company easier to understand and the equity story easier to communicate. There is no ambiguity about what you own when you buy Nordic American Tankers (NAT) shares, and you know exactly what kind of dividend policy comes with it. That consistency is a big part of why NAT's founder and CEO Herbjorn Hansson has earned the nickname the King of Dividends on Wall Street.

From an operational perspective, running a uniform fleet simplifies everything. Daily operations, maintenance, procurement, crewing, and scheduling all become more efficient when every ship in the fleet is essentially the same, and that translates directly into lower costs. The Suezmax carries ~1M barrels of oil per voyage, making it the second largest class of crude tanker behind the VLCC which carries ~2M. They think the size of a Suezmax sits in a sweet spot. Large enough to offer real economies of scale for oil companies and traders, but small enough to access a much wider range of ports than a VLCC can.

Many ports have restrictions on ship dimensions and storage capacity, and a Suezmax gets into places a VLCC simply cannot, giving traders more flexibility in where they can deliver their cargo. In the fast-moving geopolitical environment of the last few years, that versatility has proven particularly valuable.

On the demand side, NAT is more bullish on the long term than DHT. Their thinking is grounded in demographics. Around 100M people per year have been moving out of poverty and into the middle class over the last decade, mostly in developing Asia. When a country's demographic profile shifts in that way, energy consumption rises rapidly. They see that trend continuing, and they believe it supports sustained demand for oil transportation over the years ahead.

On supply, the new ship order book has been relatively quiet for several years, which should gradually shift the market balance in shipowners favor. That process has taken longer than expected, and the main reason is the shadow fleet.

On capital structure, NAT's philosophy is simple. The tanker business is highly cyclical and capital intensive. The biggest mistake a shipping company can make is to take the profits from a good cycle and pour them back into ships at peak prices, acquire competitors with high leverage, or buy back shares at inflated valuations. Many have done exactly that and ended up in financial difficulty when rates fell. NAT made a deliberate choice to avoid that from the start.

NAT made an early decision to return excess cash to shareholders through dividends rather than reinvest it at peak cycle prices. Those dividends vary significantly with the cycle, but shareholders who have held since the original listing have received over $50 per share in cumulative cash dividends.

Their view is that paying out excess cash creates discipline within management. Keeping too much money inside the company tends to lead to poor decisions.

6. 2026 Outlook for Shipping Market

The global shipping market entered an upcycle in 2026, driven by geopolitical realignments and tight supply and demand dynamics. Maritime equities rose, with the BI Global Marine Shipping Peer Group gaining 31% year to date, outperforming broader benchmarks like the S&P 500 and the Hang Seng Index.

Bloomberg sector tracking shows a divergence within the industry, as the surge is led by the BI Tanker and BI Dry Bulk indices while the BI Liner Index continues to lag. In our view, this performance gap indicates that current market drivers are specific to commodity transport and route dislocations rather than a recovery in global containerized trade. Consequently, viewing the shipping industry as a single market hides the actual trend. Earnings growth and rising asset values remain concentrated within the tanker and dry bulk fleets.

The Hormuz Disruption & Route Redrawing

The main catalyst altering global trade patterns is the March 2026 closure of the Strait of Hormuz due to the war on Iran. Displacing a flow of 15M barrels of crude oil per day from the Persian Gulf forced a reorganization of international oil logistics. High income and security sensitive Asian buyers face the most exposure to this disruption. Data from Poten and Partners highlights that Japan relies on the Middle East for 95% of its crude imports, South Korea for 72%, and Taiwan for 70%. Smaller regional importers like Pakistan, the Philippines, and Sri Lanka source nearly 100% of their crude from the Gulf.

To replace these volumes, these nations are turning to the Atlantic Basin, sourcing crude from the US Gulf, Brazil, Guyana, West Africa, and Canada. This pivot introduces two challenges for the market. First, sourcing crude from across the Atlantic lengthens transit distances, multiplying ton mile demand and locking up a large portion of the global VLCC and Suezmax fleets.

Second, an operational mismatch occurs at the refinery level because many Asian refining systems, particularly in Japan, are optimized for heavier, sour Middle Eastern grades. Substituting these with light, sweet Atlantic shale or basin crudes creates inefficiencies.

While Middle Eastern exporters are expanding bypass infrastructure, including Saudi Arabia’s Yanbu pipelines on the Red Sea and the UAE’s West East pipeline to Fujairah, these projects face scaling constraints. The UAE expansion targets a 2027 completion to double export capacity, meaning incremental barrels of crude will still travel the long route around Africa in the near term, supporting a higher baseline for long haul tanker rates.

Spot Market Momentum & Rate Dynamics

The supply shock dislocated freight pricing during the first quarter of 2026. This shift affected both unrefined and refined asset classes, lifting the Dirty Tanker Index (BIDY) to 2,307 and the Clean Tanker Index (BITY) to 1,686. Both benchmarks reached multiyear highs, reflecting the premium placed on immediate vessel availability as the fleet adjusted to longer voyages.

Bloomberg Dirty Tanker Index (BIDY)

Bloomberg Clean Tanker Index (BITY)

In the spot market, daily earnings for modern two stroke tankers surged to nearly $280,000 per day between weeks 9 and 11. For context, rates during the same period in 2025 averaged below $25,000 per day, while the five year opening quarter average sits near $50,000 per day. We believe this spread highlights the operating leverage inherent in the sector when fleet capacity tightens.

Spot Market Momentum Expected to Extend Through 2026

While charter rates have normalized from recent peaks, the spot market has established a higher baseline. Daily earnings have stabilized in a corridor between $80,000 and $90,000. Forward assessments from shipbrokers and Spark curve data indicate this strength has longevity. Rather than reverting to historical averages, the forward curve points to a steady rate plateau for the rest of 2026, which in our view should support free cash flow generation through year end.

Inventory Tailwinds & Support Floor

Underlying inventory data indicates that this elevated rate environment has a highly durable fundamental floor, driven by acute supply deficits. Compliant floating commercial stocks remain severely depleted, tracking well below the standard five year range. At the same time, the US Strategic Petroleum Reserve stands at ~363M barrels, down from over 600M barrels prior to 2022.

US Strategic Reserve Ending Stocks

This 205M barrel inventory deficit represents a massive backlog of replacement demand. Restoring the reserve to its historical baseline of over 600M barrels requires purchasing large volumes of seaborne crude over an extended timeline. We believe this multiyear restocking cycle effectively establishes a reliable floor for vessel utilization and charter rates.

Equity Performance & Valuation Variations

Public equity markets reflect the shipping sector polarization. Tanker heavy operators and specialized bulkers occupy the top positions in the marine transportation complex, while container liners show flat or negative returns.

Top performing equities in the index include Tsakos up 98%, China Merchants Energy up 97%, Cosco Shipping Energy up 93%, and Ardmore Shipping up 85%.

Conversely, companies tied to standard container liner networks or chemical logistics have missed the upcycle entirely. Hapag Lloyd remains flat at 0%, HMM is down 3%, and Odfjell is down 10%. With underlying asset values rising and cash generation hitting multiyear highs, we believe the market valuation of top tier tanker and dry bulk equities still looks too conservative.

6.1 Crude Tanker Market

A common assumption is that the closure of the Strait of Hormuz would severely damage the crude tanker market by cutting off major cargo volumes. However, global demand dictates that this oil must still be sourced and transported.

Instead of destroying tanker demand, the disruption reshapes it. By forcing buyers to replace Persian Gulf barrels with alternative supplies from the Atlantic Basin, the market requires significantly longer voyages. In our view, this multiplication of ton mile demand means the industry actually requires more vessels to move the same volume of energy, keeping fleet utilization high.

On crude oil tankers, we want to remind readers that we flagged this trade back in November 2025, before the conflict began and before rates moved.

We called it the smoothest trade in shipping at the time, and the market proved us right. Rates surged to levels not seen in years, and we think the momentum continues into 2026. The data we are seeing today only reinforces that view.

Fleet Reallocation & Atlantic Ballasting

The realignment of global trade routes has shifted tonnage heavily toward the Atlantic Basin. Throughout the second half of 2025, the number of crude tankers ballasting to the Atlantic stayed stable between 150 and 180 vessels.

More Vessels Ballasting to the Atlantic Basin

Following market disruptions in early 2026, this number accelerated to a peak of roughly 340 vessels in April before easing to around 265 vessels in May. In our view, this shift leaves fewer ships available in other regions, which should keep spot capacity tight across the rest of the world.

Onshore Inventory Draws & Demand Drivers

Global oil demand remains stable through 2027. Global consumption growth stays above 1.0M barrels per day, while China’s strategic stockpiling contributes an additional 0.6M to 0.9M barrels per day. While these factors provide a steady baseline for the market, we see the primary driver for tanker rates right now as the liquidation happening in land-based storage.

Global Oil Demand Forecast Remains Stable

During the first quarter of 2026, onshore inventories climbed to a peak of 3,425M barrels in April, moving above the 2020–2025 average. This build happened as the market adjusted to the initial Hormuz disruption. Since then, the situation has reversed. Refineries are drawing down these land-based stocks at a pace of 4.6M barrels per day through May and June.

In our view, refineries are using local safety cushions to sustain operations, drawing stocks toward low levels by July. Once these buffers are depleted, refiners must rely on seaborne imports from the Atlantic Basin to maintain daily throughput. This depletion creates a lag effect that should keep tanker utilization high and support long haul rates through the second half of the year.

Mid Size Supply Side Realities

The supply metrics for mid size tankers point to a tight multiyear outlook because orderbooks face pressure from an aging global fleet. In the Suezmax segment, the orderbook stands at 178 vessels. This forward capacity is offset by an aging compliant fleet of 125 vessels that are 17 years or older, alongside 105 older vessels tied up in sanctioned trades.

The imbalance is even clearer in the Aframax and LR2 sector, where the orderbook of 221 vessels is matched by an aging compliant fleet of 221 vessels, while the aging sanctioned fleet stands at 285 vessels. We think that as a large portion of the fleet hits retirement age, retirement pressure and compliance rules will limit net fleet growth and keep the supply of commercial ships tight.

6.2 Dry Bulk Market

The dry bulk market is our favorite shipping segment for 2026.

The setup reminds us a lot of what we saw with crude oil tankers in 2025. Valuations have come down to levels that do not reflect what we think the fundamentals actually support. Ton-mile demand is growing, the fleet is aging, El Niño adds potential upside in the second half, and the stocks are trading at a discount to their earnings power.

Demand Dynamics & Ton-Mile Expansion

Total dry bulk cargo volume is expected to grow 1.3% in 2026. That sounds modest, but the more interesting number is ton-mile demand, which is growing at 2.5%. Ton-miles measure not just how much cargo moves, but how far it travels. When that number grows faster than volume, it means trade routes are getting longer and ships are staying busy for more days per voyage. Q1 confirmed this, with volumes up 3.5% YoY, lifted by an 8.1% recovery in Chinese imports.

Dry Bulk Ton-Miles Growth

Grains are the main driver of this mileage expansion, with volumes projected to grow 3.7% and ton-miles 6.8%, supported by strong exports from major Atlantic suppliers sailing longer distances to reach Asian buyers.

Minor bulks, including bauxite out of Guinea, are also adding demand for larger Capesize vessels. Iron ore from Brazil and West Africa continues to provide support, even as China’s domestic steel output softened in Q1. Coal is the weak spot, expected to decline 1.6% in volume and 0.5% in ton-miles.

El Niño: A Variable Worth Watching

Weather could play a bigger role in the second half of 2026 than most people are factoring in. Forecasters put the probability of an El Niño event at 61% between May and July, rising to around 94% through year end.

For dry bulk, we think the implications are meaningful. Drought conditions lower water levels at the Panama Canal, cutting daily transits from 36 vessels down to 24 and forcing ships to reroute around the Cape of Good Hope, adding weeks to voyages. Warmer and drier conditions in Southeast Asia reduce hydropower generation, pushing up thermal coal imports to meet energy demand.

And shifting rainfall patterns across South America and Australia affect crop yields, changing where grain needs to come from and how far it needs to travel.

At 94% probability through year end, El Niño is more likely than not. If it materializes, we believe the second half of 2026 could look considerably stronger for dry bulk than current forecasts suggest.

Supply Side Growth & Fleet Constraints

Fleet growth is accelerating. New orders have been coming in at a pace not seen in several years, and the orderbook now represents 13.2% of the existing fleet.

What is worth noting is that contracting activity in just the first four months of 2026 has already matched the pace of full years past. Shipowners are clearly betting on sustained demand, and yards are filling up as a result.

Those numbers look significant, but a third of the global dry bulk fleet, around 362M DWT, is made up of ships over 15 years old. As vessels age, they spend more time out of service for mandatory inspections and maintenance.

New deliveries do not simply add to available capacity on a one for one basis, because older ships absorb a portion of that growth through downtime. The gap between ships on order and ships actually available to carry cargo is larger than the orderbook alone suggests.

Estimates point to those delays reducing effective fleet capacity by more than 0.5% per year in 2026 and 2027. To put that in context, when a third of your fleet is aging and regularly taken out of service for weeks at a time, the number of ships actually available to carry cargo on any given day is meaningfully lower than the total fleet size suggests. New ships coming in do not simply add to capacity on a one for one basis. A portion of that incoming supply is offset by older ships sitting idle for maintenance. The net result is a market that stays tighter than the headline orderbook numbers imply, which is supportive for rates.

6.3 Product Tanker Market

Product tanker rates have reached historic levels, recently peaking near $80,000 per day following the closure of the Strait of Hormuz. This current spike vastly exceeds the 20-year historical average of ~$18,000 per day, eclipsing previous earnings peaks driven by the war in Ukraine and Red Sea diversions.

We believe the market remains highly reactive to these compounding disruptions because the baseline supply-demand balance is exceptionally tight.

Demand Drivers: Refineries & Longer Voyages

Global demand for refined products continues to expand, but the main driver of higher rates is the relocation of oil refining capacity.

• Longer Voyage Distances: New refining capacity is coming online far from key consuming regions, particularly in the Middle East and Asia.

• Ton-Mile Growth: Longer routes increase voyage duration, tying up vessels for more time per trip. This inefficiency boosts global ton-mile demand and effectively reduces available fleet capacity.

Supply-Side Constraints: Aging Fleet vs. Orderbook

While the 2026 year-to-date orderbook appears substantial at 18.5% of the active fleet, it faces an immediate wall of vessel retirements. The global fleet is aging rapidly, creating a severe long-term replacement deficit:

• 2026e: 21.3% of the active fleet is over 20 years old.

• 2027e: 25.8% of the fleet will exceed 20 years old.

• 2028e: 30.6% of the fleet will cross the 20-year threshold.

Because the volume of aging tonnage outpaces incoming newbuilds, fleet growth faces downward pressure. Depending on the pace of older vessel retirements, net fleet growth could drop to 0.5% in 2027 and contract by 2.6% by 2028.

Inefficiencies Amplified by the Sanctioned Fleet

A significant portion of global capacity is entirely sequestered from compliant commercial trade routes, worsening the supply squeeze.

The shadow market has absorbed a large share of the global fleet:

• Aframax/LR2: 25.5% of the active fleet operates in sanctioned trades.

• Suezmax/LR3: 17.2% of the active fleet is tied up in sanctioned trades.

• MR/Handy: 9.2% of the fleet is exposed to these restricted routes.

With an average age of over 21 years across all major segments, this shadow fleet avoids the scrap yard by operating exclusively in non-compliant trades. This locks vessels out of the standard commercial pool, forcing compliant operators to compete for a shrinking supply of modern, efficient tonnage.

Consequently, we believe the product tanker market is primed for a prolonged upcycle. Stretched voyage distances ensure incremental demand or geopolitical friction translates directly into elevated baseline earnings for top-tier operators.

6.4 Container Market

The container market is not our preferred shipping segment at the moment. Fundamentals are stable, and the Strait of Hormuz disruption has supported a near-term improvement in freight rates. Supply conditions are also gradually improving as fleet growth slows. However, we continue to see more attractive opportunities in other shipping segments for 2026.

Stable but Slower Demand Growth

Container trade has grown almost without interruption since 2000, tracking global GDP closely along the way. That long term relationship remains intact. Global container demand grew 4% YoY in Q1 2026, a solid start to the year.

For the full year, demand growth is forecast at 2 to 3%, a step down from recent years and subject to two meaningful risks: the ongoing Middle East situation and US tariffs, which could weaken trade volumes if they persist or escalate.

Supply: The Main Concern

This is where the container market gets more complicated. Deliveries surged dramatically from 2023 through 2024, with quarterly deliveries reaching nearly 900k TEU at the peak. Scrapping over that same period was almost nonexistent. The result is a fleet that has grown significantly faster than demand.

In 2026, fleet capacity growth is expected to moderate to 4%, down from 10% in 2024 and 7% in 2025. Demand is growing at around 3%. Supply is still outpacing demand, just by less than before. That is an improvement, but it is not the kind of tight market that drives exceptional returns.

Fleet Age Profile Supports the Narrative

The aging fleet picture adds some nuance. Across most size categories, a meaningful portion of the existing fleet is over 20 years old. In some segments, the orderbook as a percentage of that aging fleet is relatively modest, which means scrapping activity could pick up and provide a natural offset to new deliveries over the next few years.

Rates: Hormuz Is a Near-Term Tailwind

Spot freight rates have surged following the Strait of Hormuz closure, reflecting higher bunker costs and longer routing distances. That is a genuine near term tailwind, but it is worth being clear about what is driving it. Higher rates from route disruption are not the same as higher rates from strong underlying demand. When the Strait reopens, we expect that boost to fade quickly.

Our View: The container market is in a reasonable place. Demand is growing, rates have held up better than many expected, and the supply wave is starting to moderate. But with fleet capacity still growing faster than trade volumes and the Hormuz tailwind likely temporary, we do not see the container market as the most compelling opportunity in shipping right now. It is a sector worth having exposure to, but we would size it accordingly.

7. 2026 Outlook for Shipping Rates

Rates are where the money is made or lost in shipping, and 2026 has already been one of the most volatile years on record across every segment.

The Strait of Hormuz closure reset the picture entirely, creating extraordinary earnings in some markets while leaving others largely unaffected. Below we break down where rates stand today and what we think drives them from here across crude tankers, product tankers, dry bulk, and containers.

7.1 Crude Tanker Rates

Crude tanker rates experienced one of the most dramatic moves in a decade during Q1 2026. Three forces converged at the same time: the Strait of Hormuz disruption, a Sinokor concentration play, and the draining of floating inventories. The result was a rate spike that caught most of the market off guard.

VLCC rates on the Middle East Gulf to East route surged to ~$600,000 per day at the peak in early March, a level not seen since the brief COVID-era spike in 2020.

Suezmax rates on the Middle East Gulf to Mediterranean route reached over $400,000 per day. Both have since moderated, but rates remain well above where they were before the conflict began, with VLCCs still earning nearly $300,000 to $400,000 per day and Suezmaxes holding in a similar range.

The Hormuz Shock

Around 14.9M barrels per day of crude exports and 35% of global crude ton-miles transit the Strait of Hormuz. That makes this the largest single chokepoint disruption ever recorded. The immediate effect was a near total halt in tanker traffic through the Strait, with Kpler data showing transits collapsing by around 92% compared to pre-conflict levels.

What partially offset the shock was Saudi Arabia redirecting crude exports from Ras Tanura, its main Gulf terminal, to Yanbu on the Red Sea coast. At peak, Saudi exports through Yanbu reached 8,950 kbd. That figure has since come down to around 3,719 kbd, reflecting the limits of that alternative route.

The vessel supply picture tells the rest of the story. At any given point during April, nearly 63 laden VLCCs were trapped inside the Arabian Gulf, with another 60 waiting outside the Middle East Gulf and ~36 more waiting at Yanbu.

That is over 155 VLCCs effectively removed from spot supply at once, a number that has kept the market tight even as the initial rate spike has moderated.

What Is Keeping the Market Supported

The rate spike was the first chapter. What keeps us interested is what comes after it. Going into 2026, crude tanker fundamentals were already in good shape.

The supply and demand balance had been supportive of freight rates since mid 2025, before the conflict added any geopolitical premium. During Q1, a private aggregator moved aggressively to consolidate vessels, pulling compliant tonnage off the spot market and tightening supply further. On top of that, the conflict introduced meaningful rate differences between trade routes, with some corridors commanding premiums that would have seemed impossible a year ago.

Add to that the fact that around 10% of the global VLCC fleet is currently sitting idle, either trapped with cargo in the Arabian Gulf or waiting to load in western Saudi Arabia, and you have a market where the effective supply of working ships is considerably smaller than the headline numbers suggest.

What Could Drive Further Upside

Three things stand out as potential catalysts for the crude tanker market beyond the immediate disruption.

The first is sanctions relief. If Venezuelan or Iranian crude volumes move from the shadow fleet into the compliant market, legitimate shipowners capture that business. At the same time, the shadow fleet loses its main source of employment and much of it gets scrapped. That is a double benefit for compliant operators.

The second is inventory rebuilding. Once the Strait reopens, governments and refiners that have been running down reserves will need to restock. That process generates tanker demand well above what day to day consumption requires, and it could last for an extended period.

The third is fleet retirement. As compliant trade grows and the shadow fleet shrinks, older and less efficient vessels will exit the market. That removes supply from the global pool and keeps the balance tighter than it would otherwise be.

We think the crude tanker market is better positioned than most people currently give it credit for. The extraordinary earnings of Q1 will not repeat at those exact levels, but the medium-term setup still points to a market that remains firmer for longer once the immediate crisis fades. We are already seeing strong Q2 2026 rates being locked in by companies currently reporting Q1 2026 earnings.

7.2 Dry Bulk Rates

Dry bulk rates have had a strong start to 2026. The Baltic 5TC Index is the industry's primary benchmark for dry bulk shipping rates, tracking average earnings across the five main routes.

As shown in the chart below, it opened 2026 around $25,000 per day and climbed to nearly $45,000 by late April, well ahead of where rates stood at the same point in both 2024 and 2025, and above the 2021 to 2025 average.

Four factors are driving this. Cargo volumes are up, ships are slowing down to save fuel which reduces fleet availability, port congestion is increasing waiting times, and Middle East disruptions are adding distance and complexity to voyages. Each of these independently tightens the effective supply of ships. Together, they are creating a rate environment that is meaningfully better than what most market participants expected entering the year.

Rates are running in the upper half of the 2015 to 2025 historical range, well above the 2021 to 2025 average but nowhere near the extraordinary levels seen during the COVID era peak in late 2021. For shipowners with modern, efficient fleets, the current rate environment is generating solid cash flow.

The key question from here is sustainability. We believe the demand drivers we outlined, growing ton-miles, El Niño upside in the second half, and an aging fleet absorbing new supply, provide a reasonable foundation for rates to stay supported through 2026. A reopening of the Strait of Hormuz would remove one tailwind, but the underlying demand picture would remain intact.

7.3 Product Tanker Rates

The product tanker market has been one of the biggest beneficiaries of the Strait of Hormuz closure, and the numbers speak for themselves. Medium Range tankers earned an average spot rate of $33,700 per day in Q1 2026, accelerating to $52,100 per day in Q2 to date, according to Ardmore Shipping. International Seaways reported a blended average spot rate above $100,000 per day fleetwide in Q1. These are exceptional levels by any historical standard.

The Strait of Hormuz closure has disrupted ~15% of global oil product flows. Nearly 130 product tankers are now trapped inside the Persian Gulf, significantly tightening vessel supply. To replace lost Middle Eastern volumes, buyers in Asia and Europe are sourcing refined products from the US, West Africa, and Europe instead, on voyages about twice as long as normal. Longer distances increase ton-miles, meaning vessels stay tied up for more time per voyage. Refining margins in the Atlantic Basin have also risen to their highest levels since the pandemic recovery, supporting stronger cargo flows on these longer-haul routes.

The key question is what happens when the Strait reopens.

A portion of these elevated rates will fade as Middle Eastern volumes come back online and the rerouting premium disappears. How much rates soften will depend on how quickly trapped tonnage re-enters the market and how fast Middle Eastern product flows normalize. We think the product tanker market will soften from current levels once the Strait reopens, but the underlying demand picture, growing Atlantic trade flows and an aging fleet, should prevent rates from falling back to pre-conflict levels quickly.

7.4 Container Rates

Container rates tell an interesting story when you look at the price and volume data together. Volume has been remarkably stable over the past five years, moving in a relatively narrow range throughout the peaks and troughs. The price swings, on the other hand, have been dramatic. That tells you this market is being driven by supply dynamics more than demand.

Rates peaked in 2021 at levels that were extraordinary by any historical standard, then collapsed sharply through 2022 and 2023 as the post-COVID shipping boom unwound and the fleet absorbed a wave of new deliveries.

Container Prices vs Volume Since 2021

By mid 2023, the price index had fallen deeply negative on a YoY basis. A brief but a recovery followed in mid 2024 as Red Sea disruptions rerouted vessels and tightened effective supply, before rates fell again through late 2024 and into 2025.

Looking at a specific trade lane gives you a clearer picture of where things stand today. On the Ho Chi Minh to Los Angeles route, one of the busiest Asia to US West Coast corridors, 20ft container rates currently sit ~$2,463 per FEU and 40ft containers ~$3,062 per FEU. Both are recovering gradually from their late 2025 lows, but remain well below the $6,500 to $8,500 range seen at the 2024 peak.

Asia to US West Coast Container Rates

The Strait of Hormuz closure has provided some support to rates through higher bunker costs and longer routing distances, but as we noted in the market section, that tailwind is tied to the disruption rather than underlying demand strength.

When the Strait reopens, that support should fade. We think container rates stay in a modest recovery mode through 2026, supported by stable volumes and gradually moderating fleet growth, but we do not see a return to 2024 peak levels anytime soon. The supply overhang is still working its way through the market.

8. Our Favorite Shipping Stocks

We currently have one shipping company in the Aurelion Index.

We had more exposure earlier this year, but trimmed it down when the concentration risk felt too high relative to the potential reward.

Today we are adding back a name we think is well positioned for what is happening in the market right now. Below we break down each name, what makes it interesting, our valuation, and our price targets.

You can access our Plutus Shipping Basket here.

8.1 Top Idea #1: Okeanis Tankers

Okeanis Tankers (ECO) is already in the Aurelion Index.

We published a full in depth report on ECO on December 11, 2025. If you have not read it yet, we recommend starting there as it covers the company in considerably more detail than the overview below.

Company Overview

Okeanis Eco Tankers is a pure play crude tanker company with a young, fuel efficient fleet and a clear cash return profile. OET owns 16 large crude carriers, split between Suezmax vessels (medium sized crude tankers) and VLCCs (very large crude carriers), all built to eco standards and equipped with exhaust cleaning systems that allow them to burn cheaper fuel oil.

We see OET as a high quality crude tanker platform with a proven cash distribution track record and an attractive risk reward profile, supported by aligned family ownership and dual listings in Oslo and New York.

Investment Thesis

1. Premium Fleet Advantage

OET owns a young fleet of fuel-efficient Suezmax and VLCC tankers.

These ships burn less fuel than older vessels and use exhaust systems to run on cheaper fuel. In practice, this has translated into higher day rates than peers in recent years. We expect this gap to continue as long as the industry rewards newer, cleaner, and more efficient ships.

2. Proven Capital Returns

OET has already shown what it does with free cash. Since its IPO, the company has distributed over $550M in dividends, equal to ~2.5x its initial market cap.

This track record translates to a remarkable 13% average annualized dividend yield over the past sixteen quarters. Since its fleet became fully delivered, Okeanis has returned 91% of its reported net income to shareholders, proving its commitment to direct cash returns while tanker conditions remain healthy.

3. Aligned Insider Ownership

The controlling family, board members and key institutions all hold meaningful stakes and there are no options or other dilutive instruments.

This supports disciplined decisions on leverage, fleet risk and dividends. At the same time, a tight free float and the related party technical manager help explain why the stock can trade at a discount to our view of fair value.

We believe a company like OET, with its modern fleet, strong cash generation, and high payout policy, deserves a valuation at least in line with leading crude tanker peers as the current cycle continues through 2026.

Okeanis At a Glance

Okeanis Eco Tankers is a crude oil tanker company founded in 2018. It operates a fleet of 16 modern vessels, all equipped with scrubbers that allow the ships to burn cheaper fuel. That keeps operating costs low and gives OET a cost advantage over older, less efficient competitors.

Fleet Breakdown

The fleet is split into two asset classes:

• 8 VLCCs: Very Large Crude Carriers moving ~2M barrels per voyage.

• 8 Suezmax vessels: Tankers that typically carry 1M barrels of oil.

How the Fleet Creates Value

The company focuses entirely on two ship sizes: VLCCs for global trade and Suezmax vessels for regional flexibility. While competitors often manage mixed fleets of varying quality, OET owns a uniform collection of top tier ships delivered between 2016 and 2022. This discipline creates a pure operating platform with zero exposure to older, inefficient tonnage.

The business is built on two operational pillars:

• Spot Market Strategy: Okeanis sells its shipping capacity at current daily market rates rather than locking in long term fixed prices. This ensures the company captures the full profit potential when global energy demand pushes freight rates higher.

• The Scrubber Edge: Global regulations force most ships to burn expensive Low Sulfur Fuel Oil. Okeanis utilizes a cost saving alternative. Every vessel is equipped with a scrubber, an exhaust cleaning system that removes pollutants from the smoke. This allows the fleet to burn Heavy Fuel Oil. Since this unrefined fuel trades at a significant discount to the regulated low sulfur option, it secures a durable cost advantage on every voyage.

Tanker Fleet Profile

The fleet consists entirely of Eco vessels built by Hyundai Heavy Industries in Korea and Japan Marine in Japan. Because these builders are recognized as global leaders in ship quality, these vessels hold their value better and command higher prices in the secondhand market than ships from lower tier yards.

Exhibit: Okeanis Current Fleet

The business operates with high operating leverage. Daily costs covering crew, insurance, and interest remain fixed, while revenue fluctuates with the global oil market. Once daily rates cross the break even threshold, nearly every incremental dollar flows directly to profit. With the fleet fully delivered and zero capital for new construction, it directs FCF toward dividends and debt reduction.

Competitive Advantage: The Scrubber Premium

OET runs a modern, fuel-efficient fleet equipped entirely with scrubbers. This setup allows it to burn Heavy Fuel Oil at a much lower cost than low-sulfur fuel, driving a structural earnings premium through every market cycle. Since 4Q 2019, this edge has generated ~$256M in cumulative outperformance relative to peers.

The exhibit below shows exactly how OET stands apart. It operates one of the youngest fleets in the sector with 100% scrubber penetration, while peers rely on older vessels and much lower adoption rates. This combination allows OET to capture stronger charter rates while keeping daily operating costs low.

Exhibit: Scrubber Penetration vs Fleet Age

VLCC Segment Economics

OET’s 8 VLCCs focus entirely on high-volume trade routes from the Middle East to Asia. Because of their modern engine design, these tankers can run at higher speeds without triggering the severe fuel penalties that older ships face.

This capability allows OET to consistently outpace the market. Since late 2019, the VLCC fleet has locked in a steady $11,000 per day premium over peer averages, delivering $144M in cumulative outperformance.

Exhibit: VLCC Spot TCE Against Peers

Suezmax Segment Economics

OET’s Suezmax fleet adds regional flexibility while matching the strong premiums of the VLCC segment. Low fuel consumption helps these vessels secure a steady $11,178 per day premium over peers, outperforming peers by $112M since late 2019. This cost advantage protects cash flow and keeps the fleet profitable even when rates dip and older vessels struggle to break even.

Exhibit: Suezmax Spot TCE Against Peers

Rate Setup & Bookings

OET Q1 just ended last week, and the company already enters 2Q26 with strong rate visibility. That is the beauty of shipping. A large share of available days is already fixed at firm levels, providing a clear line of sight on near-term earnings and reinforcing confidence in the upcoming quarters.

For 2Q26, the company already booked:

• 56% of VLCC days at $223,900/day

• 60% of Suezmax days at $187,300/day.

These realized and forward bookings establish the rate foundation of our model and highlight the fleet’s leverage to firm tanker conditions.

ECO Valuation & Estimates

The stock currently trades at 1.46x NAV. This is a slightly higher valuation compared to the end of 2025, but given the earnings growth and significant dividend yield, we believe it remains attractive.

On earnings, we are forecasting TCE revenues of $610M in 2026, more than double the $265M generated in 2025. That flows through to net profit of $449M and adjusted EPS of $11.49. At a 90% payout ratio, total dividends per share are estimated at $10.34 for the year, a dividend yield of 18.3% at current prices.

For 2027, we expect some normalization as the rate environment moderates, with EPS at $7.93 and dividends at $7.14 per share, still implying a 12.7% yield.

The stock trades at 4.9x our 2026 earnings estimate. Applying a 7.0x target multiple gives a price target of $80.4 per share, implying 43% upside. On 2027 at 9.0x, we arrive at $71.4, still 27% above current levels.

ECO was built to be among the lowest cost operators in the crude tanker market. Modern vessels, scrubbers, and fuel efficiency give it a margin advantage over older fleets that widens when rates are high. At a 90% payout ratio, shareholders capture most of that directly. Sell side estimates have moved sharply higher since Q1. We think there is still more to go.

8.2 Top Idea #2: TORM Shipping

We are adding back TORM Shipping (TRMD) to the Aurelion Index.

We published a full in depth report on TORM on January 20, 2026. If you have not read it yet, we recommend starting there as it covers the company in considerably more detail than the overview below.

TORM at a Glance

TORM is one of the world's largest pure-play product tanker companies, founded in 1889 and dual listed in the US and Denmark under the ticker TRMD. The fleet currently stands at 95 vessels, growing to 103 by 2028. Market cap sits at ~$3.35B.

The product tanker market continues to benefit from limited fleet growth and longer trade routes shaped by the Strait of Hormuz disruption.

TORM’s fleet mix gives it flexibility as cargo flows shift. Larger LR2 and LR1 vessels can focus on longer haul demand and switch into crude related trades when the economics work, while some MR vessels are chemical capable, expanding cargo options and keeping utilization stable.

Q1 2026 results were strong across the board.

Fleet-wide TCE rates averaged $34,937 per day, up significantly from $26,807 per day a year earlier. LR2 vessels were the standout at $41,062 per day, with LR1 at $34,903 per day and MR at $32,946 per day. Return on invested capital came in at 18% for the quarter, a level that reflects both the strength of the market and the quality of TORM's commercial execution

Key Drivers in 2026

The Strait of Hormuz closure changed everything for product tankers in 2026. Around 15% of global oil product flows were disrupted overnight, forcing a complete rerouting of refined product trade away from the Middle East and toward longer haul alternatives from the Atlantic Basin.

Atlantic Basin suppliers, primarily the US, Europe, and West Africa, are stepping in to replace Middle Eastern volumes, on voyages roughly double the normal length. That adds significant ton-miles per cargo and keeps ships busy for longer.

Russia related constraints continue to reshape trade flows. The EU ban on Russian crude-derived products has pushed Indian refined product exports into more complex routing, with some volumes ending up in floating storage rather than moving directly to buyers. That friction benefits compliant operators who can step in on longer haul replacement routes.

On supply, ~142 MR vessels are scheduled for delivery in 2026. The net impact on the clean tanker market is considerably smaller than that number suggests.

As MR vessels age past 20 years, their participation in clean trades drops sharply, from ~70% to ~40%. Once you account for that, the effective addition to the clean pool is closer to 86 vessels, around 40% less than the headline figure implies.

Demand for refined products has remained steady, with MR clean trade reaching a record 10.1M barrels per day in early 2026. That level of demand, combined with tight utilization and constrained effective supply, means the market does not need exceptional conditions to generate strong rates.

The question worth asking is how much of the current strength is tied to the disruption and how much reflects the underlying market. We think the aging fleet and the shift in refinery geography provide a solid foundation even without the Hormuz premium. We would not expect Q1 and Q2 rate levels to last forever, and anyone building a thesis on those numbers alone should factor that in.

TRMD Valuation & Estimates

Our financial model points to a compelling setup for TORM at current prices.

We are forecasting TCE earnings of $1,440M in 2026, up significantly from $910M in 2025, driven by the elevated rate environment. That translates into net profit of $655M and adjusted EPS of $6.48 for the year. At an 85% payout ratio, we estimate a total dividend per share of $5.51 in 2026, implying a dividend yield of 16.8% at current prices. For 2027, we expect some normalization as the Hormuz premium fades, with TCE earnings coming in at $1,350M and net profit at $578M, still generating $4.84 per share in dividends at a 14.7% yield.

On valuation, the stock currently trades at 5.1x our 2026 earnings estimate and 5.8x our 2027E. Applying a target multiple of 8.0x to our 2026 EPS gives a Price Target of $51.8 per share, or DKK 334.89.On our 2027E at 9.0x, we arrive at $51.2 per share, or DKK 330.82. Both imply ~50% upside from current levels.

From a NAV perspective, the fleet is valued at $3,619M across 95 vessels, with a gross asset value of $3,931M after accounting for undelivered vessels, net working capital, and committed capex. After netting out debt, NAV per share comes to $29.75, or DKK 191.26. TRMD currently trades at 1.11x NAV, a modest premium that we think is more than justified given the earnings power at current rates.

It is worth noting that sell side estimates across the board have been revised sharply higher following the Strait of Hormuz closure and the Q1 2026 results.

Consensus has moved significantly in the direction of our numbers, and we think there is still room for further upward revisions as the full impact of the rate environment works its way through earnings.

9. Additional Stocks Worth Following

The two names we cover in depth in this report are our highest conviction ideas right now, but they are far from the only interesting opportunities in shipping.

We believe that each shipping segment has names worth following closely, and we will continue to flag them as the situation evolves through 2026.

9.1 Himalaya Shipping (Dry Bulk)

While we cannot include every company in the Aurelion Index, Himalaya Shipping (HSHP) is one we follow closely and think is worth highlighting.

The company owns 12 modern dual fuel dry bulk vessels, all delivered between 2023 and 2024, making it one of the youngest and most fuel efficient fleets in the Capesize market. That focus on modern tonnage is core to how it thinks about generating returns for shareholders, alongside a consistent monthly dividend.

Earnings Premium & Cash Breakeven

This modern fleet gives Himalaya a real earnings advantage.

Data from Fearnleys shows that Himalaya consistently outperforms both its peers and the standard market benchmarks. On average, the company secures a 48% premium over the Baltic 5TC index and a 25% premium over its direct competitors. Because these ships are so efficient, the company has a low daily cash breakeven of around $17,300 on a Capesize index equivalent basis.

For context, the Baltic Capesize Index averaged $22,000 over the last five years. With a breakeven of $17,300, Himalaya generates positive cash flow even when rates are running below the historical average, which gives the company resilience through weaker parts of the cycle.

That cash flow has allowed them to pay 28 consecutive monthly cash distributions, including an 18 cent payout for the first quarter of 2026.

Operating Leverage & Dividend Capacity

We believe the real appeal of HSHP lies in its operating leverage when Capesize rates strengthen. Because their cash breakeven is set at $17,296, any increase in market rates drops straight to the bottom line as free cash flow to equity.

The company's rate sensitivity table shows exactly how this payout potential scales. If Capesize index rates rise to $30,000, free cash flow goes to $1.60 per share. At $45,000, it reaches $3.50, and if rates hit $60,000, the fleet can generate $5.30 per share annually. This direct link between market rates and cash generation makes the stock an effective way to capture dry bulk upside.

Balance Sheet & Alignment

On the balance sheet, Himalaya Shipping has a market cap of nearly $703M against $694M in gross debt. That breaks down to ~$58M per vessel, giving them an estimated loan to value ratio of 62%.

The financing carries a 7% fixed interest rate over a 7 year term, well within the 26 to 30 year useful life of these ships. Management and the board are also well aligned with shareholders, owning about one third of the equity.

9.2 Star Bulk Carriers (Dry Bulk)

Dry bulk remains our favorite segment within shipping for 2026. Star Bulk (SBLK) is a major global operator in this space, managing a large and diversified fleet of 145 owned vessels. Their fleet ranges from Supramax ships to large Newcastlemax carriers, giving them a total capacity of more than 14.0M DWT.

The average age of their ships is ~11.9 years. SBLK moves ~80M metric tons of cargo annually, carrying major commodities like iron ore, minerals, and grain, as well as minor bulks like bauxite, fertilizers, and steel products. They also operate a dedicated division in Singapore to connect cargo origins directly with end users.

Operating Leverage & Cash Flow Potential

Star Bulk has high operating leverage, meaning that when daily charter rates move higher, the impact on cash flow is amplified quickly. At current market expectations of around $20,500 per day, the company is positioned to generate $3.40 of free cash flow per share, a 13.0% cash yield.

That number scales meaningfully with rates. At $19,000 per day, free cash flow holds at $2.80 per share, still a 10.5% yield. Push rates to $23,500 and free cash flow climbs to $4.70 per share at a 17.8% yield. At $26,500, the fleet generates $6.00 per share annually, a 22.6% cash yield. The upside sensitivity here is one of the most compelling aspects of the story.

Forward Free Cash Flow Yield at Various TCE Levels

Balance Sheet & Debt Reduction

SBLK has aggressively cleaned up its balance sheet over the last few years. Since Q1 2021, it has reduced its net debt by 63%, dropping it from $1.454B down to $542M by Q1 2026. For context, their Q1 2026 gross debt sits at $951M, which is completely covered by the $975M scrap value of their fleet. Having a scrap value that is higher than their gross debt gives it a strong financial safety net.

Valuation & Outlook

We see clear upside to Star Bulk’s fundamental value. The company has a strong track record of solid execution, and as their cash flows grow, their dividend payouts are rising too. The stock still trades at a discount to its net asset value, and they operate in dry bulk, which is our favorite shipping segment for 2026. Given these factors, the current market valuation looks too conservative.

10. Our Final Take on the Shipping Market

Shipping is one of the most misunderstood industries in global markets, and that misunderstanding creates opportunity for those willing to do the work.

The Hormuz closure has accelerated trends that were already building, longer trade routes, tighter effective supply, and a growing divide between compliant operators and the shadow fleet. Those trends do not reverse overnight.

Our highest conviction call remains dry bulk, where valuations are attractive and the setup reminds us of crude oil tankers in 2025. Product tankers are generating strong earnings right now, and while some of that fades when the Strait reopens, the underlying market is in better shape than the orderbook alone would suggest.

Crude tankers have had their moment, and we think there is more to come as inventory rebuilding and sanction relief add volume back to the compliant market.

The market will keep moving, and so will we. We will continue to update our views as the geopolitical situation evolves and the data changes. In shipping, the picture can shift quickly, and staying close to it is what makes the difference.

Find how our stock portfolio is positioned here.

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The Aurelion Team

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.

His view was simple: insurance companies collect cash upfront and pay claims later, creating powerful long-term compounding when managed properly.

In his own words: "The best investment you can make is in insurance companies. They take in money before they pay it out." We share that view, which is why insurance remains a core focus of our financial coverage.

Financial companies are not always the easiest businesses to analyze. The accounting can be complex, the numbers move around for reasons that have nothing to do with the underlying health of the business, and it is easy to draw the wrong conclusions from a headline number. That is exactly why we go through the earnings reports, the calls, and the filings, so we can separate what actually happened from what the numbers appear to show.

Both companies in the space that we hold in the Aurelion Index recently reported Q1 2026 earnings.

In this report, we go through both quarters in detail, why we hold them, what management said, and our view on what it tells us about each business.

You will also find our full portfolio and current weights at the end, which you can always access here as a paid subscriber.

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Unlike the Aurelion Index, these portfolios do not come with real-time trade announcements. They are updated weekly and meant to complement our main strategy. How you use them is up to you: some replicate them directly on Plutus, some pick individual stocks from a basket they like, and others use the holdings as pre-vetted starting points for their own research.

This page is updated weekly. You can always access it from our home page here:

Disclosure: Aurelion Research publishes independent equity research and model portfolios. We do not manage money. Investors can choose to replicate portfolios through Plutus, a SEC-registered investment adviser.

Description of Portfolios & Baskets

Portfolios are diversified across multiple sectors. Baskets are concentrated on a single theme.

Aurelion Global Commodity Portfolio: an actively managed strategy consisting of small to mid-cap commodity related equities. The strategy focuses on high-conviction investments in companies across commodity sectors, combining fundamental analysis with cycle timing to identify the most compelling opportunities. The portfolio is long-only and does not include futures. The strategy targets outsized short-term returns as well as long-term capital appreciation by allocating to the right commodities in the cycle.

Aurelion Global Defensive Portfolio: consists of best-in-class companies around the world and of recession-resistant businesses, prioritizing downside protection while compounding capital over time. This actively managed strategy uses a proven process focused on identifying high-conviction businesses with sustainable competitive advantages. The portfolio provides diversification alongside an attractive dividend yield.

Aurelion Shipping Basket: consists of actively managed small to mid-cap shipping equities across dry bulk, crude tanker, and product tanker segments. The portfolio aims to navigate shipping cycles by being exposed to the right segments, with the goal of delivering long-term alpha over shipping benchmarks.

Aurelion Japanese Equity Basket: consists of actively managed Japanese equities positioned to benefit from the ongoing strengthening of the country’s equity markets. The strategy focuses on high-conviction companies with improving shareholder returns, strong capital allocation, and exposure to tailwinds including rising trading activity, higher interest rates, governance reforms, and the reallocation of household savings toward equities.

Real-Time Performance

• Global Commodity Portfolio

• Global Defensive Portfolio

• Shipping Basket

• Japanese Equity Basket

Portfolio Holdings & Weights

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Both biotech startups and large pharmaceutical companies are seeing returns from AI, which is reducing drug discovery timelines by several multiples compared with traditional approaches.

We believe the trend is clear: a surge of new potential drugs will come to the market in the coming years. However, there is a clear bottleneck. Who will run the trials for these drugs?

Contract research organizations (CROs), which benefit from strict FDA regulation and an oligopolistic structure.

This report outlines our investment thesis across three sections:

1. The Thematic: How the AI-driven surge in drug discovery translates into long-term demand for CROs. And why CROs have been unjustifiably punished.

2. Industry Dynamics: A dive into the current 2026 landscape, biopharma funding trends, and the operational realities of the CRO oligopoly.

3. New Aurelion Index stock: The addition of a high-quality differentiated CRO to the portfolio, positioned to benefit from this thematic while currently trading at a cyclical discount.

We avoid gaining exposure to this theme through single biotech names, which carry higher company-specific risk tied to individual drugs.

Three premises are required for the bottleneck to occur:

• Premise A: AI increases the volume of preclinical molecular candidates.

• Premise B: The FDA requires physical human testing. AI-driven simulations cannot replace biological validation.

• Premise C: Clinical trials cannot scale like software. They depend on a finite supply of patients, physicians, and clinics, which makes clinical trials a capacity-constrained process managed by CROs.

• Conclusion: The economic bottleneck shifts from drug discovery to clinical trial execution, increasing demand for CROs.

In our view, the most common mistake in thematic investing is timing. Even if the long-term thesis is correct, near-term outcomes are still heavily influenced by industry cycles and CRO operational dynamics. The short to medium term therefore remains critical in this space, and misreading it can lead to poor returns.

For this reason, we also analyze the current 2026 CRO landscape, biotech and biopharma funding trends, and the competitive positioning of key players. We then assess expected returns for leading CROs such as ICON, IQVIA, and CRL.

Table of Contents

0. Introduction

1. What is a Contract Research Organization (CRO)

2. Premise A) Can AI Really Discover Drugs?

3. Premise B) Regulation and the FDA

4. Premise C) Physical Limit

5. The Bottleneck

   5.1 The Market’s View

6. A look at The Bear Case

7. Recurring Mistake in Thematic Investing: Timing

8. CRO Industry Overview

   8.1 Biotech Funding Trends

   8.2 Largepharma Funding Trends

9. The CRO Market Is Growing

   9.1 Biopharma R&D: Where the Growth Is Coming From

   9.2 Where Outsourcing Is Growing and Where It Is Not

   9.3 Bioprocessing Is Recovering

   9.4 Drug Approvals

10. Diving into Industry Leaders

    10.1 ICON ($ICLR)

    10.2 Iqvia Holdings ($IQV)

    10.3 Charles River Laboratories ($CRL)

    10.4 Fortrea Holdings ($FTRE)

11. New Stock Addition: Best-in Class CRO

    11.1 Company Overview

    11.2 Why It Is Well Positioned for the Theme

    11.3 Competitive Landscape

    11.4 Financial Analysis

    11.5 Investment Thesis

    11.6 Why Now & Recent Developments

    11.7 Financial Forecasts and Price Target

    11.8 The Bear Case/Risk

    11.9 Conclusion

12. Forecasting Total Return For Major Public CROs

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1. What is a Contract Research Organization (CRO)

For readers newer to the healthcare space, a Contract Research Organization (CRO) is a company that pharmaceutical and biotech firms hire to run and manage clinical trials. Instead of building all the infrastructure internally, drug companies outsource the execution to CROs, which coordinate hospitals, patient recruitment, data collection, and regulatory compliance across global studies.

Well-known examples include IQVIA, ICON, and Charles River Laboratories.

They identify global clinical sites, recruit specific patient populations, administer the drugs, monitor complex biological data, and act as the primary liaison with regulatory bodies such as the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMA). Ultimately, they transform theoretical science into the highly regulated data required for commercial approval.

2. Premise A) Can AI Really Discover Drugs?

The industry has already started to transition from questioning the scientific feasibility of AI in drug discovery to quantifying its output.

Rather than viewing AI as a flawless “magic bullet,” it is more accurate to view it as a high-efficiency computational sorting mechanism. Historically, the preclinical phase required large capital investment to manually test and discard thousands of failing compounds. Today, AI models simulate many of those failures digitally, allowing companies to advance only the highest probability candidates.

The data reflects this shift. According to analyses by BCG, molecules developed by AI-native biotechs are moving into the clinic faster and showing Phase I success rates in the 80 to 90% range, higher than the historical industry average.

A key case study is Insilico Medicine, which advanced a molecule for idiopathic pulmonary fibrosis (IPF) from initial concept to Phase II trials in under 30 months for about $6M in discovery costs. Historically, reaching that milestone took 6 to 8 years and over $100M.

Where It Goes From Here

To understand the long-term volume of drugs that will reach clinical trials, we separate the evolution of AI drug discovery in three horizons. This is similar to the evolution of Electronic Design Automation (EDA) in the semiconductor industry, where engineers moved from manual circuit design to software that could simulate billions of transistors.

Horizon 1: Small Molecules (Current State)
The current wave of AI assets is mainly small molecules.

Algorithms analyze large genetic datasets to identify disease targets, and generative AI designs chemical compounds to match them. This lowers the barrier for small biotech firms to build viable pipelines.

Horizon 2: Biologics and Antibody (Emerging)
Over the next 3 to 5 years, AI will move beyond designing standard chemical pills and begin engineering complex, biological drugs from scratch. These advanced therapies generate the highest profit margins in the pharmaceutical industry, and will trigger a secondary wave of investment directly from large-cap pharma.

Horizon 3: Personalization (Long Term)
Over the next decade, AI systems may integrate genomic, proteomic, and metabolic data to design therapies tailored to specific patient subgroups.

Instead of one drug for a million people, we could see multiple targeted drugs for smaller defined populations. Whether the industry is in Horizon 1 or moving into Horizon 2, the macroeconomic outcome is similar. The digital supply of potential therapies is increasing rapidly.

Currently, a digitally designed molecule has no commercial value on its own. No matter how advanced simulation becomes, these assets must still be tested in human biology to prove safety and efficacy. By expanding the discovery funnel, AI increases future demand for clinical validation and development capacity.

3. Premise B) Regulation and the FDA

First, let’s define what is currently in place. The FDA’s 2025 guidance on AI firmly establishes a “Human-in-the-Loop” requirement for clinical trials. AI cannot be held legally or ethically accountable for patient safety decisions.

So the question becomes where this goes from here.

Keeping it Simple

To understand why the FDA will not allow AI to bypass clinical trials, we step away from the software and ask a basic human question:

Who is going to let a doctor inject them with a drug that has only been tested on a computer?

Clearly no one here at Aurelion.

We do not need to guess how the public will react to new medical technology. We saw it during the COVID-19 pandemic. Even with large real world human trials and strong government backing, public trust was fragile. Today, trust in government, large pharmaceutical companies, and artificial intelligence is not increasing. A trust gap cannot be solved with a better algorithm.

Regulators also understand how these models work. They know that AI can be wrong in unpredictable ways. A mistake in a chatbot is a minor issue. A mistake in the predicted safety profile of a cardiovascular drug is catastrophic.

No matter how strong AI simulations become, we believe clinical trials will remain the required step before drug reaches the market.

4. Premise C) The Physical Limit

If AI creates the drugs (Premise A) and the FDA demands physical testing (Premise B), the final piece of the investment thesis is the moat: Why won’t new competitors simply build more CROs and drive down pricing power?

Because you cannot code a clinical trial.

While software scales instantly, physical clinical trials are constrained by hard, real-world limits. Running a trial requires a finite supply of willing human patients, specialized doctors, and physical hospital space. It is a heavy infrastructure business, much closer to building railroads than writing software.

Imagine a biotech company needs to run a late-stage trial for a new heart medication. They need to find 3,000 specific patients, spread across 150 hospitals in 20 different countries, and draw their blood every month for two years.

A well-funded software startup cannot simply “disrupt” this. They do not have the regulatory clearance in Germany, the hospital contracts in Japan, or the trusted relationships with cardiologists in the U.S.

It takes decades and billions of dollars to replicate this physical network.

The Oligopoly

There is a reason the late-stage CRO industry is entirely consolidated at the top. Small service startups simply cannot execute a global Phase III trial, meaning the market naturally forces consolidation into a few massive incumbents.

Outsourcing, the Last Parameter

Why won’t biopharma simply build its own internal clinical networks to handle the AI volume?

It comes down to utilization rates and return on investment.

Building a global clinical infrastructure requires hiring regulatory experts across dozens of countries, securing hospital partnerships, and maintaining large patient databases. This demands significant fixed capital investment. For a standalone biotech or even a large pharmaceutical company, that infrastructure would often sit underused between drug programs.

By outsourcing to a contract research organization (CRO), drug developers convert a large fixed cost into a flexible variable expense. The CRO, in turn, maximizes ROI by running the same infrastructure at near full utilization across many clients.

As AI increases the number of early-stage drug candidates, many of which will still fail in Phase I or Phase II, we believe companies will prioritize capital efficiency. They will keep balance sheets lean to fund more discovery programs and rely on the CRO ecosystem to absorb execution risk on a variable cost basis.

5. The Bottleneck

The investment thesis comes down to a simple equation: an increase in AI-generated molecules colliding with the biological and regulatory requirements of the FDA, all moving through a limited clinical trial infrastructure. The result is that pricing power and demand shifts toward the CROs running the trials.

The Broadband “Last Mile” Metaphor

To visualize this dynamic, consider the telecom boom of the early 2000s. Telecom companies spent billions laying high-speed fiber-optic cables across the globe. Data could suddenly move across continents at incredible speed, yet the consumer experience did not immediately improve.

Why? Because of the “last mile,” the physical copper wiring connecting the high-speed network to individual homes. The fiber-optic network was far less useful until that final bottleneck was solved.

AI drug discovery is the fiber-optic network. It operates at incredible speed and scale. But human clinical trials are the copper wire. No matter how fast a machine learning model designs a molecule, testing it still requires finding patients, securing consent, administering the drug, and monitoring outcomes over time.

As Steph Skeet from Faculty Frontier summarizes: “Today’s bottleneck isn’t science. It’s execution under real-world constraints.”

5.1 The Market’s View

In January 2026, following the release of highly advanced generative models like Claude, a terminal value panic spread across the healthcare services sector. CRO multiples compressed sharply as investors assumed AI software would eventually replace the clinical trial process.

We believe AI will likely automate back-office tasks such as protocol drafting and data processing, but it cannot replace the core function of a CRO for one key reason: an algorithm cannot assume legal liability for human life. Because the FDA requires strict human accountability, the physical execution of clinical trials remains firmly in the hands of established CROs.

We believe the market also misunderstands the flow of pharmaceutical capital. As the accompanying chart illustrates, large pharma companies are not using AI-driven savings to reduce R&D spending. Instead, we believe those savings are being reinvested back into the pipeline. By lowering the cost of early-stage discovery, AI supports a higher volume of drug programs, directly increasing long-term demand for the physical trials that only CROs can provide.

While CRO multiples have stabilized somewhat since the initial January 2026 selloff, we still believe the sector remains undervalued. This disconnect is in-part what drove the newest allocation within the Aurelion Index portfolio.

How AI Is Impacting CROs Today

Real-world examples are already emerging:

• Patient Recruitment: AI tools are helping pre-screen electronic medical records, improving enrollment speeds by up to 25% in trials.

• Synthetic Control Arms: The FDA’s 2025 guidance on Real-World Evidence validated broader use of Synthetic Control Arms, which simulate placebo groups using historical data. In practice, this has reduced enrollment requirements by 30% to 50% and shortened timelines by 6 to 9 months.

• Real-Time FDA Pilots: In April 2026, the U.S. Food and Drug Administration launched a pilot program for “real-time clinical trials,” using AI and data science to report trial signals faster.

Improved Profits?

CRO contracts are generally not based purely on the number of employees used. They are typically structured around:

• Fixed project fees

• Milestone payments

• Per-patient enrollment fees

So if AI allows a CRO to run the same trial with fewer employees, the CRO does not automatically earn less revenue. In many cases, the opposite happens:

• Revenue can stay similar because the client still pays for the outcome.

• Costs fall because fewer labor hours are needed.

• Margins expand, but with limits as some contracts are partially tied to billable hours or staffing levels.

There are limits, though:

• Over time, pharma companies may negotiate lower pricing if efficiency gains become widespread.

• Competition between CROs could eventually pass some savings back to customers.

The summary is that we believe AI is positive for long-term CRO profits. AI should increase the number of drugs entering development, which directly increases demand for clinical testing and CRO services.

At the same time, CROs adopting AI tools can improve efficiency and expand margins. While some investors worry this could eventually create pricing pressure, we believe the increase in trial volume and the industry’s oligopolistic structure more than offset that risk.

6. A look at The Bear Case

Being clear about what could go wrong is just as important as building the case for why something works. Here is what would make us reconsider our view on the CRO industry.

The first scenario is pricing pressure. If biotech and large pharma companies begin using their expanding margins to squeeze CRO pricing aggressively, that would compress revenue growth and put pressure on valuations. We would watch for this in contract negotiations and CRO margin trends before repositioning.

The second scenario is regulatory. If regulators begin allowing drug development companies to bypass human clinical testing in a meaningful way, the volume of work flowing to CROs would decline and the industry would need to adapt quickly. We think this is unlikely given everything we have laid out on FDA accountability requirements, but it is a risk worth monitoring.

Outside of these two scenarios, we are comfortable with the thesis and the setup.

7. Recurring Mistake in Thematic Investing: Timing

Being right about a theme is not enough. You can correctly identify a trend that plays out exactly as expected and still lose money if you buy in at the wrong time or without understanding what is happening inside the industry at that moment.

This is one of the most common mistakes we see in thematic investing. Investors get excited about a big picture idea, buy the stocks tied to it, and then watch them go nowhere or decline because the near term fundamentals do not yet support the valuation. The theme was right. The timing was wrong.

That is why we spent time analyzing the health of large pharma, the state of biotech funding, and what the major CROs are actually reporting in 2026 before forming a view. A theme needs to be supported by what is happening on the ground today, not just what we expect to happen over the next five years.

We have had this theme on our radar for a while. We believe the moment to act on it is now. The industry has gone through a specific pullback that has pushed valuations to historically attractive levels, particularly in our favorite name in the space.

That combination of recovering fundamentals and compressed valuations is exactly the setup we look for before putting capital to work.

8. CRO Industry Overview

What makes this moment interesting is the setup. AI fears have pushed valuations to historically low levels while the fundamental demand picture is improving. That gap creates an opportunity, and this section explains why.

8.1 Biotech Funding Trends

Biotech funding collapsed from its 2020 peak and spent the better part of four years working through that reset. The recovery that began in late 2024 is now gaining real traction. Trailing twelve month funding is up 19% year over year as of February 2026, with year over year growth turning sharply positive into 2026.

This timing has direct implications for CRO demand. Biotech funding and CRO bookings tend to move together, with a lag of roughly six to twelve months.

When biotech companies raise money, they deploy it into R&D, and that R&D needs to be executed. Based on the trajectory we are seeing today, we expect CRO bookings to improve meaningfully in the second half of 2026 and into 2027.

8.2 Largepharma Funding Trends

M&A activity in large biopharma has been running well below its 2019 peak of $245B. After a recovery to ~$99B in 2023, deal activity pulled back to $91B in 2025 and sits at $42B year to date in 2026. The pace of consolidation has slowed, and large pharma appears to be more selective about where it deploys capital.

The picture today reflects a cautious capital environment, but we think that is starting to change. Large pharma is facing a significant wave of patent expiries over the next several years. As blockbuster drugs lose exclusivity, companies will need to replenish their pipelines, and the fastest way to do that is through M&A and licensing deals with the biotech companies that are currently building them. That pressure has historically driven a meaningful pickup in deal activity.

On the equity side, biotech issuance tends to follow investor confidence. With funding momentum turning positive and valuations recovering from their lows, the conditions for a more active market are building.

We expect both M&A and equity capital activity to accelerate as we move through 2026 and into 2027, and that will feed directly into CRO demand as newly funded and acquired assets move into clinical development.

9. The CRO Market Is Growing

The total clinical CRO market has grown from $25B in 2018 to $41B in 2025, and estimates point to $52B by 2030. That is meaningful growth for an industry that many investors currently treat as under threat.

The largest players have held their ground, supported by long standing large pharma relationships. Focused, biotech-oriented players have maintained stable share. The names facing operational challenges have gradually given up ground. In a growing market, how a CRO is positioned matters more than its size.

9.1 Biopharma R&D: Where the Growth Is Coming From

Large biopharma R&D has grown consistently from $109B in 2018 to $176B in 2025, and estimates point to $201B by 2028. It has grown through every cycle, through patent expirations, pricing pressure, and broader economic uncertainty.

Drug companies keep investing in their pipelines because the commercial incentive to do so never goes away. The growth rate is settling at ~4% per year going forward, modest but reliable, and that steady base of spending is what keeps the CRO industry moving even when sentiment turns negative.

Not all of that R&D grows at the same pace, and that distinction drives how we think about the CRO opportunity. Large pharma is expected to grow at around 3.1% per year going forward, generics at 4.5%, and the total market at 4.9%.

The standout is SMid biotech, expected to grow at 8.0% per year, nearly three times the pace of large pharma. The chart above shows just how volatile those growth rates have been historically, particularly for SMid biotech, which moved sharply through 2020 and 2021 before normalizing.

After years of that volatility, all four segments are now converging toward more predictable growth rates from 2026 onward. That stability is exactly the kind of environment where CRO demand becomes easier to forecast and easier to act on.

We believe that shift, combined with the biotech funding recovery, creates a better setup for CROs than current valuations suggest. R&D spending is growing, growth rates are stabilizing, and the fastest growing segment relies most heavily on CROs to do the work.

9.2 Where Outsourcing Is Growing and Where It Is Not

SMid biotech already outsources ~71% of its clinical trial work to CROs, and that level is expected to hold through 2030. The total market sits at ~50.6%, while large pharma comes in at 40.8% and is expected to drift lower as more companies shift toward hiring staff directly on flexible contracts.

Biotech companies rely on CROs because most of them lack the internal infrastructure to run large clinical programs on their own.

Large pharma has that infrastructure and has been gradually bringing more work back in house. As biotech grows faster and funds more R&D, we think CROs with deep experience serving that part of the market are best positioned to benefit.

9.3 Bioprocessing Is Recovering

Bioprocessing, the manufacturing side of biological drug production, peaked at $20B in 2022 and then pulled back through 2023 & 2024. The driver was a post-COVID inventory correction. Drug companies had over-ordered supplies during the pandemic and spent the following 2 years working through that excess before placing new orders. That process is complete, and the recovery is underway.

Revenue recovered to $17.8B in 2025 and is expected to reach $21.4B by 2027, with growth rates stabilizing at around 10% per year. The recovery in bioprocessing is an important signal for the broader life sciences supply chain and reinforces the improving demand picture we are seeing across the industry.

9.4 Drug Approvals Remain Strong

The FDA approved between 45 & 58 drugs per year from 2018 through 2025, a historically high pace that reflects both the productivity of modern drug development and the FDA’s capacity to review applications efficiently.

2026 shows 14 approvals so far, but we believe that reflects the early stage of the year instead of a change in trajectory. Strong approval rates over the past several years have generated significant commercial revenue for pharma companies, which is recycled into R&D budgets and feeds the generation of clinical trials.

10. Diving into Industry Leaders

Later in the report, after our price target and investment thesis on the company we are adding, we also compare our expected total return outlook for ICON, IQVIA, and Charles River against our new position.

10.1 ICON (NASDAQ: ICLR)

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We think the complete opposite. We believe oil prices will not sustain these levels and that the market is heading lower. We have held that view since the conflict began in early March, and our approach has been proven right, consistent with our track record of predicting where oil prices are actually going.

The reason is simple: while the consensus chases headlines and extreme forecasts, we stay focused on the actual flow of oil and what the data is saying.

The bull case assumes lost production will trigger a massive shortage, pushing prices toward $150 or even $200. That kind of thinking fails the moment prices stop cooperating with the forecast. You cannot fight where prices want to go. The faster you accept that, the better your chances of being right.

Since the start of the Iran-US conflict, oil prices have moved above $100 WTI on three occasions: $105 on March 30, $113 on April 6, and $109 on April 29.

Each time, prices quickly fell back below $100. Fear moves markets fast, but it cannot hold prices at levels the real economy does not support. Demand, supply, and what the consumer can actually afford are what move oil over time.

We are now back over $100, with prices around $102 on May 12, and we do not expect this level to hold. From the start, we knew that a weakened Iran could not sustain a permanent supply shock. The Strait of Hormuz risk premium pushed the price floor higher, but a higher floor does not mean prices can stay wherever the market wants to push them.

We made this point clearly on March 12, in our LatAm Oil & Gas report:

"We do not see oil staying higher for longer. Iran is now too weakened to sustain this move. While the market is reacting to headlines, the reality of a diminished Iran will eventually bring prices back down. The fundamentals simply do not support a permanent shift to triple-digit oil, and we expect this premium to fade."

Table of Contents:

0. Introduction: Don’t Fall for the Oil Bulls

1. How We Analyze the Oil Market

2. The Importance of Simplification

3. Why We Have a Contrarian View on Oil

   3.1 Trump & the Midterm Pressure

4. Expertise and the Oil Market

5. The Market Is Missing the Bigger Picture

6. How We See Oil Price Scenarios Playing Out

7. How China Is Rebalancing the Global Oil Market

8. Geological Constraints & the Cut Profile

9. Asia Is Moving Away From Middle Eastern Oil

10. Our Final Take on Oil

1. How We Analyze the Oil Market

Oil is the world’s most important commodity, and it is always the first market people turn to when a major global event unfolds. Our approach is simple: we follow the data and the macro picture, even when that leads us to a contrarian position. That is exactly where we stand today.

We believe oil prices above $100 per barrel are unsustainable. At those levels, energy costs begin to weigh on global growth, and consumers and businesses are forced to cut back on fuel consumption. That drop in demand is what brings prices back down. It has happened before, and we believe it is happening now.

The Evolution of Oil Prices Since 2020

While many focus on supply disruptions, we look at how the global economy reacts to higher price levels. History shows that $100 oil triggers a slowdown that eventually pulls prices back down. This cycle of demand destruction acts as a natural ceiling, preventing prices from staying elevated indefinitely.

Focusing on these economic reactions helps us anticipate shifts that the broader market often misses. When prices rise to a point where consumers and businesses start pulling back, spending data and real demand figures will show it before any forecast does. We watch for those signals carefully.

We believe an analyst should look past the fear and focus on what supply, demand, and inventory levels are actually saying. That is what keeps our positioning grounded when sentiment runs ahead of reality.

2. The Importance of Simplification

Since 2020, our approach to forecasting oil has been to keep things simple. It is easy to become overly bullish on oil. It can lead investors to ignore warning signals or dismiss them entirely, even when they are meaningful. We stay focused on the data and on real-world market conditions.

Our approach proved correct. We remained bearish from the peak in June 2022 all the way to the bottom in December 2025, and we have maintained that same view since the conflict in Iran began in late February 2026. Headlines move fast, but economic reality is what ultimately moves the market.

We believe successful analysis requires paying attention to changes in consumer behavior. High prices eventually reach a point where people can no longer maintain normal consumption. Tracking these real-world signals alongside the data helps identify the limits of oil prices before the broader market reacts.

In our view, keeping that focus on the consumer is what keeps analysis grounded in reality rather than in models that assume demand never breaks.

Key macro takeaway: Successful commodity analysis often requires looking beyond the desk and observing real-world conditions. What happens on the ground usually reflects the true picture more closely than models alone.

3. Why We Have a Contrarian View on Oil

Since the start of the conflict in Iran, we have maintained a bearish outlook on oil. The common bull argument suggests that lost production will lead to a massive shortage, forcing prices toward $150 or $200 as supply fails to meet global demand. We understand the logic, but we disagree with the conclusion.

The problem with many of these forecasts is that they stop adapting the moment prices do not cooperate. You cannot fight where prices want to go. It is like water.

Oil prices have not reached the extreme levels many predicted, and we do not see that changing. A shortage exists, but the data shows it is not severe enough to justify $150 or $200 oil. Markets tend to overestimate how bad a disruption will be and underestimate how fast buyers and sellers find alternatives. We have seen that happen repeatedly, and this time is no different.

3.1 Trump & the Midterm Pressure

Another major reason we are not bullish on oil prices is Donald Trump.

In the United States, midterm elections take place halfway through a presidential term. Every seat in the House of Representatives and a third of Senate seats are up for vote. They are essentially a public verdict on how the president is performing. For Trump, that vote happens in early November 2026, and oil prices are becoming a serious problem.

High energy prices hit American consumers directly, at the gas pump and in their electricity bills. When people feel that pressure in their daily lives, they blame the person in charge. Trump knows this. His approval ratings are already slipping, and the longer oil stays above $100, the more damage it does to his political standing going into November.

This gives Trump a real incentive to find a deal that reopens the Strait of Hormuz and brings prices back down before voters go to the polls. The Iranian regime understands this too. They follow American politics closely, and Trump’s midterm timeline is one of the few pieces of leverage they have left.

The clock is running. If Trump does not find a way to reopen the Strait before the summer, the damage at the polls will already be done. We do not think the market is fully pricing that pressure in yet.

4. Expertise and the Oil Market

A common question is what makes our view different from traditional experts. Oil is a commodity where excessive specialization can create blind spots.

We have seen this repeatedly across the industry, with Pierre Andurand being the most notable example. Andurand is widely considered a genius, holding 4 Masters degrees in fields like Mathematical Physics from Oxford and Astrophysics from London. Yet that depth of expertise can push an analyst toward complex models that end up missing the bigger picture.

The results speak for themselves. His flagship fund was down 15% in 2019, 55% in 2023, and 40% in 2025. The fund gained 31% in March, only to give it all back and more, slumping 52% in just the first half of April as prices retreated.

Volatile performance like that is a sign that the model is fighting the market instead of following it. Being an expert in a single field creates a narrow perspective that prevents seeing how different global forces interact.

Our approach avoids this by maintaining a flexible framework. We look at the entire macroeconomic picture instead of getting lost in the technical details of a single asset, and we believe that is what keeps our positioning accurate over time.

5. The Market Is Missing the Bigger Picture

Most people are only looking at a part of the picture. The data that supports a bullish view is easy to find right now, but the data that challenges it is just as important. We believe that when you look at both together, the case for extreme oil prices becomes much harder to make.

1. World Oil Supply vs Demand

Yes, a supply gap exists. Since 2021, global oil demand has consistently run above supply, meaning the world has been consuming more oil than it produces. That deficit has not disappeared with the conflict. What has changed is the direction. The gap has been narrowing steadily through 2025 and into 2026.

Supply from non-Middle Eastern producers has been growing, gradually closing the distance between what the world produces and what it consumes. The gap is narrowing, and that matters when assessing whether $150 or $200 oil is a realistic outcome. We do not believe those levels are realistic under current conditions.

2. Alternative Export Routes

This is the part of the story we think most people are missing. When the Strait of Hormuz closed, the assumption was that the oil stopped flowing.

But producers had other plans. Within weeks, exports were being redirected through two alternative routes: Yanbu Industrial Port on Saudi Arabia's Red Sea coast and Fujairah on the UAE's eastern coast.

The results are significant. Combined exports through these two routes have grown from around 2 mb/d in January to nearly 7 mb/d by April, adding roughly 4 mb/d of new export capacity in just a few months. That is a substantial and rapid adjustment that the market has been slow to price in.

The world adapted faster than most expected. Inventories remain comfortable, the supply gap is narrowing, and producers found alternative routes within weeks. The disruption was real, but the market absorbed it. That is why we do not see a fundamental case for oil staying above $100.

6. How We See Oil Price Scenarios Playing Out

We see oil prices staying in the $85 to $100 range for as long as the conflict in Iran remains unresolved. Even when the Strait of Hormuz reopens, we believe the damage to infrastructure and supply chains will take time to repair, and prices will not fall back to $70 quickly. We do not see oil breaking above $120 to $130 under current conditions. In our view, that kind of move would require the conflict to escalate into a much broader regional war involving multiple countries. We are not there, and we do not think we are heading there.

To support our view, we are going to walk through the data, because we think it challenges most of what you are hearing right now.

Start with US crude oil inventories. Levels in 2026 have been running above both the 5-year average and 2025 for most of the year, only beginning to ease slightly around April. They are one of the most reliable indicators in the oil market.

US Crude Oil Inventories

The logic is simple: when supply is genuinely tight and demand is outpacing it, stocks fall. Buyers draw down what is sitting in storage because there is not enough coming in to meet their needs. That has not happened here.

Despite the Strait of Hormuz closure, the US has maintained comfortable inventory levels throughout. In our view, that is a strong sign that the actual supply disruption is nowhere near as severe as the market has been pricing in.

The global picture confirms what the US data is already showing. Since 2022, world crude oil supply has consistently kept pace with demand, and that balance has held into 2026 despite the conflict. The demand line has been flat to slightly declining, while supply from multiple regions, including the US, China, and other non-OECD producers, has remained robust. A market where supply is meeting demand is not a market that justifies triple-digit panic pricing.

World Crude Oil Supply vs Demand

Taken together, these two charts make our case clearly. The fear driving oil prices right now is not supported by what is actually happening in the physical market. In our experience, that kind of gap between sentiment and reality always closes, and when it does, prices follow the fundamentals back down.

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7. How China Is Rebalancing the Global Oil Market

China’s crude oil imports are falling, and this is the first time we have seen a decline of this magnitude since 2024. The easy explanation is to blame the Strait of Hormuz closure, and while that plays a role, the Chinese economy was already slowing before the conflict began.

The Chinese economy is weak. Domestic demand for fuel is soft, and that was true before the conflict began. What China actually needs right now is LPG, ethane, and naphtha, the building blocks for its petrochemical industry. Crude oil and refined fuel products are a different story. We believe demand for both will remain limited, and the import numbers already reflect that.

We believe the difference between what China needs and what it is actually buying is important for anyone trying to read the oil market through the lens of Chinese demand. China is selectively importing what its petrochemical industry needs and pulling back on crude and fuel products.

The Strait of Hormuz disruption adds pressure, but the weakness in Chinese oil demand was already there before the conflict began. We think that ignoring this leads investors to overestimate where oil prices are heading.

8. Geological Constraints & the Cut Profile

Iran cannot cut production evenly across its oil fields. The nature of its reservoirs makes that impossible. Iran relies heavily on mature carbonate reservoirs, mainly the Asmari and Bangestan formations, which naturally decline at between 4% and 12% per year without constant pressure support.

Because oil flows through complex fracture networks in these rocks, any interruption in pressure maintenance can cause rapid and permanent damage. Once that damage occurs, that production capacity cannot be recovered.

Prioritizing Field Survival

Iran’s national oil company (NIOC) is focused on protecting three categories of fields above everything else:

• Shared Reservoirs: Fields like Azadegan and Yadavaran stay active because shutting them down risks losing oil to neighboring countries who share the same reservoir.

• Pressure Sensitive Fields: Bangestan group fields need constant pressure to keep oil moving through their networks. Any pause risks permanent loss.

• Gas Injection Fields: Iran reinjects billions of cubic feet of gas daily to keep fields productive. Stopping that process accelerates decline and reduces how much oil can ever be recovered.

Protecting these priority fields forces cuts onto a smaller group of assets, mainly older onshore southern fields like Ahvaz-Asmari and Gachsaran. These fields offer more operational flexibility, but decades of production have left them requiring more maintenance and less able to absorb sudden changes.

Impact on Export Blends

The geology determines what Iran can actually sell. Bangestan reservoirs produce the heavier Iran Heavy blend, while the shallower Asmari formations produce Iran Light, which normally makes up around 55% of exports. Because cuts are concentrated in specific areas, the mix of oil reaching Asian refineries will shift, with lighter grades likely seeing the biggest reduction.

Outlook: Higher Costs & Uncertain Recovery

With storage full and reservoirs at their limits, production cuts will begin immediately and deepen fast. President Trump has said the blockade stays until a deal is signed. Iran refuses to negotiate while the blockade is in place. That standoff is pushing Iran’s national oil company into costly workarounds.

Keeping reservoirs healthy during a shutdown requires constant well work and pressure management. Rather than shutting assets down completely, the company has to cycle production on and off, which drives operating costs higher.

As oil revenue shrinks, less money is available for the maintenance needed to protect long term capacity. The short term decisions being made today will result in permanently higher costs and lower production capacity for years to come.

9. Asia Is Moving Away From Middle Eastern Oil

India keeps buying Russian oil, and the volumes are growing. The thinking among Indian refiners is simple: keeping fuel affordable and supply reliable at home is more important than worrying about Western sanctions.

You can see it directly in the numbers. In March 2026, Russian crude imports into India surged by over 900kbd, pushing total Russian volumes to a record 2.25 Mbd. That is nearly half of everything India buys. These numbers have been building for months and show no sign of reversing.

Pricing & Sanctions Risk

Indian buyers are well aware of the sanctions risk and have been factoring it into their pricing for weeks. Premiums for May arrival Urals are currently averaging around $6/bbl above ICE Brent. Even after the record volumes seen in March, April arrivals held strong at 1.5 Mbd. India is paying a premium to keep the oil flowing, and that tells you how seriously it takes supply security.

Southeast Asia Joins In

When the Strait of Hormuz closed, Southeast Asia felt it immediately. With Middle Eastern barrels suddenly harder to access, countries across the region turned to Russia to fill the gap. Malaysia, Indonesia, and the Philippines are all actively securing Russian crude. Philippine refiner Petron bought over 2 Mbbls as an emergency measure. We think these countries will continue buying Russian oil even as the situation evolves.

Making It Permanent

India is now putting the infrastructure in place to keep these flows going. Its shipping authority recently added a Russian insurer to its approved list, allowing Indian tankers to move Russian crude without relying on Western financial systems. Supply security and cost come before anything else for India, and that decision reflects it directly. We believe the shift toward Russian energy in Asia is becoming a permanent feature of how the region sources its oil.

10. Our Final Take on Oil

Our view on oil has not changed. We remain bearish. The shortage is real, but manageable, and nothing in the data supports a permanent shift to triple-digit oil. China’s demand is weaker than most assume, Trump has a political deadline to resolve the conflict, and consumers are already feeling the weight of elevated prices. All of this points in the same direction. We see prices heading lower from here, and we will keep following the data as the situation develops.

Find how our stock portfolio is positioned here.

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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.

Real-time portfolio performance here on Plutus

Investors are actively replicating the portfolio on Plutus, with over US$1M allocated to it. Plutus allows users to automatically invest in model portfolios and handles trade execution.

We have also improved our portfolio, called the Aurelion Index. Paid subscribers now have access to real-time positions, current portfolio weights, and receive updates on all trades as they are made here.

A recurring question is why it is called the “Aurelion Index” if it is a stock portfolio and not an index. The reason is that we originally started it as a way to track the performance of our stock research, essentially an “index” of all our research. It began as a simple tracking tool that calculated the returns of all stocks with a “Buy-Rating”. Over time, it evolved into a stock portfolio with actively managed weights, where higher conviction leads to higher weightings, that can now be accessed in real time by our paid subscribers here on Substack. Of course, each stock is also supported by in-depth research.

If you want to know who’s behind the portfolio and its returns, you can access our team page.

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Aurelion Research publishes independent equity research and a model portfolio. We do not manage money. Investors can choose to replicate the portfolio through Plutus, a SEC-registered investment adviser.

Table of Contents

0. Introduction

1. Performance Overview

2. Portfolio Characteristics

3. Combining Bottom-Up and Thematic Investing

4. Risk/Reward Framework

5. Current Portfolio

Portfolio Characteristics

The portfolio consists of small to mid-cap global stocks. It is long-only, with no leverage or derivatives, and focuses primarily on U.S. companies.

We typically focus on companies in the US$1B to US$15B market cap range. The main reasons are twofold. First, there is sufficient trading volume to avoid getting stuck in a position. Second, we believe this segment is full of overlooked quality companies. Many of them are undercovered, and we believe that discussions with management teams and insights from industry experts allow us to identify quality businesses before the market recognizes them.

In terms of sectors, the portfolio is highly diversified across industrials, tech, healthcare, consumer, materials, and commodity-related equities.

Because we are Canadian, we do have a few Canadian-listed companies in the portfolio. This makes firsthand research easier, but we also believe the Canadian equity market has been underinvested over the last decade and that the winds are beginning to turn. We have a primer on this coming soon.

Performance Overview

As of May 10, 2026, our portfolio is up 29.5% YTD.

This is 16.1% above our benchmark, the MSCI World Small Cap Index, which is up 13.3% since the start of 2026.

We discuss Q1 and 2025 in further detail in the posts below:

A driver of our performance over the last month has been Marex (NASDAQ: MRX), which is up 60% since our report. This is a rare stock we have been public about, and we continue to see upside. We discuss it further in the report below.

Combining Bottom-Up and Thematic Investing

An important reason behind our past performance and the difference between us and the rest of the market is that we combine both top-down and bottom-up approaches. This means we view the large themes impacting broader industries as key drivers (top-down), and then conduct in-depth research on specific companies within those themes (bottom-up).

For example, we were bullish on nickel prices in April 2026, which have already started to rise.

And to express this view, we selected what we believe is the best nickel producer: Canada Nickel Company (CNC). Through our bottom-up research, we believe the company can outperform even if nickel prices perform poorly, which is a rare level of conviction to have in this space.

However, we think this style of investing can sometimes become a trap.

If you barely understand the theme and only take a quick look at the company, you often have no edge over the market. Knowing a little about the broader theme and a little about the company is worse than deeply understanding only one of the two. That is why we keep a concentrated approach to our portfolio. We only hold what we truly believe in and understand.

In many stocks, even if the business is excellent and generating significant cash flow, you can still lose money if you have no view on the broader macro environment and themes shaping the company.

A great example is SaaS right now. Some of these companies are beating expectations, generating strong cash flow, and improving ROI, yet are still being hammered by the broader SaaS theme. We discuss our view on SaaS further here, and we do currently hold a few SaaS positions.

Risk/Reward Framework

In our view, an investor’s risk/reward framework is the most important part of the investment decision.

Most of our holdings are based on this framework: quality businesses with competitive advantages that generate cash flow, either facing short-term headwinds that create an attractive entry point or simply being overlooked by the market.

We believe this is key to sustaining returns over the long run. Anyone can buy a group of risky stocks and perform well for a few months or even a year. We strongly believe that real cash generation, rather than hype, limits, although never completely removes, the downside risk of a stock.

First, if you invest in a company with a real competitive advantage, or moat, the goodwill on its balance sheet is not just an accounting figure but a tangible value that competitors cannot easily replicate. A competitive advantage gives you greater confidence that the company will continue to exist and generate cash flow over the next decade.

Then there is free cash flow generation. Not EBITDA or EPS, but actual cash generated by the business at the end of the year. For quality businesses, this cash flow generation creates almost a “price floor,” where the company could become an attractive acquisition target below a certain valuation. This is where DCFs and financial models are highly relevant, which we do for every portfolio stock.

The trap is focusing on EBITDA without analyzing how much of that EBITDA is converted into cash flow. Some businesses convert more than 100%, while others convert only 20%. This has a major impact on valuation, yet the market often does not spend enough time understanding these dynamics because cash generation can be volatile, especially in smaller equities.

A great example of this is ZOOMD. The CEO was pitching the stock to us at the Planet Micro Cap conference in Toronto. There was no real moat, and the business operated in adtech, a highly competitive industry. Cash flow generation was strong in certain quarters but highly uncertain overall, and there was little visibility into where the business was heading. Once the company lost its growth narrative and the hype faded, the stock crashed from $2.60 at the time of the conference to $0.50.

An example of a company with a clear moat and strong cash flow generation is Bruker Corporation. They manufacture some of the best scientific instruments on the market, including nuclear magnetic resonance machines that can cost more than $2M. Scientific research workflows are deeply integrated with these machines, creating long product life cycles and recurring revenue streams.

However, the company faced several short-term issues simultaneously in 2025. The stock was heavily impacted, with investors worrying that it would lose its “small-cap compounder” profile. Because we had strong conviction that the company would continue to grow and generate substantial cash flow in the future, we believed the stock was near a bottom and decided to underwrite the opportunity. We exited the position in January 2026.

Current Portfolio

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Our latest stock addition:

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Disclaimer

Aurelion Research is an independent equity research publisher. All content is provided for informational and educational purposes only and does not constitute investment advice, an offer, or a solicitation to buy, sell, or hold any security. Nothing published by Aurelion Research should be relied upon as a basis for any investment decision.

Aurelion Research is not registered with the AMF, SEC, or any other securities regulator and does not provide personalized investment advice or portfolio management services. Readers should conduct their own independent research and consult qualified financial professionals before making any investment decisions.

Information presented is based on public sources believed to be reliable at the time of publication but is not guaranteed for accuracy or completeness. Aurelion Research undertakes no obligation to update any information, opinions, analyses, or performance data, even if such information becomes outdated or inaccurate.

Past performance, including the performance of the Aurelion Index, is not indicative of future results. The Aurelion Index is a model portfolio presented for research transparency purposes only and is not an investable fund. Returns do not reflect fees, transaction costs, or taxes.

Aurelion Research, its affiliates, and its analysts may hold, may not hold, or may change positions in securities discussed at any time without notice. Content is intended solely for use in jurisdictions where such publication is legally permitted.

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TLDR: Most earnings reaffirm our view and increase our confidence in the investment case, but a few raise red flags that we are monitoring and looking into. All prior trades were discussed & announced in our Substack Chat.

We would be happy to hear your thoughts on earnings, we also hold the stocks!

Read more

We start from the ground up, explaining the industry and its dynamics so anyone can get up to speed. We then dive into what matters, where we believe the industry is heading, and how to benefit through actionable stock ideas, including a new portfolio addition in the Aurelion Index.

Why uranium today? With the rise of data centers, AI, quantum, and everything around it, power demand is going up fast. We think we’re going to face a real shortage sooner than later. The issue is simple: we don’t yet have the capacity to produce enough energy, especially clean energy, to support what’s coming.

Uranium has been hated for a long time. In Europe especially, nuclear energy is still very unpopular among politicians, which, in our view, makes little sense given the situation. A lot of it comes from past incidents like Chernobyl, which still shape how people think about nuclear today. But that was in 1986. We are now in 2026, and technology has evolved a lot since then.

The Chernobyl Disaster (April 26, 1986)

At some point, that fear starts to look overdone. If we are serious about meeting future energy demand without relying on coal and oil, nuclear has to be part of the conversation. It is also a very competitive source of power on a cost basis.

There are around 438 nuclear reactors operating worldwide today, and the vast majority run reliably without major issues. This already shows that nuclear technology is well proven and significantly safer than it was decades ago. The kind of disaster we saw in the past, like Chernobyl, is now extremely unlikely with modern reactor design and safety standards.

Table of Contents

0. Introduction

1. Why Uranium, and Why Now?

   1.1 The Timing Looks Right

   1.2 Supply Can’t Keep Up With Demand

   1.3 The AI Electrification Boom

2. What Is Uranium?

   2.1 Origins & Physical Traits

   2.2 The Power Of Uranium

   2.3 The Lifecycle of Uranium

3. Nuclear Energy 101

   3.1 Inside the Power Plant

   3.2 Reactor Types in the U.S.

4. Uranium Global Demand Outlook

   4.1 The U.S. Needs More Nuclear Power

5. Uranium Global Supply Outlook

   5.1 The Supply Story Will Break

6. Who Are the Big Players?

   6.1 Cameco (Canada)

   6.2 Kazatomprom (Kazakhstan)

7. Where Uranium Prices Are Headed Next

8. Our Favorite Stock Ideas

   8.1 Uranium Stock: Top Idea #1

   8.2 Uranium Stock: Top Idea #2

9. A Look at Uranium Energy Corp. (UEC)

10. Why Only Nuclear Meets AI’s Power Requirements

    10.1 Nuclear vs Solar: The Reality of Scalable Power

11. What About Kazakhstan?

12. Key Risks to the Bull Case

13. Our Final Take on Uranium Market

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1. Why Uranium, and Why Now?

Uranium has been a recurring theme over the past decade. It used to be dead money, but since 2020, uranium stocks have surged, with most major companies delivering around 5x returns and some junior miners closer to 10x.

1.1 The Timing Looks Right

Timing is everything in commodities. We have spent years building our framework that spans multiple asset classes, precisely because staying broad keeps us from getting attached to any single trade. Specialists who live and breathe one commodity tend to be perma-bulls on it, and that bias costs them.

Our approach is to rotate and wait for a setup that’s actually turning before committing capital. Getting in too early is one of the most common mistakes in this space. It ties up money for years in trades that go nowhere, and in some cases, the thesis never plays out at all.

With uranium, the re-rating has already begun.

Those who waited for momentum to build between 2023 and 2024 have seen strong performance as the spot price moved toward the $90 level. On the other hand, investors who bought during the 2014 to 2021 period had to endure a long stretch of weak price action, including the 2016 low at $17.75 per pound.

The chart also shows how different the current cycle is compared to past peaks. The 2007 spike to $138 was fast and was followed by a long decline through the financial crisis and Fukushima. So far, the current cycle has been more gradual, with a steadier recovery over time.

As of May 2026, the long-term price sits at $93.00, with the daily spot price at $86.25. We believe this strength reflects a tighter balance between supply and demand, driven by the energy transition and rising power demand from AI.

That does not mean the move is over or that the opportunity is gone, far from it. The sector has clearly turned, with capital starting to follow after years of neglect. Policy support has also strengthened, with the U.S. government openly backing nuclear energy and domestic supply, reinforcing its strategic importance.

1.2 Supply Can’t Keep Up With Demand

The primary driver for the uranium market is the rapidly growing global demand for power. Even before the current tech boom, the shift toward carbon-free energy had already led to a wave of new nuclear plants being announced and brought under construction. While the outlook was already strong, the rise of artificial intelligence has increased the scale of energy demand significantly.

The following chart on energy consumption per request illustrates this gap clearly. A standard Google search requires about 0.3 watt-hours per request, while an AI-powered search can reach up to 9.0 watt-hours. That is a significant step up in energy intensity as these systems become more integrated into everyday use.

This surge in AI intensity is translating into much higher electricity demand. Data center power consumption alone is expected to rise by ~165% by 2030, creating a strong need for reliable, around-the-clock power. Nuclear is one of the few carbon-free sources that can provide this level of consistent output, which is why the imbalance between supply and demand in uranium continues to widen.

Nuclear is not power that can be turned on and off.

It must be constant, and intermittent sources cannot meet that requirement on their own. As a result, large technology companies are stepping in directly, funding the restart of older nuclear plants and building data centers next to reactors to secure a stable, always-on supply.

On a global scale, nuclear capacity could reach nearly 1,446 GW by 2050 if government targets are met, surpassing the goal of tripling capacity set at COP28. While this reflects a massive expansion, achieving these targets will require more than ambition as the industry scales to meet future energy needs.

This expansion, which is expected by almost every analyst, involves extending the operational life of existing reactors, in some cases up to 80 years, while also building new plants at scale. It also requires the deployment of small modular reactors and the advancement of next-generation technologies like fusion.

In our view, the most likely path forward: demand continues to rise, supply must follow, and nuclear is one of the few sources capable of closing that gap.

As noted earlier, nuclear energy is currently in a strong phase, with AI expected to further increase global demand. However, the market does not yet fully reflect this growth, which suggests we are neither too early nor too late in the cycle. In our experience, that often represents one of the more attractive points for positioning before the broader market prices in the shift.

According to the World Nuclear Association (WNA), there are currently around 79 reactors under construction worldwide, expected to add 86 GW of new capacity. This would result in an estimated 21% increase in global capacity by 2030, which implies an additional ~43M pounds of uranium demand annually.

But we believe this is only the beginning.

More than 39 countries have stated ambitions to triple nuclear capacity by 2050, from about 380 GW today to nearly 1,446 GW. That implies close to 1000 GW of additional capacity over the coming decades. These are long-dated forecasts, and while 2040 or 2050 can feel far away, even the 2030 timeframe is much closer. And even there, we are still going to need significantly more uranium.

The key point is that all of this new capacity will require significant uranium supply. If AI-driven electricity demand in the U.S. were to be met entirely by nuclear power, which is unlikely but illustrative, it would require up to 60M pounds of uranium annually by the end of the decade.

1.3 The AI Electrification Boom

We are currently seeing energy providers revise their demand forecasts more frequently than in the past, which we think reflects the urgency of the rising need for nuclear power to support the electrification boom we are experiencing, both in the U.S. and globally. Looking at the exhibit below, we can see that the U.S. electricity demand outlook data from ICF looks pretty clear, it’s going higher.

Now, to match demand, supply will of course need to follow.

The rise of AI and the electrification of key sectors globally is making past forecasts increasingly outdated. Growth is accelerating, and demand is moving to levels we have not seen before. In AI in particular, where data centers require massive and constant amounts of power, the increase is already material.

Nuclear energy stands out in this environment. It is far less exposed to disruption than natural gas or oil, and it requires far less land than wind power.

It is a source of power that provides stable, reliable baseload electricity, which is exactly what the system increasingly needs. It is also a low-carbon source of energy, meaning it can play a direct role in meeting global climate targets.

At the same time, the technology itself is evolving. Advanced nuclear designs are emerging that were not available in the past, including smaller and more flexible reactors built for this new energy landscape, most notably small modular reactors.

We’ve done our best to make the following sections as accessible as possible. However, you don’t need to be a uranium expert to follow the thesis or to benefit from it.

2. What Is Uranium?

Uranium is a heavy metal that has served as a powerful, concentrated energy source for over sixty years. It is much more common than people realize, appearing in most rocks at about the same frequency as tin or tungsten. It even exists in our oceans, where it can be recovered directly from the seawater.

2.1 Origins & Physical Traits

This metal was formed billions of years ago during massive star explosions called supernovae. While it is rare in space, the heat produced by uranium decaying naturally is actually the main reason the inside of the Earth stays hot. This internal heat is what drives the movement of our continents.

Uranium is extremely heavy, about 18.7x denser than water. Because of its density, it has uses beyond energy. It can be used as added weight in ships, as counterweights in airplane wings, and as protection against radiation.

2.2 The Power Of Uranium

Nuclear fuel is extremely energy-dense, so a reactor needs very little of it. Uranium pellets weigh about 20 grams each, slightly less than an AA battery.

Fewer than 10 pellets can power the average Canadian home for a year. To produce the same amount of electricity, you would need about 410 litres of oil or 350 cubic metres of natural gas, showing just how energy dense nuclear fuel is.

2.3 The Lifecycle of Uranium

Uranium is a heavy metal that provides a concentrated source of energy. It is about as common in the Earth’s crust as tin and was formed billions of years ago in exploding stars. The process of turning this metal into electricity involves several steps and industrial processes, collectively known as the nuclear fuel cycle.

Nuclear Fuel Cycle:

Refining the Raw Material

The journey begins when uranium ore is mined and refined into a solid material called yellowcake. To prepare this for a reactor, the solid yellowcake is converted into uranium hexafluoride gas.

This gas is spun in large machines to enrich it, which increases its efficiency by concentrating the most powerful parts of the metal. Once this step is complete, the gas is processed into a black, powder-like substance called uranium dioxide.

Manufacturing the Fuel

The final transition from powder to power involves precise mechanical steps:

• The black powder is squeezed together and heated until it forms small, hard cylinders known as uranium pellets.

• These pellets are stacked one by one into long tubes made of metal.

• Many of these filled tubes are bundled together to create a fuel assembly.

Energy Production & Recycling

These assemblies are the primary source of energy for a nuclear reactor. They are placed inside the heart of the power plant, where they provide the heat necessary to produce steam and electricity for years at a time. Once the fuel has been used, it is removed and stored to cool down. At this stage, it can either be recycled to extract remaining uranium for future use or disposed of safely as waste.

3. Nuclear Energy 101

Nuclear energy is a power source derived from uranium, a heavy metal found in rocks and seawater. It produces electricity through fission, where splitting atoms releases large amounts of heat. Although the science is advanced, the plant works much like a coal facility, using heat to boil water into steam that spins a generator.

3.1 Inside the Power Plant

A nuclear power station functions much like a coal or gas plant because both systems use intense heat to boil water and produce steam. That steam then spins a turbine to generate electricity. The main distinction is that a nuclear plant uses the energy from splitting atoms instead of burning fossil fuels to create that heat.

Inside the Core of a Nuclear Reactor

3.2 Reactor Types in the U.S.

In the US, most facilities are light-water reactors, which use normal water to manage the reaction and keep the system cool. The most common design is the pressurized water reactor (PWR), shown below, which pumps water into the core under high pressure to prevent it from boiling. This hot water travels through tubes to heat a separate water system, creating the steam for the generators.

Another design, the boiling water reactor (BWR), allows the water to turn into steam directly inside the reactor vessel, as illustrated below.

To keep these systems steady, engineers use control rods to soak up particles and slow the reaction, while moderators like water or graphite ensure the process moves at the right speed. The fuel itself is designed so that it is physically impossible for the reactor to explode like a weapon.

The thing to remember: One single large reactor can produce enough electricity to power a city of a million people, which just proves how crazy it is that we do not use this highly efficient source of energy, and that governments are still reticent to use it more.

4. Uranium Global Demand Outlook

At this point in the report, it should not be a surprise that global growth is accelerating across all major markets for nuclear reactors worldwide, and we think the exhibit below illustrates it clearly.

What we are seeing is happening globally. Reactor growth is surging across every major region, led by APAC and EMEA, which have been the most active in terms of new builds, planned units, and reactors under construction. But we believe what makes this moment particularly significant is that North America (NA) is now re-entering growth mode after a long period of stagnation.

That is a major shift. For years, the conversation around nuclear in NA was largely about keeping existing plants alive. Now we are talking about new capacity coming online, and that changes the demand picture meaningfully.

Now, let’s look at what this means for uranium. According to UxC, global nuclear capacity is expected to triple by 2050, driven by 38 countries committing to expansion. That is not a fringe scenario, that is the stated ambition of nearly four dozen nations moving in the same direction at the same time.

What stands out is the widening gap between projected supply and demand. Production, shown in green, is expected to peak in the mid 2030s before declining sharply, falling to roughly 130 to 140M pounds U3O8 by 2040.

Meanwhile, demand keeps climbing across every scenario.

Even in the base case, the most conservative outlook, demand rises from around 220M pounds today to nearly 290M by 2040. In the high case, it exceeds 320M pounds. And if we factor in the tripling ambition from those 38 countries, demand could approach 400M pounds before we even reach 2050.

What this tells us is that by the early 2030s, the uranium market is set to become very tight, and that tightness only deepens as we move through the decade. Production is simply not keeping pace in any scenario shown here.

Meeting demand would require significant new mine development, and that is before even considering the tripling case. By 2040, the annual shortfall could exceed 100M pounds, which is a very large number in a market of this size.

Bottom line: More reactors, running longer, across more countries, all consuming uranium at a rate that existing and projected production cannot match. That is the demand story, and it is one that is only getting stronger.

4.1 The U.S. Needs More Nuclear Power

Now, let’s talk about what is happening at the policy level in the United States, because it adds a very important layer to everything we just covered. The Trump administration has set a target to grow U.S. nuclear capacity from ~100 GW today to 400 GW by 2050, a fourfold increase supported by near-term actions.

The Department of Energy is already backing the construction of 10 new large reactors, along with ~5 GW of upgrades to existing plants, with work expected to begin before 2030. That said, most new large reactors and small modular reactors are unlikely to come online before the 2030s, meaning construction will need to accelerate in the following decades to reach that target.

Now let’s talk about the U.S. nuclear fleet. As you can see in the exhibit below, the U.S. operates 94 commercial reactors, ranging from brand new units to plants as old as 56 years. Most of them are already over 40 years old, meaning they are operating under their first license renewal, which typically covers years 41 to 60.

What stands out is how far this life extension trend is going. Twenty reactors have already received a subsequent license renewal, extending operations out to 80 years. The NRC is currently reviewing five more applications, and another 22 are expected before the end of the decade. The momentum is clearly building.

These extensions are not just about keeping existing capacity online. They often allow for power uprates, increasing the amount of electricity a plant can produce, as well as major equipment upgrades that modernize decades-old infrastructure.

At a high level, this shows the US is doubling down on nuclear, extending, upgrading and reinforcing its existing fleet for decades to come, which has direct implications for long term uranium demand.

It is also interesting to look at the new reactor pipeline. According to Rystad Energy, which tracks projects across various stages of development, there are just over 8 GW of new nuclear capacity in the pipeline, excluding reactor restarts.

Important to note that this also does not include Fermi America’s separate plan to build 6 GW of nuclear generation by 2038, highlighting how limited near term additions remain relative to the scale of the challenge.

5. Uranium Global Supply Outlook

In the coming years, analysts expect a significant rise in annual uranium production as projects across major jurisdictions move forward. According to the data from UxC growth is anticipated in regions such as Kazakhstan, Canada, and Africa, with Kazakhstan alone projected to add 11M pounds of production by 2030. While this increase in global output is a positive development for the industry, it is unlikely to satisfy the rapidly accelerating demand.

Now, here is where things get really interesting. By 2040, the uranium deficit is expected to reach 319M pounds per year. To put that in perspective, the entire world produces only around 160M pounds annually today, meaning global supply would need to more than double just to keep up with where demand is heading.

As shown in the following exhibit on the supply gap, this gap is set to widen progressively, reaching a 42M pound shortfall by 2030 and a 109M pound shortfall by 2035 before hitting a critical 63% deficit in 2040.

And here is the problem. Bringing a new uranium mine from discovery to production typically takes 15 to 20 years. This represents a real constraint in the industry. Even if every mining company on the planet broke ground tomorrow, the math simply does not work out in time to close that gap.

Which brings us to the uncomfortable truth. Unless governments act much faster than they historically have, and let’s be honest, they are known to be slow with the puck, supply just won’t be able to respond fast enough. We believe the deficit is effectively locked in given the timelines involved, with direct consequences for uranium prices in the years ahead.

5.1 The Supply Story Will Break

And these two following charts prove exactly that point.

The first one lays it all out clearly: even when primary supply, secondary sources, and planned production are combined, the market still falls short of meeting demand in both the base case and the high case. The supply gap begins opening in the late 2020s and continues to widen through 2045.

Closing the gap would require materially higher prices and accelerated project development.

The numbers simply do not work without a significant wave of new mine development, which typically takes 15 to 20 years to come online. The long development cycle is a key constraint that keeps the gap difficult to close, even with higher investment, so we believe it is likely that we are going to have a shortage of uranium, it is just a matter of time now.

The second chart makes the situation more concrete. Utilities, the actual buyers of uranium, have roughly 3.1B pounds of requirements through 2045 that are currently uncovered. That is around 65% of total needs still uncontracted.

As you can see, both U.S. and international utilities are sitting on large uncovered positions, and as we approach the mid-2030s, that urgency is likely to increase. This large uncontracted volume represents a meaningful tailwind for the market as utilities eventually compete to secure fuel for the coming decades.

What this tells us is that utilities are going to need to come to market in a meaningful way, and they are going to need to do so sooner rather than later.

When that buying wave hits a market that already cannot produce enough, the conversation around uranium prices becomes a very different one. This is not a slow moving story anymore. The window to secure supply at reasonable prices is getting smaller by the year. And with that supply deficit, we already know what usually happens. It leads to a steady increase in uranium prices.

And this is the most important point of our uranium investment thesis: a growing supply deficit leads to higher prices, because the market needs to incentivize new supply to come online. It’s just macro, and it will happen again.

The chart below makes that history clear. Back in 2007, when the world last faced a major uranium supply crunch, spot prices reached the equivalent of roughly $240 per pound in today’s dollars.

Term prices, which utilities pay under long-term contracts, peaked at around $170 per pound. Following Fukushima, reactors went offline across Japan and demand collapsed, causing prices to grind lower for nearly a decade.

But look at what has happened since 2021. Prices have been climbing steadily and meaningfully, with spot already moving back toward the $100 per pound range. And here is the key point: we are still in the early stages of this supply deficit. The gap we just walked through has not fully materialized yet.

While the primary imbalance will likely show up in the 2030s, the current market still offers a strong opportunity to generate returns.

The market has navigated these cycles before, but we believe the setup today in nuclear energy equities appears more compelling than it was in 2007, because the runway is long.

6. Who Are the Big Players?

In the uranium space, the big players are limited, you can almost count them on one hand. You have Cameco, the Canadian giant, Kazatomprom, the Kazakhstan leader, and the French state-owned Orano. Beyond that, there are some players in Russia, Africa, and Uzbekistan, and a few in Australia, but that is pretty much it.

After the big three, the market becomes much more fragmented and less concentrated. This also means that the investable universe is not as broad as in other commodities. The number of high-quality businesses you can select to gain exposure to the theme is more limited, but that does not change our approach. We will still focus on the most relevant opportunities.

In the next section, we will cover two major publicly traded companies, then focus on our preferred name, along with another non-pure-play company that should still benefit from the current strength in nuclear energy.

6.1 Cameco (Canada)

Cameco stands as a global leader in the nuclear industry, and its influence extends far beyond mining. Its competitive advantage is built on ownership of some of the world’s most significant high-grade uranium reserves, primarily the McArthur River and Cigar Lake operations in northern Saskatchewan. These assets are among the highest-grade and lowest-cost in the sector, providing a stable foundation that is difficult for competitors to replicate.

The company has evolved into a more integrated energy player, expanding across the nuclear fuel cycle. Through its strategic partnership in Westinghouse Electric Company, Cameco now has direct exposure to the technology and services side of the industry, supporting both the existing global reactor fleet and new builds.

This is further reinforced by its interest in Global Laser Enrichment, which we believe positions the company for next-generation fuel technologies required for small modular reactors (SMRs). Utilities rely on this integration to secure both fuel and services for consistent, carbon-free power. As demand for reliable electricity continues to grow, driven by AI and broader electrification trends, we believe Cameco is well positioned to benefit from this trend.

Recent multi-billion dollar agreements, including a long-term supply deal with India, highlight the importance of its reserves in energy security. By controlling high-quality assets and investing in future technologies, Cameco is positioned as a full-cycle supplier in a market increasingly reliant on nuclear power.

To illustrate its scale, Cameco accounts for ~18% of global uranium conversion capacity. It also plays a major role in Canada’s power system, with more than half of Ontario’s electricity generated using fuel supplied by the company.

When we look at the financial side of Cameco, the story only gets better.

Beyond mining, the company is also a key player in uranium conversion, an essential step in the nuclear fuel cycle. Global uranium hexafluoride production was about 32M kg in 2025, with roughly 85% coming from Western suppliers.

Cameco is one of the main producers alongside Orano, making it a critical supplier for utilities that depend on this part of the value chain.

This position translates into strong and recurring cash flow, which the company is actively redeploying. In 2025, Cameco allocated ~$500M toward sustaining operations, replacing capacity, and supporting future growth.

Capital spending is expected to ease slightly into 2027 as major projects are completed, but the strategy remains unchanged. The company continues to invest ahead of demand rather than reacting to it.

That discipline is also visible in shareholder returns. In 2025, management brought forward a dividend increase to $0.24 per share, originally expected in 2026. Stronger financial performance, helped in part by contributions from Westinghouse, allowed them to act earlier than planned. Since 2022, the dividend has roughly tripled, reflecting stronger cash generation.

Taken together, this highlights a company executing ahead of schedule. Cameco generates strong cash flow, which supports both reinvestment and shareholder returns, while positioning itself for sustained nuclear demand growth. It remains a relatively stable way to gain exposure to the uranium cycle.

6.2 Kazatomprom (Kazakhstan)

As the national operator for the Republic of Kazakhstan, Kazatomprom sits at the center of the country’s uranium exports, rare metals, and nuclear fuel production. Kazakhstan has been the world leader in natural uranium mining since 2009, and Kazatomprom holds priority rights over the nation’s vast reserve base. These rights were recently reinforced through 2026 legislation, further securing its leading position across new exploration and production projects in the country.

Kazatomprom’s primary competitive advantage is its exclusive use of the In-Situ Recovery (ISR) mining method. This technology allows the company to extract uranium at a significantly lower cost and with a smaller environmental footprint than traditional open-pit or underground mining. Because their operations are among the lowest-cost in the world, Kazatomprom remains highly resilient to market fluctuations while capturing significant upside as uranium prices rise.

The company’s assets cover the entire front-end of the nuclear fuel cycle. This integration includes everything from geological exploration and mining to the production of high-tech nuclear fuel components. Through its Ulba-FA plant, Kazatomprom produces finished fuel assemblies for international markets, providing a complete, vertically integrated solution for utilities worldwide.

Kazakhstan: Uranium Mines & Nuclear Legacy Assets

Like we said earlier, Kazakhstan is the undisputed heavyweight of the uranium industry, with its operations concentrated across six major uranium provinces that effectively define the global supply landscape. These regions, including Shu-Sarysu, Syrdariya, and North Kazakhstan, host a network of 14 mining entities that form the backbone of global production.

While the country holds a dominant position, it has also built a broad international footprint by structuring 12 of these 14 operations as joint ventures. This brings in major partners from France, Canada, China, and Japan, keeping its assets closely tied to global nuclear supply chains.

The scale of these holdings is significant. Kazakhstan’s total uranium resources are estimated at over 954,000 tonnes. Key joint ventures such as Inkai, Katco, and Budenovskoye include some of the most important production assets globally.

This resource base is reinforced by a strong commitment to future development, with 75-85B KZT (~US$155–175M) allocated to exploration through 2030.

In practice, this makes Kazakhstan a central gatekeeper of global supply, with a level of influence very few producers can match. At the same time, the country is starting to evolve on the demand side. A national referendum in 2024 saw ~71% of voters support the development of Kazakhstan’s first nuclear power plants.

This marks a gradual shift from being almost exclusively an exporter to also becoming a domestic consumer of uranium. As plans move forward with international partners, Kazakhstan is reinforcing its position as a long-term pillar of the global nuclear fuel cycle and the broader shift toward carbon-free energy.

7. Where Uranium Prices Are Headed Next

The real question is where the new floor is being established.

As of May 2026, the uranium spot price is holding around the $86 range, up more than 23% year over year. But the spot market is only part of the story.

The long-term contract price, where utilities secure the majority of their supply, has already reached $90 per pound, the highest level since 2008. To us, this signals that buyers are increasingly accepting that the era of cheap uranium is likely over.

We believe uranium prices could reach $100 in 2026.

This view is supported by analysts who expect a growing supply deficit over the next two decades. As the market tightens, higher prices will likely be needed to bring on enough new supply to meet demand.

What also makes this cycle different from 2007 is the source of demand.

This is no longer just about utilities. Large tech companies like Meta and Microsoft are now securing nuclear power to support AI data centers. Meta alone has signed deals tied to up to 7.8 GW of nuclear capacity. This adds a new layer of demand that barely existed a few years ago.

The broader setup remains difficult to ignore. Reaching the annual supply required over the next decade likely demands materially higher uranium prices to justify new mine development. We know it is not the first time we say it, but the issue is that new mines typically take 15 to 20 years to come online. In our view, that keeps the market in a position where deficits remain extremely difficult to close, supporting a much stronger long-term pricing environment for the sector.

8. Our Favorite Stock Ideas

In the sections that follow, we present our two favourite ideas to play the uranium cycle. We believe they are among the most effective ways to express this thesis and strong ways to gain exposure to the upside we see in the sector.

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CNC is the largest holding of our portfolio, the Aurelion Index, with an 8.4% weight vs our 5.7% average weight.

Report following our initial highlight:

On another note, a well-known investing mistake is falling in love with a stock, and it’s especially easy when a CEO tells the story. Part of their job is to market the company to investors. We stay cautious and critical of the story, but we believe this opportunity genuinely stands out.

Key Takeaways from Our CEO Call

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For twenty years, software was a capital-light dream: build once, sell forever, and enjoy 80% margins. Today, AI has driven the cost of writing code to zero, evaporating that traditional moat. As this violent transformation accelerates, we believe most of SaaS will behave like a heavy industrial business.

Many companies are entering a Red Queen’s Race, forced to spend aggressively on AI just to defend their existing positions. For these businesses, margins, cash flow, and valuation multiples are likely headed lower.

Yet not all software is doomed. A small group of companies, those with proprietary data, mission-critical workflows, and zero-fault execution, should emerge stronger. Recent indiscriminate selling has created significant opportunities among these future winners. We present 3 stocks, 2 US and 1 in Japan.

Most research on SaaS offer scenarios. We prefer to state our view clearly and put our money on the line through high-conviction stocks. Built on 7 logical premises, this report expands on our widely cited flash note (CNN), which only captured our view of a specific stock.

We start with our AI Risk and Opportunity Matrix.

This framework identifies which companies AI will crush and which will thrive.

• The Vertical Axis (The Nature of the Spend): When a company invests in AI, does that money generate new, profitable growth (Growth Capex)? Or is it purely defensive spending required just to keep current customers from leaving (Maintenance Capex)?

• The Horizontal Axis (The Defensibility of the Moat): Is the company selling generic code and basic dashboards that AI can now write for free? Or does it own assets like proprietary data, strict regulatory compliance, and integrated physical workflows?

Crossing these dimensions reveals 4 distinct destinies for software equities:

1. AI Wrappers (Top Left). Slick interfaces built on borrowed AI models. Lacking proprietary data, their initial success is a temporary illusion before competition drags them downward.

2. The Red Queen’s Race (Bottom Left). The brutal reality for most of SaaS. Forced to spend heavily just to survive against AI-enabled competitors, their margins are crushed by zero pricing power. (e.g., LegalZoom, Upwork)

3. Trapped Incumbents (Bottom Right). Entrenched systems of record. They won’t die tomorrow, but they will bleed profit margins paying an “AI Token Tax” just to defend their existing turf. (e.g., Salesforce, Workday)

4. The Compounders (Top Right). Only a few possess proprietary data or mission-critical workflows where failure is unacceptable. For these companies, AI is a force multiplier.

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Table of Contents

1. AI vs SaaS: The Market Sentiment Shift

2. Software Was Eating the World

3. The Red Queen’s Race

4. SaaS Is The New Industrial

5. The Three-Tiered Price Action

6. Where the Value Shifts in the AI Era

7. Is Vertical SaaS More Resilient?

8. Why Incumbents Are Struggling

9. The Playbook: Where We Are Allocating Today

10. Software Pick #1: I’ll Inc. (3854.T)

11. Reiterating Our Cellebrite (CLBT) Thesis

12. Software Idea #2: Red Violet (RDVT)

13. Our Final Take on SaaS

1. AI vs SaaS: The Market Sentiment Shift

First, let’s frame the current AI versus SaaS debate and the sentiment driving the market. The application software selloff, often described as a SaaS apocalypse, stems from growing uncertainty around the ultimate future of the sector in the face of AI disruption. We saw the impact directly in share prices.

This ambiguity materially weakened confidence in long term assumptions, pushed discount rates higher, and left many investors on the sidelines. They increasingly view the space as difficult to underwrite and structurally challenged.

The debate goes far beyond a single dimension. Beyond whether generative AI and AI agents reduce demand for traditional software or simply reshape spending patterns, even investors who remain constructive on incumbent durability need to account for a second layer of risk. That risk remains completely real and unlikely to fade in the near term.

At the same time, certain software companies will undoubtedly benefit from AI, but we believe their number will fall far short of what many bullish narratives suggest. This includes the impact of AI driven transformation on existing software models, bringing potential acceleration in product redevelopment, margin pressure, and changes in pricing structures alongside workforce efficiencies. We saw these concerns becoming much more pronounced earlier this year as the market realized AI driven change is arriving much faster than initially expected across the software space.

As you can see below, we are seeing a clear rotation within the sector.

Application software names like Adobe, Salesforce, and Workday are moving lower, while infrastructure, data, and security leaders like Amazon, Oracle, and Microsoft are moving higher since March.

Rapid advances in foundation models, rising competitive intensity across the ecosystem, and a steady stream of developments highlighting the overlap between AI platforms and traditional software offerings are reinforcing this shift. Accelerating enterprise adoption of AI tools only adds fuel to the fire.

2. Software Was Eating the World

About three years ago, Artificial Intelligence (AI) emerged. It quickly became the most disruptive force in enterprise software since the rise of SaaS, so much so that companies around the world, including many of the largest across industries, are now racing to launch agent-based use cases and integrate AI into every workflow. Which leads us to this section theme: Software was eating the world.

When we say software was eating the world, we mean that digital applications swallowed up physical processes across every single industry over the last fifteen years. Companies bought specialized platforms for accounting, supply chains, and customer management. Human employees then had to learn those specific workflows. The software completely dictated how your business operated.

Generative AI flips that old model upside down. We are moving away from buying tools that help people work, toward deploying systems that actually do the work directly. AI consumes the very software we spent years building. You stop having to adapt your operations to fit a rigid platform. You deploy intelligent agents that adapt to your specific needs instead.

The whole economic foundation of enterprise technology changes here. Instead of licensing empty interfaces for humans to click through, companies will pay for executed tasks and actual business outcomes.

For years, the core investment thesis for enterprise software rested on its absolute indispensability. Robert Smith, Founder and CEO of Vista Equity Partners, famously captured this dynamic:

“Software contracts are better than first lien debt. You realize a company will not pay the interest payment on their first lien until after they pay their software maintenance or subscription fee. We get paid our money first. Who has the better credit? He can’t run his business without our software.”

The software business model was, in theory, almost perfect. Under ideal conditions it represents an investor’s dream: highly scalable capital-light businesses with limited reinvestment requirements earning recurring revenue at 80% gross margins. If the market would place a premium multiple on anything, of course it would be software.

The software business can be categorized into two general phases:

1. Startup & initial scaling. This phase is categorized by high revenue growth and generally negative earnings as the business invests in sales and engineering talent to acquire as many customers as possible.

2. Out-year scaling. Once the base of high-margin recurring revenue has grown enough, margins normalize to positive and can scale to be very significant — highly desirable EBIT margins of 25-30% and beyond are common in mature software businesses. Given the buildup of recurring revenue eventually the law of large numbers kicks in and revenue growth normalizes as the business enters more of a “cash cow” phase.

Such a perfect business model always attracts competition, and software is no different. Eventually these capital-light businesses began competing to win client deals, to retain top engineering and sales talent. Much of the cost of the latter section of competition is visible in Stock-Based Compensation, common in software companies to incentivize employee retention. Some software companies particularly in small and mid-cap use so much stock-based compensation that the actual cash generated to shareholders of the business is slim to none.

Thus, this capital-light ideal business model was pressured through competition into many businesses that actually produce very little net cash flow at thin margins. Importantly, this competition is not new, it existed before the age of AI.

In 2022, everything changed with the launch of OpenAI’s ChatGPT.

Since then the entire software sector has been hit with two simultaneous crises:

1. The rapid advancement of AI technologies and their ability to automate many human tasks, particularly coding, lowering the barriers to new software creation, increasing competition, and reducing the TAM of seat-based software as AI increases productivity per employee at customer firms.

2. The market realization that many top software stocks had been trading at highly elevated multiples relative to the amount of Free Cash Flow to Shareholders produced, that is, FCF adjusted for Stock Based Compensation.

These two factors have led to crippling multiple compression across the vast majority of public software. Once a cohort of infinitely scalable capital-light darlings, software stocks are now heavily scrutinized.

Private credit funds with software lending exposure are reclassifying healthcare software loans to just ‘healthcare’ to hide their true software exposure. Software ETF IGV is down almost 30% from 2025’s highs, though many individual names have performed significantly worse.

3. The Red Queen’s Race: Running Just to Stand Still

In evolutionary biology, the “Red Queen Hypothesis” describes a brutal reality: a species must relentlessly mutate and adapt, not to conquer its ecosystem, but simply to avoid being hunted to extinction by competitors who are evolving at the exact same time. As the Red Queen tells Alice in Through the Looking-Glass: “It takes all the running you can do, to keep in the same place.”

Today, we believe the legacy SaaS sector has entered a financial Red Queen’s Race.

The Logical View: Why Software Becomes a Heavy Industry

The re-rating of the SaaS sector comes down to a chain of financial logic:

• Premise 1: The Historical Moat.

  For the last two decades, writing complex software was expensive and required specialized talent. The code itself was the barrier to entry. Investors gladly awarded 25x earnings multiples because competitors could not easily replicate the product.

• Premise 2: AI Commoditizes the Baseline.

  Foundation models have driven the marginal cost of writing software to near zero. A leaner, AI-enhanced startup can now replicate a legacy UI or workflow dashboard in a matter of weeks.

• Premise 3: The Existential Threat.

  Because code is no longer a bottleneck, legacy SaaS companies relying on generic dashboards or seat-based pricing have lost their defensibility. They face immediate replacement not just from leaner startups, but from internal enterprise IT teams empowered by AI, and mega-cap tech giants bundling these commoditized features at no cost.

• Premise 4: The Red Queen’s Capex.

  To survive this threat, incumbents are forced into a two-front war on their cash flow. First, they must pay the “AI Token Tax” to hyperscalers just to integrate baseline AI functionality. Second, because every competitor has access to the same underlying AI models, the incumbent must constantly spend heavy R&D to build “something on top” to differentiate their interface.

  However, because foundation models are constantly improving, yesterday’s unique feature becomes tomorrow’s baseline. If the incumbent stops spending this maintenance capex, a competitor will immediately match their offering. This creates an endless cycle of spending just to retain customers.

• Premise 5: Low Pricing Power.

  While some incumbents are currently enjoying a short-term “sugar high” by charging premium tiers for AI add-ons, this pricing power is transitory. As open-source models rapidly close the capability gap, the cost of intelligence trends toward zero. Because AI functionality and constant user interface updates are rapidly becoming basic “table stakes” across the industry, legacy vendors cannot charge a premium for them long-term. Customers will expect these continuous improvements by default.

• Premise 6: The Maintenance Capex Trap.

  Because they cannot raise prices, this surge in capital spending generates little to no incremental revenue. The return is largely defensive. When a company must invest heavily simply to protect its existing position, the economics deteriorate sharply. Value accrues upstream to AI infrastructure providers, while the software layer faces margin compression, weaker cash flow, and ultimately a lower valuation multiple.

4. SaaS is the New Industrial

For the last decade, the market gladly awarded legacy SaaS businesses a baseline multiple of 25x earnings (and frequently 25x sales at the peak), assuming infinite pricing power and sticky retention. We are arguing for a continued re-rating.

As AI drives the barriers to software creation to zero, SaaS companies lacking proprietary data or mission-critical integration will face severe commoditization. If you do nothing, you lose. We expect these displaced incumbents to see their multiples aggressively compress to ~10x earnings, effectively pricing them as declining assets rather than forever cash flows.

Before many of these companies even reach a 10x public market multiple, they will likely be taken private by buyout firms. Private Equity will treat them exactly like mature industrial assets; slashing SG&A, halting R&D, and aggressively harvesting whatever cash flows remain from trapped customers.

A 10x multiple aligns these software vendors with heavy industrial companies that must constantly invest in capital expenditures just to keep their factories running. The age of building software with a team of smart coders over five years, then milking that same product for a decade with near-zero improvements, is permanently over. If you do not continuously iterate, a smaller competitor will replicate your frontend in a few months and steal market share within a year.

Consequently, we expect cash flow conversion and operating margins to decline across the sector. Companies will be forced into a perpetual cycle of “maintenance capex”: spending heavily on compute, AI tokens, and constant R&D simply to maintain parity and prevent churn.

The sticky incumbents: bleeding, but not dying. To be clear, not all of the SaaS will compress to a 10x multiple. Some larger incumbents operating in zero-fault environments, managing complex government contracts, or sitting inside highly regulated systems will retain a higher multiple simply because a startup cannot legally or operationally replace them in a single year.

However, even these entrenched players will face margin compression. Their competitors will be able to close the feature gap much faster, and the constant investment required to make their software valuable enough to justify annual price hikes will be significantly higher. They warrant an impacted multiple, but they avoid terminal value collapse.

Where AI Amplifies the Moat

However, there is a distinct group of companies that will see earnings accelerate and their dominance expand. These are the companies where AI does not replace their value proposition, but amplifies it. Even with AI lowering the barrier to writing code, these businesses cannot be easily replicated due to a few critical advantages:

• Proprietary Data Monopolies & The Flywheel: When code itself is commoditized, data becomes the ultimate moat. However, it is not just about hoarding historical data, the key is the feedback loop. Every time a customer uses the platform, the system captures new proprietary data exhaust. This continuously trains bespoke models, widening the moat every day in a way an out-of-the-box LLM cannot replicate. Companies that own these dynamic proprietary data lakes will thrive because an AI agent cannot “vibe-code” a decade of licensed, aggregated intelligence.

• The Zero-Fault Tolerance Barrier: AI is notoriously prone to hallucinations. While a 95% accuracy rate is sufficient for drafting marketing emails or summarizing meeting notes, it is catastrophic for FDA compliance, criminal forensics, or real-time infrastructure management. Companies deeply involved in mission-critical workflows where the cost of failure is a lawsuit, regulatory action, or physical harm will thrive because enterprise buyers will not risk replacing a trusted system of record with a cheaper AI-generated alternative.

• Action Over Observation: Most legacy SaaS is simply a database with a dashboard to observe information. The winners in the AI era will be software that actually executes complex physical or financial actions like moving money, routing physical supply chains, or altering physical operations. AI makes the decision-making faster, but the proprietary execution layer is more difficult to replace.

5. The Three-Tiered Price Action

Because the recent sell-off was largely indiscriminate, we expect a divergence into three distinct tiers of price action over the next 12 to 24 months:

1. The Basic Apps (More Falling to Come) While these generic apps that charge you “per person” have already seen their stock prices drop, they are still not a bargain. The market is currently making a mistake by valuing them based on how much they sell, rather than how much profit they actually keep.

As these companies enter the “Red Queen’s Race”, where they must constantly spend just to keep their current customers, their ability to set high prices will disappear.

1. The AI Token Tax: To stay relevant, these companies have to add AI features. Every time a customer uses those features, the company pays a fee (a “token tax”) to large AI providers like Microsoft or OpenAI, which directly eats into earnings.

2. A Never-Ending Arms Race: Because AI makes it easy for anyone to copy a basic app, these companies have to spend massive amounts on constant updates just to avoid being replaced by a cheaper competitor.

Because profits are being pressured by these rising costs, we expect these stocks to face continued multiple compression and eventually trade closer to 10x earnings, based on true earnings after stock-based compensation.

2. The Sticky Incumbents (Dead Money): For mega-cap incumbents tied to complex workflows, such as Salesforce and Workday, the recent 20 to 30% correction was likely justified. The market has begun pricing in a new reality: slower growth, lower margins, and rising reinvestment needs. These companies are unlikely to collapse, but they may struggle to generate meaningful returns as an increasing share of cash flow is reinvested to maintain their position.

3. The Compounders: This is where indiscriminate selling created a clear opportunity. The market punished these companies assuming all software faces the same AI commoditization risk.

Because these companies hold proprietary data monopolies and zero-fault execution moats, their AI spending is purely accretive growth capex. As they prove their ability to expand margins, we expect them to aggressively re-rate higher, decoupling from broader software indices.

What About AI Wrappers?

Premise 7: Companies that enjoy high early returns by simply “wrapping” external AI models face a unique risk. Since they do not own the underlying engine or data, their high ROI is temporary. As soon as the baseline technology improves, their “feature” is absorbed, and they are pushed into a defensive maintenance cycle.

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6. Where the Value Shifts in the AI Era

The pattern repeats across industries: early success concentrated in a handful of leading firms attracts competition, which compresses margins and slows growth at the individual company level. With the rise of AI, we expect software will be no different. From here, most of the value is likely to accrue to AI-native companies.

The TAM for AI-enabled Agentic Solutions Could be Huge

As you can see above, the market for AI agents represents a massive ~$4 trillion opportunity, roughly three times the size of the global software market.

While Gartner estimates total software spending at about $1.25 trillion by 2025, the rise of agentic AI expands this horizon. We see this shift as AI becoming a new layer of software, moving beyond simple tool replacement toward a broader expansion of the industry’s scope.

The real driver behind this transition is a fundamental change in enterprise budget allocation. Software is shifting from a tool employees use to a system that performs tasks directly. This allows AI and software vendors to capture a larger share of corporate spend by displacing traditional labor costs, effectively redirecting payroll dollars into software expenditure.

In this context, we expect most of the value creation to accrue toward AI-native players, including frontier model developers, as well as a smaller group of software companies that are early and effective adopters of AI.

In contrast, firms that simply layer outsourced AI onto existing products risk margin pressure over time, particularly as providers such as OpenAI and Anthropic normalize pricing and compute economics mature. If the majority of value creation in the space ultimately concentrates in AI, incumbent SaaS players will need to adapt quickly and decisively, or face increasing commoditization risk.

We see the main risk for software firms in those that manage generic workflows without proprietary data. These functions are more easily replicated by AI. While highly specific or regulated processes remain harder to automate today, that gap is narrowing quickly. These companies still have time to adapt, but they need to move fast as AI capabilities continue to expand.

Conversely, the most durable companies are those that control underlying data.

AI agents and models rely on context to function, and that context sits within established systems of record. Rather than replacing these databases, AI is being layered on top of them. This puts companies that own the data layer in a stronger position than those that only provide interfaces or basic workflow tools.

Thus, the focus on this report will be on software and software-adjacent companies that are not under threat from AI: they control proprietary data and hold clear advantages over newcomers, and they actually produce meaningful Cash Flow to Shareholders today, not in 5 or 10 years.

7. Is Vertical SaaS More Resilient?

Our research and the field checks we recently came across while looking into this space suggest that application software with governance, regulatory complexity, and high levels of customization is generally more resilient to AI disruption.

These systems sit within mission critical workflows that require trust, auditability, and compliance, which in turn creates high switching costs due to deep technical integration and significant operational change management.

Vertical SaaS typically sits at the center of these dynamics.

Its functionality is highly industry specific, and its customers operate in regulated environments such as healthcare, government, financial services, and construction. In these markets, software is not generic tooling but part of the operational backbone, which makes replacement considerably more complex.

A recurring theme from prior work is that domain expertise is becoming a key input in building effective AI systems. Translating general model capability into reliable, context aware decision making requires deep understanding of industry specific workflows and constraints.

It is therefore not surprising to us that many of the most prominent AI native startups are vertically focused, such as Harvey in legal and Abridge in clinical documentation, a point highlighted by several sell side analysts. We believe this trend is highly relevant for incumbents as well, particularly those able to translate proprietary industry knowledge into their AI offerings.

That said, it would be incorrect to assume vertical SaaS is insulated from disruption. These companies still need to adapt as AI capabilities evolve. For example, recent UBS research highlighted that pharmaceutical companies have already begun developing internal AI applications for workflows they previously relied on vendors such as Veeva Systems to provide. In some cases, enterprise customers are moving earlier than expected to internalize functionality.

Even so, vertical SaaS incumbents appear better positioned than most due to their deep industry entrenchment and accumulated domain expertise. These advantages provide a foundation for integrating AI in ways that enhance rather than displace their platforms, provided execution remains disciplined.

We believe vertically focused companies benefit from years of accumulated product depth, often built through highly specialized workflow components that are difficult to replicate. This allows them to add AI features more quickly and with greater relevance to end users compared to horizontal platforms.

However, investors must not mistake this entrenchment for absolute immunity. Domain expertise provides a critical head start, but it is no longer a permanent shield. If vertical incumbents grow complacent in their execution, the barrier to code creation is now low enough that enterprise clients will simply build bespoke AI solutions to bypass them entirely.

8. Why Incumbents Are Struggling

While industry participants generally agree that software incumbents benefit from important advantages such as strong customer relationships and control over systems of record, the financial results so far tell a more limited story.

Total AI-related revenue reported across application software companies is estimated at around $6B. Excluding Microsoft, that number falls to roughly $2B. Against about $290B in combined revenue for the ten largest public SaaS companies, AI still represents only around 2%.

This gap raises an important question: why have these advantages not translated into stronger results yet? Even though enterprise adoption of AI is still early, incumbents are already trailing both AI-native startups and foundation model companies in growth. This suggests that scale, distribution, and installed customer bases have not yet translated into meaningful financial impact.

One reason is that many incumbent AI products are still early in their development. Market feedback often describes them as first-generation tools that lack depth, reliability, and consistency for mission-critical use. In some cases, they fail during pilot testing or do not meet security requirements needed for live production. As a result, some companies are choosing to build internal tools instead of relying on vendor solutions, mainly to keep pace with change.

Internal processes also slow things down. Large software companies must work through multiple layers of approval, coordination across teams, and strict governance, which reduces how quickly they can build and release new products.

In contrast, AI-native companies tend to operate with simpler teams and are more willing to experiment quickly. At the same time, incumbents still depend heavily on their core products for most of their revenue, which limits how much focus they can shift toward AI.

Pricing models add another challenge. Most legacy software companies still rely on per-seat pricing, but this becomes less effective as AI begins doing the work directly. In that setting, value depends more on output than on number of users. Over time, this is likely to lead to usage-based or hybrid pricing models.

However, this shift is happening slowly, and many companies are still offering AI features at little or no extra cost to encourage adoption. For example, Microsoft has bundled external model capabilities into its Copilot product without separate pricing, although this could change later.

Customer discussions also point to potential changes in workforce needs, with estimates of up to 30% reductions in areas like customer support, IT help desks, and engineering over the next two years. Even so, overall spending with software vendors is still expected to grow in the high single digits, as savings from labor are partly redirected toward software and new AI capabilities.

For now, most buyers are focused on reducing labor costs rather than cutting software budgets. The bigger risk for incumbents appears when customers bypass vendors completely by building internal tools or switching to AI-native alternatives, which would lead to lost revenue that is harder to replace.

Finally, there is an ongoing debate about whether incumbents need to rebuild core parts of their technology to fully adapt to AI. Most industry views suggest that a full rebuild is unlikely, but we are less convinced. In reality, meaningful upgrades alone may not be enough in many cases.

We think the more realistic path is layering AI into existing products, but at the same time fundamentally reshaping how they are used, with interfaces shifting away from dashboards toward natural language and agent-based workflows.

That said, not all companies are equally prepared. We see platforms like ServiceNow (NOW) as better positioned due to their unified data design, while companies such as SAP and Salesforce likely face more complex upgrades.

At a deeper level, the shift is from traditional rule-based systems built on structured data to AI systems that work with unstructured information, understand context, and carry out tasks dynamically. Bridging this gap remains one of the key challenges for established software companies.

9. The Playbook: Where We Are Allocating Today

Given our view of the software landscape, the mandate is simple: own proprietary data and mission-critical execution.

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Today, we are adding a new stock to the Aurelion Index.

In a market as uncertain as the one we face today, you may have noticed that we are adding more defensive names to our Index. This does not reflect a preference for lower returns or reduced upside elsewhere. In fact, we believe that as inflation persists and the consumer weakens, the market will increasingly reward defensive plays. We are currently navigating another energy shock driven by the conflict between the US and Iran in the Middle East. While the inflationary impact might not be as severe as the 2022 shock in Ukraine, the effect is already visible.

In this environment, we believe our “defensive” positions are tactical choices designed to capture alpha while the broader market struggles with volatility.

The data confirms our view that defensive stocks can extend beyond a simple safety net, and that, in fact, they can serve as a powerful tool for outperformance when energy costs spike. Looking at the four major energy shocks since 1973, defensive names have consistently beaten the S&P 500. During the 1979 Iran Revolution, these stocks delivered a 43% return.

As you can see above, they outperformed the broader market by 17% as inflation peaked. Even during more recent events such as the 2022 Ukraine invasion, defensive plays protected capital better than the average stock.

Performance in Inflationary Environments

The bottom chart shows that defensive stocks tend to perform better during inflationary shocks. When the economy faces rising prices, defensive names deliver forward 12-month returns of 7.5%. This is a significant increase compared to 4.5% in non-inflationary periods. This gap exists because these companies often have the pricing power to pass costs on to consumers.

As we navigate the current tensions in the Middle East, which appear far from over, history suggests that holding these positions is a smart way to stay ahead. They offer a combination of lower risk and higher relative returns while the rest of the market struggles with a weaker consumer and rising energy bills.

Table of Contents

1. New Position Overview

2. Investment Thesis

3. The Business Model

4. The Supply Gap Is Widening

5. Investment Market Overview

6. Development Monitor

7. Growth Strategy and the 2028 Plan

8. Capital Allocation & Portfolio Quality

9. Debt & Capital Structure Analysis

10. Valuation Analysis

11. Key Risks to Our Thesis

12. Our Final Take

This Real Estate company recently delivered another strong quarter, with margins once again outperforming. It is not a REIT or a pure real estate model, but a differentiated platform that gives it an edge and supports continued performance.

Its new assets are generating healthy margins of ~45%, which we believe reinforces management’s capital allocation ability and the earnings power of recent M&A. We see this as a well-run company that offers investors upside and durable earnings growth, while also providing downside protection supported by a strong net asset value (NAV).

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To make this piece more valuable, we spoke with analysts across Argentina, Brazil, Chile, and Mexico. While we could not always get full on-the-ground coverage, we place strong weight on perspectives from people who live and invest in these markets, as they often pick up signals that data alone misses.

At Aurelion Research, we focus on real-world insights, whether from analysts we respect with local experience, portfolio managers who regularly travel across LatAm, or investors with direct exposure to these markets.

Data is important, but it is only part of the picture.

We know this may seem quieter compared to the focus on AI, software, semiconductors, and data centers. Every investor has their own view of the market, and we respect that, but we see significant value in focusing on a region that remains under-covered by most analysts. That is where more attention should be directed. One of the clearest advantages is that LatAm remains largely insulated from the geopolitical instability in the Middle East.

You may refer to the table of contents below the introduction, as several topics, countries and dynamics are discussed.

Introduction: Why LatAm and Why Now?

LatAm is experiencing a notable shift in geopolitics and domestic policy.

LatAm is heavily shaped by politics and elections, which makes getting the macro view right essential. Without it, portfolio outcomes can start to resemble a lottery. Looking ahead, 2026 is set to bring a meaningful political shift, as reflected in the changing alignment shown in the maps below.

Latin America Poised for a 2026 Political Shift

As shown above, Latin America shifted from a largely Right leaning map in 1999 to a broad Left leaning majority by 2023. The areas marked on the 2026 map show where elections are coming up this year, including in key markets like Brazil, Mexico, Colombia, and Peru. We believe this busy election cycle points to higher volatility and another possible shift in the political landscape.

We are also seeing improving interest rates, which supports the bull case for the region. We are looking at a cycle driven by investment and spending.

Every capital market is set to outgrow its underlying economy.

In many cases, that growth may even accelerate due to new regulations, as seen in Chile and Mexico. These markets are highly unbalanced. Traditional portfolio guidance suggests a 60/40 split between stocks and bonds, yet LatAm is closer to 75% bonds. In Brazil, it reaches ~90% to 95% bonds.

The US capital market is now an integrated part of the LatAm story. US venture capital is actively funding new regional business models that challenge the old way of doing things, mostly around digital services.

New IPOs are increasingly happening in the United States. Capital market growth is expected to be the engine for this investment cycle. Historically, this has moved in waves, but right now, stocks as a percentage of total assets are near all-time lows. Returning to those normal levels would represent more capital than LatAm markets could even handle right now.

This policy shift across the Americas could be a major turning point. Even if LatAm is not at the center of global change, that change is still central to the region. You can see it clearly as US companies move their supply chains out of Asia and into Mexico to be closer to home. You also see it in the tension heading into the 2026 Brazilian presidential election, where a divide is emerging between the Global South and the US over tariffs and trade threats.

Interest rates look to be peaking and could start to head lower through 2026. LatAm capital markets are far deeper today than they used to be, and we expect them to outgrow their underlying economies. We do not take it for granted that leaders will play their cards right. There is a lot of work left to do, and we are concerned that local regulations are still stuck in the past while the markets themselves become too dependent on the US.

The Regional Breakdown

• Chile is starting to turn the corner. After a period of heavy uncertainty, things are beginning to stabilize.

• Brazil is essentially running out of room to borrow. The government is reaching the limit of what it can spend, meaning growth has to come from private companies rather than the state.

• Mexico needs to move past its current slowdown. To fully take advantage of US companies moving production closer to home, the country needs to speed up spending on infrastructure and energy.

• Argentina needs a genuine investment cycle. For any recovery to actually last, it has to move beyond short-term fixes and build a foundation for long-term growth.

The bull case is not a guarantee, but the path is definitely starting to show. It is going to take real political will and a change from how things were done in the past. If the region actually delivers, the upside is massive. LatAm could move away from just being a source of cheap labor and raw materials to becoming a dynamic engine of growth driven by investment.

Table of Contents

0. Intro: Why LatAm and Why Now?

1. The LatAm Bull Case (2026-2035)

   1.1 Potential Returns: The 2030 Outlook

   1.2 Valuation: Room for Re-Rating

2. Brazil Is Our Top Pick

   2.1 Brazil is Just Too Cheap

   2.2 The Spring Bull Case

   2.3 Supply & Demand Squeeze

   2.4 Great Capital Rotation

   2.5 Brazil’s Fiscal & Inflation Outlook

   2.6 Resolving the Crowding Out Problem

   2.7 Our Favorite Brazilian Stock: A New Portfolio Addition

   2.8 Perspectives on Cost of Capital

   2.9 Our Final Take on Brazil

3. The Argentina Experiment

   3.1 Opening Up the Economy

   3.2 A Concrete Economic Recovery

   3.3 A History of Turmoil

   3.4 Debt Profile & Liquidity Squeeze

   3.5 Argentina Bull Case

   3.6 Energy Turnaround

   3.7 Mining & RIGI Catalyst

   3.8 Our Final Take on Argentina

4. Colombia: High Upside on Hold

   4.1 Colombian Energy Squeeze

   4.2 Election Catalysts & LT Optionality

   4.3 Debt Profile Ahead of the Vote

   4.4 Our Final Take on Colombia

5. Chile: A Safe Haven in Latin America?

   5.1 Unlocking the Investment Backlog

   5.2 Copper Prices & Sovereign Strength

   5.3 Tax Cuts & Capital Market Reforms

   5.4 Our Final Take on Chile

6. Mexico: At a Turning Point

   6.1 The Current Reality

   6.2 Scenarios & Regional Upside

   6.3 Our Final Take on Mexico

7. Our Final Take on Latin America

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1. The LatAm Bull Case (2026-2035)

As you already know, we believe LatAm is positioned as the most obvious bet for the rest of the decade. The bull case for the region between 2026 and 2035 rests on a convergence of powerful global forces that have been building for years. We are looking at a fundamental turning point driven by three massive themes that are completely reshaping the global economy.

Key Themes Converging in LatAm

These three drivers are redefining the landscape and creating a durable foundation for massive growth.

First is the shift toward Multipolar Investing. Global supply chains are actively rewiring. With rising global tensions, manufacturing is moving closer to the final consumer, and Latin America is capturing this capital directly. At the same time, shifting local politics and a rising focus on defence spending are changing how capital flows into these countries. The region is becoming a necessary alternative to traditional Asian manufacturing hubs.

Second is the Future of Energy. The global energy map is being redrawn, and Argentina and Brazil are rapidly emerging as massive energy powerhouses, drawing real comparisons to the output potential of Texas. Beyond traditional oil and gas, Latin America controls a dominant share of the copper, lithium, and critical minerals that the world absolutely requires to build the next generation of energy infrastructure.

Third is AI Tech Diffusion. The artificial intelligence boom requires heavy physical assets. As you can imagine, the rapid rollout of data centers, robotics, and AI servers demands massive amounts of reliable power.

This dynamic completely changes the importance of utility companies across the region, turning them from boring local businesses into highly valuable global tech infrastructure. We are also monitoring how regulation and potential risks to AI models will dictate where these physical assets are built.

The true power of this bull case is that these three themes feed directly into each other. The aggressive expansion of AI drives an insatiable need for energy, the future of energy requires critical minerals, and the multipolar shift directs global capital to build it all locally. This rare combination creates a massive engine for growth that the market is currently underpricing.

1.1 Potential Returns: The 2030 Outlook

We are witnessing a setup that is still in its early stages. Across Latin America, the outlook is increasingly defined by a small number of macro constraints and catalysts that are starting to converge. Instead of being driven by a single variable, it now comes down to how these three forces interact over time.

Three specific threads tie the whole story together:

1. Debt is at historical highs. Governments are stretched thin, so they cannot just spend their way out of trouble anymore.

2. Stock valuations are near all-time lows. Prices have been held down for so long that the market is basically expecting things to stay stuck forever.

3. Investment growth is the only move left. These countries cannot rely on people just buying things or selling raw materials alone. They need a real cycle of building and spending to start the next phase.

In a world where the benefits of globalization are fading, these countries have to take greater responsibility for their own growth. Ironically, that external pressure may be the catalyst that finally forces the reforms they need.

If the region successfully delivers on these reforms, the potential for returns is massive. Morgan Stanley’s “Spring” scenario suggests that by 2030, we could see a total index upside of 93% for Latin America as a whole.

While the “Middle” case still offers a solid 54% return, the “Spring” scenario is where the real upside is. This growth comes from two main drivers: earnings growth (EPS) and a re-rating in valuation multiples (P/E).

When you break it down by country, the numbers are even more striking:

• Argentina leads the pack with a potential 176% upside in a bull case. Most of this comes from a massive jump in earnings as the economy resets.

• Brazil shows a potential 121% return. Even in a “Fall” scenario where things stay difficult, Brazil is the only major market expected to remain positive with a 20% return.

• Chile & Mexico offer more measured but still strong bull case returns of 60% and 45% respectively. In these markets, the growth is almost entirely about earnings rather than just valuation changes.

The bottom line is that the market has priced these countries so low for so long that even a partial return to normal could trigger a major move upward. If the “LatAm Spring” actually takes hold, the region moves from being a forgotten corner of the global market to one of its top performers.

1.2 Valuation: Room for Re-Rating

Latin American equities still have massive room for multiple expansion.

While the region is currently trading near its long term average of 11x to 12x forward earnings, previous bull cycles have seen valuations push much higher. During strong periods, like the mid 2000s and the recovery following the global financial crisis, multiples expanded well into the mid teens.

This history highlights the clear upside potential as macroeconomic conditions improve today. Morgan Stanley projects that LatAm equities could return to that 14x multiple by 2030. This upward move will be driven by three clear catalysts: shifting global politics, the normalization of interest rates, and pivotal elections across the region.

We believe the most important re-rating will happen relative to the broader Emerging Markets (EM), and that catch-up phase has already started. Right now, LatAm stocks trade at just 0.9x the valuation of their EM peers.

This leaves the region sitting half a standard deviation below its 20-year historical average. To put this in perspective, for the majority of the decade between 2010 and 2020, Latin America actually traded at a premium to the rest of the emerging world. That relative valuation peaked at 1.3x in 2017.

The market has priced the region at a steep discount since 2020, bottoming out at 0.6x in 2022. Simply returning to the historical average gives these markets a huge runway for growth, completely separate from the actual earnings the companies will generate.

2. Brazil Is Our Top Pick

Brazil enters a high-stakes phase as the 2026 presidential election looks set to be another binary contest. President Lula has confirmed his intention to run for reelection, focusing on continuity of his social and economic agenda.

On the other side, Flávio Bolsonaro has emerged as the main challenger from the right, officially carrying the mantle for his father’s movement.

While a few prominent governors are mentioned as middle-ground options, that part of the field remains too fragmented to call a definitive third-party threat. We believe this environment ensures that political polarization will remain a core theme for the market throughout the year.

The real issue is that the country is running out of room to borrow. Brazil’s debt has climbed to nearly 79% of GDP, up from 56% just ten years ago. The budget is incredibly tight because over 90% of government spending is mandatory, leaving leaders with almost no room to move money around.

To fix this, the government needs to make major changes to how it spends, like unlinking pensions from the minimum wage and cutting back on tax breaks. Brazil has passed some big reforms lately, like the VAT tax change in 2023, but the momentum is starting to feel hit or miss.

However, there is a clear path forward. Interest rates are likely at their peak, with the Selic rate currently sitting at a high 15% to keep prices under control. Since inflation is cooling off and the economy is slowing down, we expect a big cycle of rate cuts. We could see rates drop by as much as 4.5% by mid 2027. Inflation ended 2025 at 4.26%, which is right where it needs to be, though growth is expected to slow from 3% last year down to 2% by 2026.

Even though the stock market has done well recently, local investors are still mostly staying away. Domestic allocation to stocks is near all-time lows at 8%. Most people are still hiding out in fixed income because the interest rates are so high. To get people to move their money back into stocks and help companies raise fresh capital, interest rates have to come down and stay down. Until that happens, most of the action in the market is being driven by foreign investors, who currently make up 60% of the trading volume.

If Brazil successfully delivers on these reforms and navigates the next election, we believe the upside is significant. The MS bull case scenario points to ~121% total index upside by 2030.

In this Brazil section, we give credit in part to our friends at Morgan Stanley, who were the first to develop the bull case.

We remain optimistic, but also recognize a more cautious view. Even if conditions stay difficult, Brazil is still one of the few major markets expected to deliver positive returns of around ~20%. This comes from a mix of real earnings growth and a needed re-rating in how the market values these businesses. The path is there, it just depends on political will to follow through, and we are highly confident that it will happen.

2.1 Brazil is Just Too Cheap

Brazil is a bargain. The market is currently trading at a forward P/E of 9.6x, which is sitting well below the historical average. For context, we have seen this same market climb as high as 17.4x when the narrative shifts.

Even with the recovery since 2022, valuations are still stuck near the bottom of their historical range. It feels like the market is still pricing Brazil as if it will never grow again, largely ignoring the potential for a strong re-rating as interest rates start to come down. When you combine these low entry levels with the earnings growth we see ahead, the setup for a meaningful rally is hard to ignore.

2.2 The Spring Bull Case

In its Spring bullish scenario, MS analysts believe domestic equity funds in Brazil could increase roughly sixfold by 2035. That implies a move from $100B to around $584B, or nearly ~18% annual growth over the next decade. This would represent a meaningful shift in local participation and would far exceed the ~8% growth seen between 2005 and 2025.

However, the macro thesis is not without challenges. We estimate that Brazil needs to find savings equivalent to 3.4% of GDP just to stop the debt from growing. Turning these fiscal dynamics around will be a long process that stretches well beyond the next five years. The depth and scale of the market on the other side of this transition would be massive.

2.3 The Supply & Demand Squeeze

The setup suggests Brazil has significant further upside. MS supply curve for LatAm equities shows the market sitting on the steep, near-vertical part of the curve. At this point, even modest incremental demand can translate into outsized price moves as valuations re-rate and risk premiums compress.

Three catalysts are driving that demand. First is the rising probability of a policy shift that moves Brazil into a sustained bull case. Second, interest rates have peaked, and the start of the easing cycle in March is already forcing a rebalancing of local portfolios. Third is a broader rotation of global capital into emerging markets as investors look to diversify their holdings.

This trend is becoming a primary driver for the next leg of the rally. Foreign capital is flowing into the local exchange at a strong pace, with cash inflows reaching new highs into early 2026. While futures positioning is still adjusting, spot inflows signal that conviction is building. We think this is the type of demand shift that drives a rapid move up a steep supply curve.

When these inflows enter a market with limited free float, the result is a sharp repricing rather than a gradual climb. With domestic investors underweight for an extended period, they are now forced to chase the market higher, adding further momentum to the move. We believe this combination of foreign conviction and local rebalancing is creating a squeeze effect that reinforces the bull case for the rest of the decade.

2.4 The Great Capital Rotation in Brazil

If the Spring bull case plays out as we expect, Morgan Stanley projects the overall Brazilian mutual fund industry will double its total asset base.

Forecasts show a jump from ~$1.7 trillion today to $3.2 trillion by 2035, representing a steady 8% annual growth rate. While that headline expansion is strong, the most powerful change will happen entirely beneath the surface.

The real story is a massive, forced reallocation of capital. For years, high policy rates have kept domestic capital parked in fixed income.

When double-digit returns are available risk-free, there is little incentive to allocate to equities. We are now seeing that dynamic start to shift. As fiscal discipline improves and the debt trajectory stabilizes, the central bank gains room to lower interest rates more aggressively.

This policy shift effectively closes the fixed income hiding place. As bond yields compress and safe returns dry up, local funds have no choice but to move up the risk curve to hit their return targets.

This creates a massive rotation of capital directly into public equities. Money that has been sitting comfortably on the sidelines for a decade will be forced to move, providing a massive domestic bid for Brazilian companies.

Driven by this rotation, equity assets are expected to grow at an aggressive 16% annual rate over the next decade. This pace completely doubles the 8% historical growth rate seen over the last twenty years.

Equity market growth is expected to outpace the broader fund industry, driven by this large internal transfer of capital. The domestic market is waking up, and the flow of money from bonds into stocks creates a powerful, sustained tailwind for the entire region.

2.5 Brazil’s Fiscal & Inflation Outlook

We see the upcoming election as a key turning point for Brazil’s fiscal outlook. On current projections, gross government debt continues rising and stabilizes near ~95% of GDP by the mid-2030s.

In an adverse scenario where spending accelerates, it moves above 110%. Under a tighter fiscal path consistent with Treasury assumptions, debt could peak just below 90% before gradually declining.

The path Brazil takes depends almost entirely on the 2026 presidential race. We are looking at two very different fiscal outcomes based on who wins.

If Luiz Inácio Lula da Silva secures reelection and maintains a looser fiscal stance, we see a clear downside case. Primary spending remains elevated, interest costs compound, and the nominal balance deteriorates.

By 2031, this path would add around 3% of GDP to the deficit, with rising interest payments weighing on activity and keeping the economy in a high-rate, low-investment environment. If Flávio Bolsonaro wins and implements a more fiscally disciplined agenda, the outcome flips. Tighter spending control and improved revenue dynamics drive a steady improvement in the fiscal position, moving the nominal balance into surplus by the end of the decade.

This implies an improvement of nearly ~3% of GDP versus the baseline by 2031. Lower primary spending combined with stronger fiscal credibility would also create room for a faster and deeper rate-cut cycle.

Fiscal policy is only one half of the equation. The other half is inflation, and here the outlook is actually much better than the consensus suggests.

While we respect the perspective from Oxford Economics, their inflation outlook feels overly cautious because it assumes oil rising toward $100 per barrel. We do not see that as a base case. In our view, oil remains on a softer trajectory and well below triple digit levels. That high oil assumption drives a highly negative transmission into their model, where higher fuel costs feed into core goods, pressure real wages, and keep rates elevated.

We see a different path for Brazil. If oil remains in its current range, the trajectory toward the 3% inflation target becomes significantly clearer.

That clearer trajectory in turn gives the central bank maximum room to continue cutting rates, lowering borrowing costs, supporting household spending, and reinforcing the investment cycle. A more grounded view on commodities shifts the narrative away from a sticky inflation regime and toward a sustained recovery.

Right now, the market is largely pricing in the baseline fiscal path and a cautious inflation outlook. This creates a massive setup. Any concrete shift toward the upside austerity scenario, combined with soft oil prices, will be the exact catalyst needed to trigger a massive bull run.

This political green light would force a broad upward rerating across Brazilian equities. When capital realizes the debt trajectory is actually under control and rates are heading lower, the rush to own these assets will be aggressive.

2.6 Resolving the Crowding Out Problem

Brazil is the deepest capital market in LatAm, but it is currently operating at an extreme point. Government spending and nominal deficits are near record highs, pushing debt and interest rates higher. As a result, the investment-to-GDP ratio is among the lowest in the region, while local equity ownership has fallen to cycle lows. These conditions contributed to the sharp currency selloff in late 2024, with valuations now compressed to historically low levels.

The main issue is a persistent crowding-out effect. With long-term rates between 12% and 14%, capital can double every six to seven years risk-free, making equities less competitive. Financing the state absorbs a large share of domestic savings, limiting liquidity for risk assets. This weighs on valuations, reduces market activity, and keeps the IPO window effectively closed. Capital markets are now operating at levels last seen during the 2014–2016 downturn.

The Path to Rebalancing

The bull case depends on restoring fiscal discipline and allowing rates to normalize. In the Spring scenario, Brazil follows a credible adjustment path that rebuilds confidence and supports a recovery in private credit.

Capital allocation shifts away from government financing toward productive business investment. Under this rebalancing, the macro picture improves meaningfully. Long-term growth stabilizes near 2.8% annually, while inflation remains around the 3.0% target, reinforcing monetary credibility. This allows the neutral rate to return to pre-COVID levels, ~6.0% nominal and 3.0% real.

At the same time, the labor market remains resilient, with unemployment stabilizing near 7.5%. The combination of lower rates, stable inflation, and steady employment is the setup that unlocks the equity re-rating ahead.

2.7 Our Favorite Brazilian Stock

We are adding Embraer (NYSE: EMBJ) to the Aurelion Index.

Embraer: A Multi Decade Growth Story

Embraer is a company we have been watching for a while, and we feel like now is finally the right time to pull the trigger. We believe the stars are more aligned than ever, and the business has evolved into a much more balanced aerospace player with several high margin revenue streams.

A Balanced Business Mix

They no longer rely solely on selling aircraft. The Services and Support division has become a major profit driver, accounting for 42% of total EBIT with margins around 15%. While Commercial Aviation makes up nearly half of the $31.6B backlog, it currently operates on tighter 5% margins, which gives it room to grow profits as it scales production. Meanwhile, the Executive Aviation segment is already performing well with 10% margins.

Geographically, it is very well positioned in the West. North America accounts for 59% of its $7.4B in annual revenue, followed by Europe at 24%. This footprint allows the company to capitalize on the massive demand for private jets and the need for airlines to replace aging regional fleets in the US.

The Ten Year Roadmap

Embraer has a very clear plan for the next decade.

For 2026, revenue is expected to reach between $8.2B and $8.5B. This near term growth is being driven by its current successful platforms, including the E2 commercial jets and the Praetor executive line.

Looking further ahead, it expects to hit double digit revenue by 2030 as it accelerates deliveries of its current aircraft. By 2035, the focus shifts to Eve Air Mobility, its subsidiary developing electric vertical take off and landing (eVTOL) aircraft. Eve is expected to be the main driver of growth in the next decade as urban air travel takes off. With a huge $31.6B backlog and a high margin services business to lean on, it is moving from a period of recovery into a decade of serious expansion. We find the setup very compelling.

Financial Performance & Cash Generation

The company’s financial recovery is clearly visible in the steady climb of revenue over the last few years. After hitting a low point in 2020 at $3.77B, sales have grown every year to reach $7.57B in 2025.

For 2026, EMBJ expects this momentum to continue with a target range between $8.2B and $8.5B. This growth shows a business that has moved past its recent struggles and is now operating at a much larger scale.

Equally important is the company ability to generate cash. After heavy losses in 2019 and 2020, the business has remained cash flow positive for five straight years. Even with elevated spending to ramp up production, it generated $491M in free cash flow last year. For 2026, management expects at least $200M in free cash flow. While conservative, this allows the company to fund growth and support its $31.6B backlog without adding debt.

Strategic Backlog & Expansion Projects

EMBJ’s order backlog has grown at a 16.5% CAGR since 2020, reaching $31.6B in 2025. It could approach $50B when including existing purchase options.

The backlog is also becoming more diversified. While commercial aviation remains the largest segment, we believe growth in executive aviation and defence adds a more stable, long-term revenue base.

To convert this massive backlog into actual sales, the Brazilian company is focusing its capital spending on three major expansion projects.

Executive Aviation Production. A $90M investment is currently underway to increase production capacity in both Brazil and Melbourne, Florida. This expansion is designed to match the rising demand for private jets and ensure the company can meet its delivery targets through 2027.

Services: OGMA Engine Line. Through its OGMA subsidiary, it has invested $105M in a brand new Pratt & Whitney engine maintenance line. This facility began operations in April 2024 and is expected to reach full ramp up by 2030, contributing roughly $650M in annual revenue as it services the global fleet.

Services: North American MRO. It is also investing $70M to expand its Maintenance, Repair, and Overhaul (MRO) capabilities in Fort Worth, Texas. This project aims to support a 50% increase in NA commercial aviation clients by 2027. By positioning these services close to its largest customer base, it is securing high margin, recurring income for years to come.

Improving Returns & Market Consensus

The company is now consistently creating value for its shareholders by keeping its Return on Invested Capital (ROIC) well above its cost of capital.

After a difficult period with negative returns in 2020, the business has staged a strong recovery. By 2024, ROIC rose to 10.2% and is expected to reach 10.8% by 2026. We see this as confirmation that Embraer is not only growing, but also becoming more efficient at turning investments into profit.

Return on Invested Capital (ROIC)

Market expectations for the business are also on the rise.

Analysts have steadily increased their forecasts for both revenue and earnings through 2028. Revenue consensus for 2026 sits at ~$8.39B, with projections climbing toward $9.67B by 2028.

Similarly, EBIT forecasts show a strong upward trajectory, with earnings expected to grow from $777M in 2026 to $935M by 2028. We believe these rising estimates reflect a growing confidence in the company’s ability to execute its massive backlog and maintain its current momentum.

Financial Projections & Valuation

Our estimates reflect a business entering a period of steady, profitable expansion. We project total sales to grow from $8.4B in 2026 to over $13B by 2030, maintaining a low double-digit growth rate throughout the decade. This top-line growth is accompanied by expanding margins, with Adj. EBITDA margins expected to climb from 12.3% to nearly 15% as it benefits from its high-margin services business and more efficient aircraft production.

Historical Context

Looking at the historical EV/EBITDA multiples, the company currently trades at 11.5x, which is in line with its long-term average and closely tracks its peer, Airbus. After the extreme volatility of 2019-2020, the valuation has stabilized. We believe this multiple is well-supported by its improving Return on Invested Capital (ROIC) and its clear path to reaching $13B in revenue by 2030.

Key Valuation Assumptions

• Predictable Revenue: The confirmed $31.6B backlog provides high visibility for continued sales growth over the next several years.

• Margin Expansion: We expect margins to continue scaling, following a similar trajectory to Airbus as production efficiency improves.

• Cash Flow Strategy: While heavy capital investment will impact free cash flow conversion in the near term, the company has already successfully paid down its debt.

• Shareholder Returns: With a clean balance sheet, cash generated after capital investments is expected to be directed toward share buybacks.

This operational strength translates into significant cash generation. Free Cash Flow is projected to rise steadily, reaching nearly $1B annually by 2030. This strong cash position allows the company to maintain a very clean balance sheet, with net debt expected to stay below $300M.

Quick technicality: Embraer trades on the NYSE at a 4:1 ratio relative to its shares on the Brazilian stock exchange. Therefore, to arrive at a comparable price target, we have multiplied our derived per-share value by 4 to get $76.7 in 2026. If you want to buy it on the Brazilian stock exchange, our price target would also need to be converted using the current BRL/USD exchange rate, which is around 4.98. This results in a price target of approximately R$95.

Based on these projections, we see a highly compelling valuation.

Using an 11.0x EBITDA multiple, our model points to a value per share of $19.2 in 2026, scaling to $34.2 by 2030. This represents a total upside of 163.8% over the next four years, or an expected share price CAGR of 21.4%.

We believe this more than justifies our bullish stance on the stock as it delivers on its long term flight plan.

2.8 Perspectives on Brazilian Cost of Capital

A great way to look at the Brazilian market is through different tiers of capital. Morgan Stanley compares this to how TV rights work in European football. While there are hundreds of clubs, the few that make it into the Champions League get a disproportionate share of the money.

The “Champions League” of Capital

In LatAm, getting into the MSCI index is like winning those TV rights.

It opens the door to a global audience and an investor base that can diversify risk much more easily. Companies that operate globally and earn in hard currency benefit from a lower cost of capital because they can lean on the US risk-free rate and stay insulated from local volatility.

On the other hand, domestic mid and small-cap companies are in a different league. They are mostly funded by local players who are stuck with a 14% Brazilian risk-free rate plus a high risk premium. These local investors have fewer ways to diversify, so they see risk through a much narrower lens and demand much higher returns to compensate.

MS strategy has been to identify stocks that are transitioning from local players into the global “Champions League” category. Axia (AXIA3) is a clear example of this migration. In 2022, its ownership was 91% local. Today, that has fallen to 72% as foreign investors have stepped in.

The growth of AI is the main driver here. It has turned the utility sector into a global play, allowing companies like Axia to diversify domestic risks better than any local investor could. In just three years, Axia’s P/E has jumped from 4x to 13x. This has closed the valuation gap with its US peer, Sempra, from 70% in 2023 to just 30% today.

We are not saying this is necessarily the best way to frame it, but we found it interesting to highlight, as we always like to look at how different investors are positioning across markets.

2.9 Our Final Take on Brazil

Brazil remains the heavyweight of the region, offering a mix of steady growth and attractive valuations. While the economy is expected to slow slightly toward ~1.6% growth, its scale and leadership in global commodities make it a core allocation in any Latin American portfolio.

The story is mainly about interest rates and fiscal policy. The central bank has begun cutting rates from a 15% peak, but they remain elevated to contain inflation. At the same time, public debt sits near 80% of GDP, with markets waiting for greater fiscal clarity before increasing exposure.

The overall foundation, however, remains solid.

Brazilian equities currently trade at a steep discount to historical levels. There is value in major iron ore and oil producers, which generate strong cash flows regardless of domestic conditions. Large banks remain resilient in a high-rate environment, while quality retailers should benefit as rates decline and consumption improves.

Brazil does not offer the near-term upside of Argentina, but it provides greater stability and liquidity. It acts as the region’s main stabilizer, and current valuations offer an attractive entry point for long-term positioning.

3. The Argentina Experiment

Argentina provides a fascinating look at a country attempting to force a massive economic shift. The political changes and deep fiscal reforms happening under Javier Milei represent the most significant transformation Latin America has seen in nearly thirty years. However, for this narrative to hold up over time, the country desperately needs to kick off a new cycle driven entirely by capital deployment.

The primary challenge is incredibly simple. Argentina just needs cash. The local pension fund system is a shadow of its former self, and the mutual fund industry is virtually nonexistent. While the everyday retail crowd is active, you cannot build a reliable long term market on that kind of volatility. Right now, locals heavily prefer trading crypto or simply hoarding US dollars. Neither of those habits creates a foundation for a healthy domestic market.

Because of this dynamic, we believe Argentina stands apart from the rest of the region. It is pursuing one of the most aggressive growth agendas, while remaining heavily dependent on external financing to sustain it. This creates a fragile setup, as foreign capital tends to exit quickly at the first sign of instability. Developing a domestic capital market grounded in credible governance is the most urgent and complex challenge ahead.

Everything comes down to a complete lack of trust in the local monetary system. Rebuilding that confidence is the only way forward. Whether the Milei administration pursues this through a truly independent central bank or full dollarization, both paths are highly complex and would require significant constitutional changes. That is the key test we are watching.

Political Momentum and the 2026 Legislative Push

Argentina enters 2026 with a highly clarified political landscape and a strengthened reform mandate following the October 2025 midterm elections.

The vote confirmed broad public support for President Milei, with his coalition securing over one third of the seats in both chambers. Its share rose from nearly 28% to 42% in the lower house and from 18% to 33% in the Senate, materially reducing impeachment risk and improving governability.

Since the midterms, Congress has already approved the 2026 national budget, a labor reform aimed at lowering costs and encouraging formal job creation, and the Law of Fiscal Innocence Presumption, which facilitates the return of US dollars into the formal financial system.

The momentum is accelerating. In his March address to Congress, Milei announced a plan to submit 9 consecutive rounds of ten bill packages every month through 2026. This aggressive agenda targets a complete overhaul of the Penal Code, alongside comprehensive tax and electoral reforms, aiming to fully modernize institutions and reorganize the state.

The Macroeconomic Turnaround

The policy objectives for 2026 are clear.

The goal is to establish a baseline for sustainable growth, regain normal market access, protect the disinflation trend, and maintain fiscal discipline. The central bank is focused on rebuilding reserves and remonetizing the economy, targeting between $10B and $17B in purchases.

The underlying macro conditions are improving.

Fiscal accounts are in surplus, and GDP growth for 2026 is projected at ~3.5%. Inflation has converged to ~3% per month, with further disinflation expected through the second half of the year.

After declining 29% in 2025, the sharpest drop in the region, the peso has stabilized since the midterms and has recently appreciated alongside reserve accumulation. With IMF support and a clearer FX framework, Argentina is positioned to regain access to international capital markets this year.

The Valuation Disconnect & Upcoming Catalysts

It is not too late to lean into the Argentina trade. Confidence has surged since October, pushing country risk down dramatically.

The EMBI spread has compressed to ~6.0%, a massive recovery from the 27.0% seen in late 2023. With government approval holding above 40%, the combination of a fiscal surplus, lower risk premiums, and ongoing reforms will support a deep earnings recovery and significant valuation upside.

Currently, a glaring performance gap exists between equities and bonds. While sovereign fixed income has rallied hard, pushing bonds to ~70 to 80 cents on the dollar, MSCI Argentina remains practically flat in USD terms, trailing its Latin American peers. We view equities as severely undervalued relative to fixed income right now.

The primary reason for this lag is a lack of passive flows. While the rest of the region benefited from massive inflows early this year, Argentina was excluded due to its status as an MSCI standalone market.

The ultimate catalyst for the equity market will be the initiation of an MSCI reclassification consultation. If reform momentum and policy continuity hold, this consultation could begin later this year. A successful move would put Argentina back on the radar of passive investors, potentially unlocking $2.3B in inflows with an upgrade to Emerging Market status by 2027 or 2028.

To get there, authorities are actively lifting capital and foreign exchange constraints while improving regulatory clarity. While hurdles remain, including limitations for foreign institutions and the need for greater English language disclosures, the direction of travel is undeniable.

A more predictable managed float regime, continued reserve accumulation, steady legislative progress, and alignment with the US administration provide a highly constructive setup for the rest of 2026.

3.1 Opening Up the Economy

Historically, Argentina has kept its economy closed off.

The ratio of trade to GDP is surprisingly low at just 25% for a small country, largely because of heavy protectionist policies. The Milei administration is making a massive push to change this by slashing tariffs, cutting taxes, and signing new trade deals to finally open the country to the rest of the world.

Agriculture & the LatAm Connection

Right now, the economy leans heavily on commodities. Of the $87B in goods exported in 2025, ~60% came from primary products and agriculture.

The oilseed complex, which is mostly soy but includes wheat and corn, pulls in ~$26B a year. That makes up 30% of all exports, leaving the country highly exposed to droughts and shifting commodity prices. Interestingly, over 40% of these exports stay right here in Latin America. The Mercosur agreement plays a big role in this. Over the last thirty years, Argentina has expanded its footprint in LatAm and Asia while losing ground in Europe.

Brazil is the absolute biggest buyer, taking 18% of total exports in 2024, mostly in industrial goods and autos. The US and China follow at 8% each, with China mainly scooping up food products like soy.

3.2 A Concrete Economic Recovery

The data below shows a clear V-shaped recovery taking hold. After a tough period where the economy fell by 1.9% in 2023 and 1.3% in 2024, reforms are starting to show results. Growth is expected to bounce back strongly, with GDP rising 4.5% in 2025. Instead of a one-time spike, this then levels off into steady growth of 3.5% in both 2026 and 2027. This shift from decline to stable growth is the foundation of the investment thesis.

The most impressive change is happening with inflation.

The stabilization plan is steadily reducing price pressures across the economy. From a peak of 118% in 2024, inflation is expected to drop to 31.5% in 2025. It continues trending lower from there, reaching 22.4% in 2026 and a more manageable 13.2% by 2027.

Argentina Macro Forecasts

This rapid disinflation is not what we would consider an accident. Strict fiscal discipline is what is driving the disinflation in inflation entirely.

The government is maintaining a primary fiscal surplus, at 1.8% of GDP in 2024 and projected to stay between 1.5% and 1.7% through 2027. By refusing to overspend, the administration has removed the main driver of historical inflation, helping convince the market that this time is different.

Alongside cooling prices, the currency environment is becoming more predictable. The official exchange rate is following a controlled adjustment path, moving from 1,031 pesos per US dollar in 2024 to an expected 1,700 by 2026. This gradual adjustment, combined with a stabilizing current account, gives foreign investors greater visibility and confidence to enter the market without the risk of sudden currency shocks.

3.3 A History of Turmoil

Argentina has a long history of economic turmoil despite being incredibly rich in natural resources. The country has faced frequent currency crashes, massive budget gaps, high inflation, and multiple defaults over the last two decades. The core issue usually traces back to the government spending far more than it brings in, and then trying to mask the problem by artificially controlling the exchange rate.

The 2023 crisis is a perfect example of this dynamic. The government ran a deficit near 4.5% of GDP while actively holding the currency down. That combination completely drained their international reserves to a negative $11B by November 2023 and pushed inflation to an aggressive 25% month over month by the end of that year.

The Human Cost and the Rebound

These constant shocks have hit the population hard. Real wages collapsed by 40% from their 2017 peak, crushing purchasing power across the board. This severe drop pushed the poverty rate to a peak of roughly 50% in 2024.

We are finally seeing a real turn. As the recent stabilization plan takes hold and the economy actually rebounds, inflation is cooling off. This direct improvement allowed poverty to decline below 31.5% in the first half of 2025, showing that the core economic engine is starting to work again.

The Banking Challenge and the Opportunity

Years of high inflation and past banking shocks, like the forced conversion of dollar deposits to pesos back in 2002, have completely stripped money out of the official economy. People simply stopped trusting the banks.

By December 2025, the total supply of money in the system dropped to just 16% of GDP, which is well below the 21% average we saw from 2010 to 2019. US dollar deposits are also incredibly low at a mere 6% of GDP.

A shallow banking system is a huge drag on business growth because companies cannot get the credit they need to expand. It also severely limits the ability of the government to refinance its debt obligations locally.

But this extreme low base is exactly where the upside lies. Because the system is so empty right now, there is massive room to remonetize the economy and expand credit as confidence returns. Locals currently hold an estimated $200B in assets safely tucked away outside the country.

The government just passed a tax amnesty law specifically designed to convince people to bring those hidden dollars back into the formal banking system. If even a small fraction of that wealth returns, it will flood the local market with liquidity and completely transform the credit landscape.

3.3 The Debt Profile and the Liquidity Squeeze

At first glance, central government debt appears elevated at roughly $455B, or ~70% of GDP. That headline overstates the true burden. Once intra-public sector holdings are excluded, which carry minimal refinancing risk, the effective debt stock falls to about $255B, or nearly 40% of GDP.

Within that, ~$96B is owed to official creditors such as the IMF, with longer maturities and more structured repayment profiles. This framing excludes central bank liabilities, provincial debt, and potential legal obligations tied to past disputes, all of which sit outside the core sovereign balance but remain relevant for the broader macro picture.

The real problem is liquidity. The debt profile is heavily front loaded with an average maturity of just five years. On top of that, ~60% of it is denominated in hard currency. When you combine those fast approaching due dates with severely low international reserves, it creates a massive liquidity squeeze.

Navigating the IMF

The country has a long and complicated history with the IMF. After a massive $56B agreement in 2018 and a failed attempt to refinance it in 2022, the program completely fell apart by 2023 because the previous government missed almost all of its targets.

The Milei administration managed to revive the relationship.

In April 2025, they secured a fresh $20B agreement, cleverly front loading $15B of those funds directly into 2025. This new plan focuses entirely on keeping the budget balanced and stacking up foreign exchange reserves. In total, Argentina owes the Fund nearly $56B, with these specific loans typically paid back over a seven to eight year window.

Returning to the Global Bond Market

The local bond market has been through massive swings. After a long lockout, the country finally regained access to global debt markets in 2016, only to restructure almost all of its foreign currency bonds again in August 2020.

Recently, government dollar bonds have rallied hard on the back of the new stabilization plan, hitting their highest prices since that 2020 restructuring.

While the sovereign government is still fighting to get fully fluid market access due to low reserves and near term maturities, the momentum is clearly building. In the meantime, the private sector is stepping up. Corporations and provinces have successfully issued nearly $10B in global bonds since October 2025.

The Political Calendar Hurdle

The biggest obstacle to lasting change is the incredibly short political cycle. Frequent elections make it exceptionally difficult to pass deep economic reforms through Congress. It also creates a bad habit where governments often increase spending right before elections.

The calendar is packed. The country elects one third of the Senate and half of the Lower House every two years, with presidential elections every four years. Because primary elections happen months before the general vote, the campaigning cycle drags on for a long time. All eyes are now on the October 2027 presidential election, which will be the ultimate test to see if this new economic direction has the political backing to last for the rest of the decade.

3.4 The Argentina Bull Case: Unmatched Upside

When you look across the Latin American landscape for the rest of the decade, the upside potential is incredibly asymmetric, and Argentina sits entirely in a league of its own. In the Spring bull case scenario for 2030, the projected returns for the region are strong across the board.

The broader Latin American index is expected to nearly double, but Argentina completely shatters the curve, projecting a massive 176% total upside over the next few years.

What makes this projection so powerful is the actual composition of that return. This is not just a story about cheap stocks getting slightly more expensive. If you look at the breakdown in the data, the vast majority of that 176% upside is driven directly by explosive US dollar earnings per share growth, rather than just a simple valuation rerating. While multiple expansion will certainly play a role as country risk drops and foreign capital returns, the core engine of this massive bull run is pure fundamental business growth.

This earnings explosion perfectly captures the fundamental shift happening on the ground. As the administration executes its deep economic reforms, stabilizes the currency, and unlocks massive sectors like energy and mining, corporate profitability is positioned to skyrocket. Companies that have survived decades of severe capital controls and hyperinflation are suddenly being unleashed into a normalizing pro business environment.

We believe this creates a rare setup. For capital willing to position ahead of the crowd, Argentina offers the most compelling high conviction growth story in the entire emerging market universe. The scale of the earnings growth potential completely separates it from its regional peers, making it one of the most obvious bet for the rest of the decade.

3.5 The Energy Turnaround

The energy picture is where the Argentina story gets really exciting. Thanks mostly to the Vaca Muerta shale formation, the country holds the second largest unconventional gas reserves and the fourth largest unconventional oil reserves globally. We are watching a massive turnaround play out in real time.

The energy trade balance completely flipped from a $4.4B deficit in 2022 to an $8.6B surplus in 2025. That is the highest number on record, and the trajectory suggests it will keep growing. Total oil production has surged to ~850,000 barrels per day. To put the impact into perspective, fuel and energy now make up 12% of exports. That is a huge jump from just 4% back in 2016.

On top of that, new domestic infrastructure like the Moreno pipeline is actively boosting local gas supply. This completely eliminates the need to buy expensive fuel from outside the country. Looking further ahead, new floating LNG projects could push export capacity even higher starting in late 2027.

The Historical Gap

To understand the true scale of this opportunity, you have to look back at the history. Argentina has a long legacy with oil and gas. They made their first discovery over a century ago. At one point, the country actually produced more oil than Brazil. Today, the situation is completely reversed. Brazil pumps out ~4.8M barrels per day, which is roughly 5x more than Argentina.

The reason for that massive gap comes down to decades of policy instability and heavy energy nationalism. Privatizing the state energy company YPF and then nationalizing it again 13 years later severely crushed the potential of the entire industry. For the past two decades, energy companies operated under incredibly difficult conditions. Growth was suffocated by regulated prices at the pump, strict capital controls, and severely restricted access to the heavy equipment needed to actually drill. But that history is exactly what makes the current setup so powerful. Unlocking the oil and gas sector is one of the clearest paths to bringing real stability to the broader Argentine economy.

The Vaca Muerta Catalyst

The entire bull case rests squarely on Vaca Muerta.

While geologists knew the formation was rich in hydrocarbons all the way back in the 1930s, the true scale was not confirmed until around 2010 when fracking technology finally took off in the US.

From a geological standpoint, Vaca Muerta rivals major US shale basins such as the Permian, Eagle Ford, and the Bakken. But when we look at actual well data, Vaca Muerta is outperforming US peers.

Over the past few years, the local teams have really figured out the rock. Productivity and extraction rates have improved dramatically. Looking at the best in class average well productivity for the first year of production, Vaca Muerta is delivering 30,000 barrels per 1,000 feet of lateral.

That completely blows past the Permian Delaware at 21,000 and the Bakken at 20,000. The rock quality here is undeniably world class, and the formation is widely viewed as one of the most promising shale plays in the entire world.

Now that the productivity is proven and the political backing is firmly in place, the next step is actually moving the oil. The historical bottleneck for Vaca Muerta has always been evacuation capacity. You can pump all the oil you want, but you need pipes to get it to the coast. This is exactly where the massive capital expenditure is going right now.

The existing infrastructure, including the Oldelval pipeline and local refineries, handles the current load but caps future growth. The real game changer is the upcoming Vaca Muerta Sur pipeline project, known as VMOS. This specific project completely unlocks the basin. Starting in Q4 of 2026, VMOS will add 180,000 barrels per day of new evacuation capacity.

It is going to scale incredibly fast from there.

By 2027, that pipeline alone will carry 550,000 barrels per day. By 2028 and beyond, VMOS reaches a massive 700,000 barrels per day. When you combine this new pipe with the existing network, it essentially doubles the total takeaway capacity of the entire region compared to where it sits today. This massive infrastructure buildout is the exact catalyst needed for Vaca Muerta to finally reach its full production potential.

3.6 Mining and the RIGI Catalyst

Mining is the next massive catalyst for foreign capital.

Argentina sits on the third largest lithium reserves and the sixth largest copper reserves in the world. Metals exports hit $6.4B in 2025, driven mostly by gold, but the central bank projects the mining trade balance could top $15B by 2030 as copper and lithium rapidly scale up.

To understand the urgency behind this push, you have to look at the global copper market. Following unprecedented supply disruptions in 2025, the market has officially shifted into a steep deficit. Demand is set to expand ~3% annually for the rest of the decade, driven heavily by rising electrification, the global energy transition, and massive power needs for artificial intelligence and data centers. Forecasts show the global copper deficit widening to 2M tonnes by 2030 and hitting a staggering 8M tonnes by 2035.

Argentina is perfectly positioned to help fill this massive gap, representing over 1M tonnes of potential new supply over the next decade.

However, developing new greenfield projects in the country comes with significant technical hurdles. The local mining industry is less developed compared to neighboring jurisdictions. Miners face a challenging starting point, often needing to build entirely new infrastructure like water desalination plants and pipelines coming all the way from the Pacific.

Furthermore, these projects sit at significantly higher altitudes than most active operations on the Chilean side. Because of these logistical hurdles, future supply additions face steep costs. The average capital intensity sits ~$27,000 per tonne, which is 30% higher than 2020 levels. For completely new greenfield projects, that cost pushes well above $30,000 per tonne.

Given the massive expense and the long duration of mining investments, securing firm legal and fiscal protection is an absolute requirement for developers to commit capital. This is exactly why the government launched the Regime of Large Investments, known as RIGI. We believe this framework provides the exact incentives needed for strategic projects requiring over $200M in capital.

In February 2026, the government formalized an expansion of this decree to include upstream hydrocarbon activities on underdeveloped blocks, setting a minimum commitment of $600M for those specific energy plays. To keep the momentum going, the administration recently simplified the rules and extended the entire program through July 2027.

The financial perks within RIGI are highly attractive. Companies get their corporate income tax rate slashed from 35% to 25%. They receive total exemptions on export tariffs after three years, the removal of value added tax prepayment requirements, and accelerated depreciation.

Crucially, the regime grants them free access to US dollars linked to their project export revenues starting in the third year, while guaranteeing absolute legal and fiscal stability for thirty years. The framework is working, and capital is already moving fast. Most major copper projects have already submitted applications to secure these protections. So far, RIGI has received over $70B in project proposals, with $26B already officially approved. Almost 70% of this total is tied directly to mining, while energy makes up the rest.

We are seeing concrete timelines form rapidly.

The Vicuna mining project in the San Juan province has already mapped out $7B in capital expenditure between 2027 and 2030. In the energy space, a massive $15B liquefied natural gas project is actively moving forward, and the government expects even more capital to flow in shortly as these regulatory frameworks cement confidence.

3.8 Our Final Take on Argentina

The country is executing the most aggressive and necessary economic pivot in recent history. While the historical risks are well documented, the market is severely underpricing the actual progress happening on the ground right now. We are officially moving past the fragile early stabilization phase and directly into a period of massive capital deployment.

With inflation rapidly cooling, a sustained fiscal surplus, and billions in foreign direct investment actively lining up for energy and mining, the foundation for a sustainable economic boom is firmly in place.

The combination of world-class hard assets, a deeply undervalued equity market, and a government committed to lasting economic change creates a rare setup. For capital willing to look beyond recent history, Argentina stands out as one of the most compelling asymmetric growth stories in the emerging world for the rest of the decade, though it is not without risks.

4. Colombia: High Upside on Hold

While Colombia has significant upside potential in a true bull scenario, we believe it remains too early to position aggressively. Notably, the country was largely excluded from major regional 2030 upside projections due to high political volatility. Realizing its full potential requires the next administration to enforce strict fiscal adjustments and reduce fixed spending to bring the debt-to-GDP ratio closer to 40%.

The market is currently pricing in a B+ rating, implying more than two full downgrades. If a market-friendly outcome materializes, we could see spread tightening of around 150 basis points, back toward levels not seen since 2021. However, until valuations become more attractive or clearer political signals emerge, we think patience is still required.

The Political Catalyst

Political cycles completely dictate equity performance in Latin America. Center right victories consistently trigger massive rallies, while leftward shifts lead to heavy selloffs. After a rally driven by pure business fundamentals in 2025, the local COLCAP index is now moving entirely on election expectations and foreign capital flows.

Our base case points toward a potential regime change, which would force a major upward rerating for Colombian equities. Conversely, a continuation of the current leftist policies presents severe downside risk for the market.

The State of the Race & Legislative Safety Net

Currently, Ivan Cepeda leads the first round polling, but the landscape is highly fluid. The ultimate deciding factor will be the massive block of undecided and centrist voters. Because rejection rates remain elevated across the board, the candidate who successfully consolidates the orthodox vote has the absolute clearest path to winning the final runoff.

Fortunately, regardless of the presidential outcome, the recent legislative elections created a powerful safety net. Congress is divided. This split legislature provides immediate institutional checks against extreme policy proposals from the executive branch, effectively forcing the next administration to negotiate and govern closer to the political center.

4.1 The Colombian Energy Squeeze

Colombia is facing a severe domestic gas shortage that is forcing a complete rethink of its energy strategy. Domestic gas production fell 17.1% YoY to ~794M cubic feet per day in 2025. The reserve picture is also weak.

As of 2024, the country only had enough gas reserves to last 5.9 years at current consumption levels, down from 6.1 years in 2023. The daily supply shortfall is already near 200M cubic feet, roughly 20% of total demand, and is expected to rise to 310M next year according to the national commodities exchange. We see this widening gap as increasing pressure on imports and forcing a rapid shift in how the system is being supplied.

The Forced Return to Coal

To keep operations running, local industries are abandoning the idea of cheap domestic gas and turning to alternatives. LPG and coal are the top choices to fill the yawning gap. Because domestic coal is significantly cheaper than imported LPG, which is partly sourced from the US Gulf Coast, small and medium sized businesses are actively reverting to burning it.

As the head of the National Federation of Coal Producers, Carlos Cante, noted, industries realize the era of cheap gas is over. This industrial pivot represents a massive defeat for the Petro administration and its aggressive push to completely eliminate fossil fuels, especially since solar energy still accounts for a tiny fraction of the overall energy mix.

The LNG Bridge

To address the immediate gap, the country is working to expand its import capacity. The existing 475M cubic feet per day SPEC terminal outside Cartagena will increase by about 12% next year, with generators absorbing most of the supply to prepare for El Niño events. A wave of new offshore liquefied natural gas projects is also moving forward.

Two smaller 60M cubic feet per day projects have reached final investment decisions and will begin operations in September. This includes Caribe LNG, led by Course2 Energy LLC and Andalusian Energy, which will supply distributor Empresas Publicas de Medellin. Ecopetrol will launch a similar facility at Buenaventura on the Pacific coast.

The outlook for larger scale proposals is much less certain.

Ecopetrol and Frontera Energy aim to kick off a 400M cubic feet per day floating terminal in Cartagena in December. Transportadora de Gas Internacional is planning a similar sized project off La Guajira for January.

Further out, Amazonica LNG is pushing a 150M cubic feet per day project near Barranquilla for late 2027, backed by supply agreements with Vitol Group, while Cienaga LNG hopes to dock a 400M terminal in 2028. While these proposals far exceed actual requirements, project directors openly admit that many will fail to secure necessary financing to reach construction.

4.2 Election Catalysts & Long Term Optionality

The ultimate fix for the gas deficit depends heavily on the upcoming May elections. The Petro administration banned hydraulic fracturing back in 2022, but leading presidential candidates are actively looking to bring it back to unlock domestic supply. Looking further out, Ecopetrol and partners like Brazil’s Petrobras are targeting deepwater Caribbean gas deposits by 2030.

Gustavo Petro at the UN General Assembly in New York

Furthermore, pending cross border pipeline repairs, the easing of US sanctions could eventually open the door for direct pipeline imports from neighboring Venezuela.

4.3 Smoothing the Debt Profile Ahead of the Vote

Colombia is actively buying back a portion of its outstanding global bonds. This marks the third operation of its kind over the past year as part of a broader strategy to reduce borrowing costs right before a highly contested presidential race. The government is using cash to repurchase notes with maturities ranging from 2035 all the way to 2061. Public credit chief Javier Cuellar stated last week that authorities expect to retire roughly $4B in bonds, with the current tender offer set to expire at 5 PM on April 24.

The main goal is to reassure bondholders and stabilize markets amid rising concern over the national accounts. The budget deficit is now projected at 6.7% of GDP this year. Investor concerns intensified last year after the administration suspended the legal fiscal spending cap.

That deteriorating financial picture recently prompted S&P Ratings to cut the sovereign credit score further into junk territory. The agency explicitly cited the persistently large fiscal gap and a high overall debt burden. Given this immense pressure, the buyback serves as a strategic defensive move.

As UBS strategist Pedro Quintanilla noted, the tender is structured to encourage participation without requiring the government to overpay. In practice, clearing these maturities is a sensible step for a sovereign facing rating pressure and elevated political uncertainty ahead of the May election.

4.4 Our Final Take on Colombia

While Colombia can screen as a market with deep value opportunities, we do not believe the current risk profile is attractive, and patience is the right approach. Our strategy is to wait out the political noise.

We prefer to stay on the sidelines until the upcoming elections are complete and the policy direction becomes clearer. Once that uncertainty fades, high-conviction opportunities will be easier to identify and act on with conviction.

From a positioning standpoint, we are not a big fan of large state-backed energy players and avoid names like Ecopetrol (EC). That said, we do see strong value in select local Colombian equities that trade outside US ADRs, but we prefer to cover those in a follow-up report.

5. Chile: A Safe Haven in Latin America?

Chile is currently enjoying strong momentum backed by clear policy direction and a wave of investor optimism. During the 2025 fiscal year, the local IPSA index delivered an exceptional 72% return in US dollar terms.

This rally was remarkably broad, with every single component of the index posting gains. The banking, retail, and real estate sectors led the charge, alongside industrial giants like LATAM Airlines and SQM.

The Political Turning Point

The primary driver of this performance was a major shift in investor positioning ahead of the presidential election. Markets anticipated a move toward a more pro investment administration, a view that was confirmed by the election of Jose Antonio Kast. Confidence remains high as the market looks toward his economic policies for the 2026 to 2030 period, supported by the appointment of a highly technical and proficient cabinet.

Macroeconomic Resilience & Tailwinds

The Chilean economy proved much tougher than expected throughout 2025. While initial estimates pointed to 2% growth, the economy is now on track to expand by as much as 2.3% thanks to a surge in investment during the second half of the year. Several key factors are supporting this recovery:

• Copper prices remain at record highs, providing a meaningful boost to the national accounts and export revenues.

• New pension reforms are increasing savings within the $239B private pension system, strengthening domestic capital formation.

• The adoption of a new sectoral permitting law is beginning to cut regulatory delays and unlock project execution across key industries.

• Business confidence has broadly improved, supporting stronger corporate profitability and improving investment across the economy.

The 2026 Trajectory

As we move into 2026, Chilean equities are expected to continue their upward trajectory. Early indicators point to corporate earnings growth in the high single digits, providing a solid base for the market.

Beyond strong commodity prices, the economy is also benefiting from the restart of previously stalled infrastructure projects, particularly data centers and transportation. Economic projections for 2026 remain positive, with GDP growth expected at 2.5%. This expansion is driven by a 4.6% increase in capital formation and a steady rise in consumption. While constraints in copper production might slightly moderate the overall headline numbers, the broader economy is showing consistent improvement.

There is also a major potential catalyst on the horizon.

The administration is pursuing a politically sensitive tax reform aimed at lowering corporate tax rates. If this legislation passes, it would likely trigger another significant move higher for equity valuations by immediately boosting earnings per share and stimulating further domestic investment.

5.1 Unlocking the Investment Backlog

A principal driver for 2026 is the implementation of new permitting legislation designed to cut through years of bureaucratic red tape.

This framework is expected to reduce processing times by 30% to 70%, effectively unlocking a massive investment pipeline valued at $165B.

The timing is critical. The convergence of a new administration with a more efficient regulatory system is a major catalyst for accessing an expanded investment backlog that has been stalled for years.

This $165B pipeline is broken down into 3 major categories:

While this capital will be deployed over the next decade, it provides an immediate and substantial stimulus to the heavy construction and engineering sectors. The downstream effects will likely drive increased employment and consumer spending, supporting a tactical bias toward the banking and consumer discretionary sectors.

Strategic Commodities & Infrastructure

The incoming Kast administration is moving to leverage record high global prices for copper, molybdenum, and silver. These commodities are vital to both Chile’s export portfolio and global technology supply chains. To support this growth, significant investment is flowing into essential infrastructure, including port facilities, desalination plants, and logistics networks.

Chile is also emerging as a key player in the rare earth elements market through the Penco module owned by Aclara Resources. This project offers a high quality, non Chinese supply of heavy rare earths. By April 2026, Aclara reached the final stages of the environmental review process, positioning Chile as a critical partner for Western supply chains.

The Green Hydrogen Frontier

New industries are also beginning to expand the investment backlog.

A major milestone occurred in December 2025 with the approval of a bill promoting the green hydrogen industry. This legislation includes a $2.8B tax incentive program designed to stimulate domestic demand through 2030.

The bill creates a targeted tax framework to encourage producers to set up operations in the Magallanes and Chilean Antarctic regions, leveraging strong wind resources. It includes corporate tax exemptions and VAT relief on imported equipment. While it is in the final stages of Senate approval, it already adds to Chile’s investment appeal.

5.2 Copper Prices & Sovereign Strength

The Kast administration is well positioned to restart mining investment after a decade of stagnation, supported by copper prices at record highs of $6.03/lb as of April 22 2026. This environment attracts capital while also improving public finances through higher export revenues, royalties, and corporate taxes. These inflows are rebuilding fiscal strength.

By early 2026, Chile’s sovereign wealth funds reached a combined value of around $14.1B, with the Pension Reserve Fund (FRP) rising above $10.5B.

The budget was based on a conservative copper assumption of $4.35/lb. With spot prices nearly $2.00/lb higher, Chile is generating a significant fiscal windfall. This is improving government finances and supporting the country’s stable A-range credit rating outlook.

Market Dynamics & Deficits

After averaging $4.51/lb in 2025, copper prices are projected to average $5.00/lb throughout 2026 and 2027. Several factors are pushing prices higher:

• Supply Constraints: Persistent mine disruptions and regional supply bottlenecks are tightening the market.

• Global Demand: Massive growth in electric vehicles, power generation, and grid infrastructure continues to soak up available supply.

• Refined Deficit: The global market for refined copper is facing an estimated deficit of 350,000 metric tons for 2026.

Speculative interest also remains high, with thousands of net long positions across the London Metal Exchange (LME) and COMEX, signaling expectations of further gains and reinforcing the upward momentum in copper prices.

Production Challenges & Recovery

While copper prices remain high, production volumes have faced significant volatility. As shown in the monthly tracker, Codelco mine production in early 2026 started at levels notably lower than previous years, following a trend of persistent output decline that bottomed out in 2023 and 2024.

However, there are signs of stabilization. Yearly production data indicates that while output dipped to 5.25M metric tons in 2023, it recovered to 5.55M in 2024 and 5.45M in 2025. A critical component of this output is the split between concentrates and SX EW production.

Currently, copper concentrates account for ~75% to 79% of total Chilean production, while SX EW (a leaching and refining process) makes up the remaining 21% to 25%. Maintaining the scale of concentrate output is key for Codelco to benefit from the current market deficit and elevated prices.

This production recovery, paired with the surge in copper prices, is providing the financial momentum necessary for Codelco to manage its debt load.

As of late 2025, the company net financial debt stood at ~$23.8B. Improving production figures throughout 2026 will be essential to ensure the company can continue to improve its earnings and slowly work down this leverage, maintaining its role as the primary engine for the Chilean state coffers.

5.3 Tax Cuts & Capital Market Reforms

Chile’s newly appointed Finance Minister, Jorge Quiroz, takes office on March 11 with a highly ambitious plan for his first ninety days. The government intends to introduce major reforms by April 1 and hold final congressional votes by September. The primary goals are to simplify business regulations, reduce taxes, and achieve ~$6B in government savings. Quiroz openly admits the first 6 months will be challenging. To build immediate momentum, his strategy relies on sending very short and highly focused bills to Congress right away, which should significantly speed up the approval process.

The economic agenda is focused on passing pro-business reforms, easing investment constraints, and keeping tight control over public spending.

The key proposal is a large corporate tax cut. The government plans to reduce the rate for medium and large companies from 27% to 23% over four years. Firms could lower it to 20% by hiring workers currently in the informal economy and paying compliant wages. Small businesses would benefit from a fixed 12.5% rate. Because the administration lacks a legislative majority, passing the bill will require negotiation with opposition lawmakers. If approved, the reform would lift corporate profits and support valuations.

At the same time, the administration is pushing a new investment framework to provide legal and financial certainty for domestic and foreign investors. It targets large projects focused on technology transfer and workforce training.

While details are still pending, the framework is expected to follow models from Argentina and Peru, offering tax stability and deductions linked to capital spending. To support the financial sector, the government is considering removing capital gains tax on infrequently traded shares and reintroducing tax integration. These measures aim to increase trading activity, attract new investors, and deepen the local stock market.

5.4 Our Final Take on Chile

Chile is currently positioned as an attractive market with a 60% total index upside projected through 2030 in MS best case scenario. While this is lower than the triple digit projections for Argentina or Brazil, Chile offers a much more balanced risk profile and a unique internal growth story that is now starting to play out.

The Drivers of Upside

The projected 60% upside is split almost evenly between corporate earnings growth and a valuation re-rating. We expect roughly half of this gain to come from US dollar earnings growth, which is being supported by record copper prices and the new wave of industrial investments. The other half is driven by a price to earnings re-rating. As the Kast administration implements its pro investment agenda, we expect the market to reward Chilean equities with higher multiples, reflecting the return of long term policy stability.

Relative Positioning in Latin America

Chile stands out in the regional landscape for its strong institutional framework. Unlike Mexico, where upside is limited by political uncertainty and judicial changes, Chile is moving in the opposite direction by reducing regulatory barriers and cutting corporate taxes to unlock investment.

Argentina offers higher upside, but it comes with much greater volatility and execution risk. Chile sits in a more balanced position, offering a better risk-adjusted return than the Latin American average when accounting for stronger legal and fiscal stability.

Overall, Chile offers investors exposure to growth in green energy and mining without the political volatility seen elsewhere in the region. The current entry point also leaves room for meaningful upside as the market adjusts to the new economic framework over the next 4 years.

6. Mexico: At the Turning Point

Mexico stands at a critical turning point. Long term success depends on capturing the massive trend of moving production closer to the US while keeping the budget under control and the legal system reliable. The market reflects this tension, with valuations trading well below historical peaks as the world waits to see how the country handles its current challenges.

6.1 The Current Reality

Economic growth stays below potential through 2026.

High uncertainty surrounds the mid year trade review with the US and Canada, while slower American growth weighs on Mexican exports and business spending. A major question for the economy is whether it can move from “Brownfield” to “Greenfield” investment.

Brownfield vs. Greenfield Growth

Most investment in Mexico has been “Brownfield,” meaning companies are simply expanding or upgrading their existing facilities.

This provides a steady but slow boost to the economy. To see a real surge in growth, Mexico needs “Greenfield” investment, where companies build entirely new factories and infrastructure from scratch.

As the chart below shows, this type of investment takes longer to start but eventually creates a much steeper wave of growth. Currently, Mexico sits at a point where Greenfield projects are just beginning to pick up, but they require a strong and stable trade framework to truly take off.

The Credit Gap & Inflation

Lower interest rates offer no quick fix for the current slowdown. Because very few people in Mexico use formal bank credit, rate cuts do not easily lead to more consumer spending or business expansion. At the same time, high inflation driven by rising wages keeps the central bank cautious.

This combination makes it difficult to stimulate the economy through traditional means, leaving the country heavily dependent on external trade and the successful transition to large scale new construction projects.

6.2 Scenarios & Regional Upside

The government aims to cut the budget deficit but still needs to fund major energy and infrastructure projects. A primary concern remains the recent removal of independent regulators and judicial changes which raise questions about how fairly contracts will be enforced.

In the MS base case, the trade review passes without major disruptions, but domestic political shifts cap growth. While some manufacturing moves to Mexico, other firms choose the US for complex projects to avoid legal risks.

The Valuation Gap

When compared to its neighbors, Mexico shows the most limited potential for a market re-rating. As the chart illustrates, the projected 45% upside for Mexico through 2030 is almost entirely dependent on corporate earnings growth. Unlike Chile or Argentina, where a significant portion of the upside comes from the market paying a higher premium for stocks, Mexico lacks that valuation tailwind. People remain hesitant to pay more for Mexican assets while institutional and legal questions linger.

MS Bull & Bear Scenarios

In a Bull Case, political reforms cause less disruption than expected and a US productivity boom driven by AI creates strong demand for Mexican goods. This could push growth toward 2.5% and trigger a wave of new factory construction. In the Bear Case, rising US protectionism is the main risk.

If the US turns more restrictive, the trend of moving production to Mexico could weaken as companies shift operations back to American soil. Combined with institutional weakness at home, this would cause private investment to dry up and lead to stagnant growth.

6.3 Our Final Take

We agree with MS projecting a 45% total index upside for Mexico through 2030, the lowest among major Latin American markets. Unlike Chile or Brazil, almost all of this gain must come from corporate earnings growth rather than the market paying a higher premium for the stocks. People remain cautious about the price they pay for Mexican assets until there is more clarity on the rule of law and the future of the North American trade relationship.

7. Our Final Take on Latin America

Latin America enters 2026 as a region of sharp contrasts.

Overall growth remains modest at ~2.1%, but the real story is the divergence between countries. The region is shifting away from broad macro trends toward country-specific dynamics driven by political change and global demand for green energy materials.

The Growth Leaders

Chile and Argentina offer the most compelling turnaround stories.

In Chile, a pro-investment administration and record copper prices are driving optimism. In Argentina, the shift toward a market-oriented economy has unlocked significant upside, though with much higher risk. These are the markets with the strongest potential for re-rating as sentiment improves.

The Large Markets

Brazil and Mexico provide scale but face more constraints. Brazil remains attractive through banks and commodity leaders, but high rates and debt limit upside. Mexico benefits from supply chain relocation toward the US, but faces trade uncertainty and legal changes that weigh on sentiment.

The Path Forward

We believe success in Latin America over the next four years depends on selectivity. The strongest opportunities lie in companies exposed to the global energy transition, such as copper and lithium producers, and in businesses benefiting from more stable domestic policy environments.

While challenges remain, improving policy is creating a more supportive environment for long-term value creation.

The Aurelion Team

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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.

We start with a simple thought experiment to make a complex shift easy to understand.

The year is 2021. You are Hiromi Yamaji, incoming CEO of the Tokyo Stock Exchange under Japan Exchange Group. At this time, the Nikkei index is still down 20% from highs last seen in 1990, marking 31 years of negative returns.

By 2022, the share price of Japan Exchange Group (JPX) itself has been stagnant since highs in August 2015, earning around 0% annual price returns over 7 years. If you want to create shareholder value in this situation, you clearly have a difficult task ahead of you.

First, let’s rewind a bit. The Japanese equity market has been stagnating for decades - why? Though the issue has been multifaceted, two primary reasons come to mind:

Firstly, the risk-averse tendency of many Japanese executives, a trait shared with much of the rest of Asia, has led to many companies hoarding cash or investment securities earning low returns, strangling shareholder value, instead of returning cash to shareholders or investing for new growth. This works against shareholder value because equity investors fundamentally need a return of capital at some point, or else there is no reason to invest. This dynamic created years of stagnant stock prices and low economic growth.

Secondly there is the cross-shareholding issue. Many Japanese companies are publicly traded subsidiaries of much larger parent corporations, usually controlled by said corporations. This works against shareholder value in two ways. For one, it decreases the free float of company shares, making them more illiquid, and illiquidity always carries lower valuation multiples with it.

More importantly, public market investors prefer to feel confident that if necessary, corporate policies can be changed by the democratic process of the market. Shareholders vote to elect board members to represent them and oversee corporate processes. If necessary shareholders can generally vote out board members who do not act in the shareholder’s fiduciary interest, at least in the U.S. In Japan, things have been different.

Take Toyota Boshoku (3116.T), Toyota's primary seat supplier. Toyota Motor owns 31% of the company, with the broader Toyota group controlling well over 40%. The result is a supplier whose margins have been compressed to a fraction of what comparable independent peers like Adient or Lear earn globally. Every year Toyota demands price-downs from its suppliers, and Boshoku has no leverage to resist — Toyota is simultaneously their largest customer and their largest shareholder — any price increase would be seen as a slap in the face.

Minority shareholders watching gross margins erode have had no recourse: they cannot vote out the board because Toyota controls the vote, and they cannot demand strategic change because Toyota's interests as a customer override their interests as fellow shareholders.

Decades of value transfer from minority Boshoku shareholders to Toyota Motor shareholders is the visible cost of this governance structure. Toyota Boshoku is one example among many in Japan.

Today roughly 25% of the entire market capitalization of the Tokyo Stock Exchange consists of cross-shareholdings, down from 60% in 1990 (per McKinsey). That is 25% of the publicly traded economic might of an entire nation sitting trapped, earning low returns, stagnate on the balance sheet.

These dynamics work against the market and the economy as a whole, and they work directly against you, the Japan Exchange Group. You want people to trade more stock. You want people to invest, to take risks, to put money to work in the economy — but if any shareholder value that gets created is dampened by these forces, almost nobody has a real reason to own Japanese equities, and your profits stagnate. So… what can you do about it?

Table of Contents

1. The Reforms

2. The Results

3. Japan Exchange Group

4. Stock Idea #1: Ichiyoshi Securities (8624.T)

5. Stock Idea #2: Nomura TOPIX Banks ETF (1615.T)

6. Stock #3: Our Favorite Idea Added to the Portfolio Today

7. Basket Positioning

8. Key Risks to the Thesis

9. Our Final Take on the Japan Financials

1. The Reforms

Being Japan’s only stock exchange operator, you control exchange listings for the entire equity market. You also control the TOPIX index, a prestigious index inclusion for Japanese companies.

Beginning in April 2022, you restructure the 5 segments of your equity market into a simpler 3 segments — Prime, Standard, and Growth.

You change listings and delisting criteria for these segments, essentially forcing listed companies into compliance with these criteria, including mandates against cross-shareholdings. This began the unwinding of cross-shareholdings, which has been a massive boost to Japanese equity valuations on its own over the past four years.

In October 2022 you begin overhauling the TOPIX index to hold more compliant companies, to hold them in a more efficient manner. The TOPIX tracks the broad Japanese equity market as the preferred index over Nikkei.

If a company can get into the TOPIX, passive institutions across Japan regularly buy their shares, supporting stock prices, and it brings a similar level of prestige as an S&P 500 inclusion might for an American company.

Following your promotion to Group CEO of the Japan Exchange Group, in March 2023 you tell corporate executives to stop destroying shareholder value. Literally, the reform is titled “Action to Implement Management Conscious of Cost of Capital and Stock Price”, telling corporate managers almost flat-out, “change your policies to generate returns above your cost of capital and increase your stock price, or get delisted.” Scorched earth tactics, but it has worked wonders.

2. The Results

Today many Japanese companies have successfully implemented these reforms, and those that didn’t bother have been delisted or moved to lower market tiers. The percentage of Prime Market companies trading below book value has decreased to 27% (down from 50%) and the percentage of companies with ROEs below 8% has also declined, to 43% (down from 47%).

The majority of unwound cross-shareholdings have been deployed into record dividends and buybacks. In just a few years, you have made the Japanese equity markets significantly more attractive.

Standing here today in April 2026: equity trading volumes are up significantly. Activists and other foreign investors have poured capital into Japan at the highest pace in 22 years — even household equity ownership is increasing. Trading profits are up, and thanks to a rise in interest rates, yields on clearing balances are boosting profits further.

The Nikkei index finally broke through its 1990 highs in early 2024, after a staggering 34 years, and it has since rallied a further 50%. M&A volumes are skyrocketing. In 2024 corporate stock buybacks doubled over 2023 and they remained strong in 2025.

These impressive results have led to total shareholder returns running at a cool 17% annually from the Japan Stock Exchange Group since the implementation of the April 2022 reforms, beating many other global exchange operators over that timeframe.

Despite the impressive progress that has been made, the work is far from over. More cross-shareholdings need to be unwound. Many companies still hold 15-25% of their assets in cash and equivalents. Interest rates likely have further to rise. In a June 2025 interview with Nikkei Asia, you acknowledge that despite the strong pace of progress, the overall reforms are still only 20% of the way there.

“Our reform has just started, and we are not satisfied with the current situation.” — Hiromi Yajami, JPX Group CEO

The Japan re-rate trade isn’t over just yet. So how can we still play it?

In this report we are covering the exchange itself, 2 small-cap brokers, and the TOPIX banks, all direct beneficiaries of higher trading volumes, higher interest rates, and higher JGB yields.

Let’s kick things off by discussing Japan’s monopoly exchange itself.

3. Japan Exchange Group ($8697.T)

Japan Exchange Group is different to American exchanges in that it has a monopoly over equities and derivatives trading and clearing in the country, whereas in the U.S., the big four exchanges (ICE, NDAQ, CME, CBOE) are locked into an oligopoly, and the clearing of equities and options is handled by regulated infrastructure corporations owned by the exchanges themselves as well as other financial institutions.

However in Japan, the JPX Group controls everything. All cash equities trading, functionally all listed derivatives trading, and their subsidiary the Japan Securities Clearing Corporation is Japan’s sole central counterparty through which every single JPX listed financial asset in the entire country must be routed. The JPX Group even controls the dominant regional index, TOPIX.

This gives the JPX Group a much stronger position than non-monopoly exchanges that fight tooth and nail for trading volumes. The JPX Group is the bedrock infrastructure layer of Japan’s entire public capital markets stack. It owns all the economics between trading, clearing, listings, and market data and other services. The JPX Group operates the Tokyo Stock Exchange, the Tokyo Commodities Exchange, and the Osaka Securities Exchange, in addition to the Japan Securities Clearing Corporation.

Financial Profile

As mentioned above, thanks to reforms driven largely by the exchange itself, trading volumes and transactional revenues are up significantly over the past few years, and clearing income has been boosted by rising interest rates.

Trading revenue growth has been driven entirely by cash equities trading (14.8% CAGR since Q1 2021), while listed derivatives revenues have been flat over the same period.

Within listed derivatives, 87% of trading revenues come from financial derivatives (TOPIX and Nikkei futures and options, JGB futures) and the remaining 13% comes from commodity derivatives (energy, precious metals, and agriculture). Broadly, over 75% of revenue comes from the typical exchange transactional, clearing, and data fees, with a smaller share coming from listings, systems, and access fees.

Given the impressive strength in trading volumes, the JPX Group has posted a revenue CAGR of 11.58% with steady margins. In Q3 2025, revenue increased 14.8% Y/Y with operating income up 17.1% due to record high margins.

Given the high incremental margins of the exchange business, as well as an increase in high-margin clearing interest income due to increases in interest rates, profitability has remained strong, with 2025 YTD pretax margins through Q3 reaching a strong 58.5% keeping pace with the three large U.S. exchanges with large market shares in equities and options, ICE, NDAQ, and CBOE. In Q3 2025, pretax margins reached a record 60%.

JPX Group generates significant cash and returns the majority of cash to shareholders through dividends (3.2% yield, 60% stated target payout ratio) and buybacks. Capital investment requirements are relatively minimal, with capex running at 9% of revenues in 2025.

The Japan Exchange Group trades today at 22x forward earnings, a premium multiple. Strong, diversified exchanges typically trade at premium multiples because they will be operating and producing cash flows long after we are around to collect them (The Osaka Exchange predates the founding of America by about 80 years), their cash flows usually scale at or beyond the pace of long term economic growth due to increasing financialization, and they are realistically impossible to displace, in this case due to liquidity network effects and regulatory lock-in.

Assets like this have earned a bit of premium, or at least, the reasonable expectation that premium exit multiples can be assumed in valuation.

Our Final Take on JPX Group:

While it may not be the most exciting Japanese Financials investment in this environment given the premium already in the price, we see JPX Group as a solid way to earn market or potentially above-market returns, given strong revenue growth as trading volumes continue increasing long-term, the prospect of slight margin expansion, and a 3%+ dividend yield.

4. Ichiyoshi Securities ($8624.T) — Idea #1

The first pick we discuss is Ichiyoshi securities, a Tokyo-based retail broker with a $259M market cap trading at 11x trailing earnings. As the company has been transitioning toward a “stock-type” business model in recent years, the Japanese equivalent of a wealth management business in the U.S. or Canada, their recurring AUM fees have grown strongly in recent years to the point that they now cover 80.2% of total operating costs (up from 60% in 2023), approaching the structural 100% breakeven where incremental fee revenue flows through at near-pure margin.

Customer AUM has grown from ¥2.26Tn in 2023 to ¥2.6Tn in Q3 2025, driven by growth across all asset classes, including investment trusts at ¥860Bn, stocks at ¥1.27Tn, and the newest fund wrap at ¥420Bn in assets.

With its portfolio of custom offered fund wraps including the popular “Dream Collection”, Ichiyoshi is specifically cashing in on demographic wealth transfer in Japan as older retirees pass wealth to younger family members. Specifically, their ‘“Dre-Colle Pass” product which offers succession of funds to the next generation without realizing taxes.

“With regard to “Dream Collection,” a fund wrap account vehicle and a core of “Stock-Type Business Model” with its ten-year anniversary behind, it enjoys an increasing popularity among customers as a medium- to long-term investment vehicle for customers’ conservative assets. Its outstanding balance as of December 31, 2025, amounted to 421 billion yen, up 33.8%.

The Company started new services from 2024: namely, “Dre-Colle NISA” (which can be used as a growth investment frame for NISA investments) and “Dre-Colle Mini” (which is an automatic monthly subscription type).

By combining “Dre-Colle Pass” (which makes the succession of the fund to next generations possible without cashing in the fund) with the new two services, the Company can support its clients’ asset-formation for a medium- to long-term across generations.” — Q3 2025 Earnings Report

High net worth accounts have grown 12.5% since Q4 2024 while total accounts have decreased a very small amount, similar to other Japanese retail brokers.

Due to strong growth in revenues and 72% of costs through Q3 2025 being fixed, Ichiyoshi has demonstrated strong margin expansion as revenue has grown, a trend that is highly likely to continue as recurring AUM-based revenue continues to increase. Operating expenses increased just 9% through Q3 2025 primarily due to higher compensation.

As of the FY 2025 earnings pre-release, Ichiyoshi grew revenue 30.7% in 2025, and as you can see in the chart, operating income grew an astonishing 170% Y/Y driven by massive leverage around the fixed cost base.

Considering the recent earnings pre-release Ichiyoshi trades at 11x trailing earnings and as of Q3 earnings, 1.7x book value per share, earning a very strong TTM ROE of ~14.5% with negligible non-operating earnings from interest income and sales of investment securities — an excellent ROE that shows Ichiyoshi is deserving of a premium book value multiple.

Over the past year the company has significantly increased their biannual dividend as earnings have grown, from 17¥ per share in 2024, up to 30¥ in November 2025, and finally to 58¥ in March 2026, from a 48¥ regular dividend and an extra 10¥ each period to commemorate the company’s 75th anniversary. Given a targeted 50% payout ratio, if earnings sustain, the 48¥ biannual dividend would equal a 6.4% forward yield which we find highly attractive.

In a similar vein to other Japanese brokers, we think the trend of Japanese household participation in the equity and investment trust markets will only increase, and Ichiyoshi is well positioned to capture their share of that volume.

Given that 67% of TTM revenues are high-quality, relatively stable and recurring wealth management fees, and given a very strong ROE, we think Ichiyoshi deserves to trade for a good bit more than 11x trailing earnings. Assuming modest earnings growth and the 6%+ dividend, even a 14-15x multiple re-rate could generate fantastic shareholder returns from here.

5. Nomura TOPIX Banks ETF ($1615.T) — Idea #2

While other companies we have covered benefit primarily from higher benchmark interest rates and higher trading volumes, TOPIX banks benefit from higher Japanese Government Bond (JGB) yields, because they may reinvest maturing loan balances at higher yields to earn significantly wider spreads than they have historically earned.

Pictured below is the yield on 10-year JGBs, driven higher by increases in inflation and benchmark interest rates in Japan as well as the formal ending of Yield Curve Control (YCC) policy.

Combined with increasing capital return trends among Japan’s financial institutions driving increasing ROEs, warranting higher BVPS multiples, the TOPIX Banks have performed incredibly well over the past year and we think they are likely to continue to do so. We see the Nomura TOPIX Banks ETF ($1615.T) as an elegant way to express the trade, given relatively diversified exposure across 70+ banks. The fund’s 3.2% dividend yield covers the 0.22% expense ratio with plenty of extra yield.

Next we are covering a small cap Japanese retail broker trading at 8.4x TTM earnings and just 1.24x book value despite recently pre-releasing a 25% increase in revenue and a 50% increase in operating income. This broker sports a 14.4% (and improving) core ROE, with ambitious and capable management who have taken reforms very seriously, committing to a 6% dividend yield.

We dive deep into why we think this broker is simply far too cheap given the company’s strong growth, execution and quality of earnings.

Our Favorite Japanese Stock Added to the Portfolio

We are adding this stock to the Aurelion Index today.

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By 2024, US credit card debt had reached all-time highs and payment delinquencies were trending upward.

Buy Now, Pay Later boomed.

When consumers are financing even everyday purchases like a burrito, it speaks about the underlying health of the economy.

However, the situation was stabilizing. Fed rate cuts began to take effect and the AI boom was fueling optimism of productivity gains.

The new Republican administration was promising affordable homes, lower energy prices, and a growing job market. Consumer health and investor sentiment finally got a breath.

We can see in the data from the charts above and below that consumer health began to improve in late 2024.

2026: Consumer Health Weakens Again

The two factors that have turned the recovery into what we believe is a continued period of weaker consumer health are AI and oil.

AI was supposed to be the “fix”. Productivity gains were expected to lift wages, justify high stock market valuations, and ultimately put money back into consumers’ pockets. That thesis is now under serious pressure.

First, AI driven job loss is looming over white-collar work. While some AI-related job cuts are simply a way for companies to explain broader layoffs aimed at improving margins, the overall trend is clear.

The real damage shows up in decreasing entry-level hiring. Roles that used to absorb hundreds of thousands of new graduates, such as junior analysts, entry-level coders, and compliance work, are now being done by AI tools.

The chart below shows the result: the share of new graduates among new hires has fallen sharply at both large tech firms and startups.

Meanwhile, the stock market continues to price in strong productivity gains. The S&P 500 trades at a forward P/E of 20.9x, elevated versus its long-run average of 16.6x. This premium implies sustained earnings growth, which in turn depends on meaningful productivity gains from AI.

However, the evidence so far points to diminishing near-term returns on AI investment. Companies are committing significant capital to infrastructure, yet the economic payoff at the consumer level has yet to materialize.

And now, disruptions in the Strait of Hormuz are driving oil prices higher, with consumers facing a potential 25–30% increase in fuel costs at the pump.

Despite rate cuts, mortgage rates have stayed higher than expected.

Right now, rising oil prices and inflation concerns are offsetting the mechanical impact of prior Fed rate cuts. This has kept housing in both the US and the broader G7 markets largely unaffordable for most households.

The Setup

We do not expect a significant market crash, but we believe this creates a very attractive setup to invest in companies that benefit from a weakened consumer. Rising debt, weak housing affordability, AI-driven job anxiety, and now a ~$100/barrel oil shock are all compressing real disposable income.

Historically, pawn shops, discount retailers, thrift stores, and dollar stores outperform in these types of environments. Certain defensive names have already started to move. The question is which high-quality names remain undervalued before the market reclassifies them as defensives.

The company we are adding to the Aurelion Index is an under the radar consumer defensive that we believe should trade at a higher, more normalized multiple. It has not received the attention it deserves. It is practically forbidden. That is exactly what makes it attractive to us.

Table of Contents

1. Company Description

2. Investment Thesis

3. Canadian Market Outlook

4. Business Overview

5. The Profit Advantage

6. Strategic Analysis

7. Best-in-Class Value Positioning

8. Macro Environment

9. US Market Overview

10. Operational Margin Pressures

11. Mitigating Factors & Efficiency Gains

12. Valuation & Price-Targets

13. Key Risks

14. Our Final Take

1. Company Description

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Why nickel today? It is a critical mineral that the market has punished heavily since 2023, largely due to oversupply. Indonesia is the biggest producer, and they rely heavily on this industry. It generates massive revenue for them, so you cannot blame them for overproducing. However, the more they produce, the more it distorts the supply and demand balance.

As you can see in the chart below, this is directly reflected in the price. When production floods the market and exceeds demand, prices naturally fall.

This dynamic is exactly why we stayed on the sidelines. It was simply too risky, the trend was fading, and the outlook was ugly. So why look at it now?

The story has changed, and we like the new setup a lot. We believe the risk/reward profile has clearly improved. With Indonesia significantly cutting production in 2026, the overall outlook is suddenly much brighter.

The reason we are writing this primer is simple. Aside from a great piece by Macquarie Commodity Research, we have not seen any other real deep dives into the nickel market. We think that is a mistake because this commodity deserves far more attention than it currently receives. It has the potential to be the next big mineral. While the demand might not reach the sheer scale of copper, nickel absolutely should be discussed just as much as lithium.

Table of Contents

1. Nickel Market Overview

2. What Is Nickel?

3. The Process of Producing Nickel

4. Why the World Will Need More Nickel in the Coming Decade

5. Breaking Down the Nickel Producers

   5.1 PT Vale Indonesia

   5.2 Norilsk Nickel

6. Our Favorite Nickel Miners

7. Indonesia Dominates Global Nickel Supply

8. Don’t Forget the Philippines

9. Key Risks to Watch

10. Our Final Take on the Nickel Market

1. Nickel Market Overview

We always begin our primers with a market overview, as understanding the broader dynamics of the nickel market provides essential context before diving into the specific details and the investment thesis.

Here is exactly what is driving the market today:

The Demand for Nickel. The global shift toward green energy is creating massive demand for nickel. The metal is absolutely essential for manufacturing the batteries that power electric vehicles and store renewable energy. Because production is concentrated in just a few regions, securing a steady supply of nickel has become a major concern for global supply chains.

Macquarie expects total nickel demand to grow 5.4% this year, reaching 3.7M tonnes. Higher stainless steel production in China will drive the majority of this growth. European stainless steel production should also recover as new trade rules restrict outside imports. Energy storage systems will create additional demand, growing by 16,000 tonnes to reach a total of 47,000 tonnes in 2026. However, if nickel prices climb too high, battery makers could switch to cheaper alternatives like LFP or sodium ion chemistries.

The largest nickel-consuming countries driving this demand are China, Indonesia, EU member states, Japan, the USA, and South Korea.

The Hidden Value in Nickel Mining. Extracting nickel brings additional financial value through important byproducts. The mining process also yields copper and platinum group metals. Copper is crucial for a wide range of industrial uses and the broader electric grid. Platinum group metals, including platinum and palladium, are necessary for building automotive catalytic converters and advancing fuel cell technologies.

Indonesia Changes the Rules. National trade policies directly control the global nickel market. In 2020, Indonesia banned the export of unprocessed nickel ore. The government made this move to force companies to build smelting and refining facilities inside the country. The goal was to create a strong domestic industry, attract foreign investment, and secure a dominant position in the global electric vehicle battery supply chain.

The Global Market Impact. The Indonesian export ban caused immediate disruptions in global supply and pushed nickel prices higher. It also completely shifted international trade flows. China responded by pouring investment directly into Indonesian nickel processing facilities.

While these policies made Indonesia the central player in the market, they also introduced lasting uncertainties for global pricing and supply chains.

Indonesian Policy Uncertainty. Today, Indonesia dictates the global nickel market. They supply China, maintain a near monopoly on production, and control recent supply growth. This makes global prices highly sensitive to their internal regulations. The Indonesian government set the 2026 mining quota between 260M and 270M tonnes, but local smelters will actually require between 320M and 330M tonnes.

This significant shortfall forces processing plants to rely on imports from the Philippines, a dynamic that supports higher nickel prices. However, miners can request additional volume in July, meaning strict quota enforcement remains uncertain. Furthermore, the government delayed a planned nickel export tax, adding another layer of confusion to the policy outlook.

The Government Strategy. Indonesian authorities worry about how miners use the remaining nickel reserves. They believe too much nickel goes to stainless steel mills rather than the electric vehicle industry. To fix this and stop the oversupply, the government put new rules in place.

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We will not add Amazon (AMZN) to the Aurelion Index because it exceeds our $50M to $15bn market cap mandate. That said, we find the current setup highly attractive. We are confident enough in this thesis to buy shares in our personal accounts, something we rarely do for mega-caps, as we typically find more edge in small caps.

Introduction

We almost never analyze mega-cap companies, but today we choose to cover Amazon. You might wonder why we are stepping outside our usual focus.

We believe the setup is favorable for a move higher.

We almost never look at the mega-cap giants, but we make an exception for Amazon today. The current setup looks too good. We believe the market mispriced the stock. Right now, it trades at 10.5x estimated earnings, which sits 44% below its 10-Y average of 18.6x. High-quality returns often happen when a market leader faces such a huge disconnect from its historical value.

Valuation Gap Extends to Retail: AMZN Below Walmart’s Average

We view this as a rare chance to get ahead. For the first time in a long time, Amazon appears significantly cheaper than Walmart. While WMT trades at 20.4x, AMZN sits at just 10.5x.

This rarely happens for a company that dominates tech and cloud computing. Instead of the typical high-growth premium, the market treats Amazon like it has less value than a standard grocery chain. We expect that gap to close as the company hits its stride and proves its earning power.

When you compare Amazon to its internet peers, the valuation looks even more disconnected. At 11.0x projected 2026 EBITDA, the stock trades at a discount to nearly everyone in the group. Companies like Uber, Airbnb, and Google all carry higher multiples. Even DoorDash trades at 18.4x, which is nearly double the valuation of AMZN. This price tells us the market expects a permanent slowdown, but our work suggests a recovery is coming. This low entry point should provide a safety net.

AWS: The Engine of Growth & Profit

AWS remains the most important segment for Amazon.

While the cloud business makes up 18% of the $717B in total sales, we estimate it provides 57% of the company’s operating income. In 2025, AWS generated $45.6B in operating profit with a 35% margin. Revenue for the segment grew 20% for the full year, with growth reaching 24% in the final quarter. As the dominant global cloud provider with a 30% market share, AWS serves as a strategic piece of the world’s AI infrastructure.

Resilience in the Retail Business

Amazon’s position in retail is still strengthening. We estimate the gap between it and competitors is widening. It now accounts for over 40% of the US eCommerce market. This massive scale lets them keep inventory closer to customers than any other player. Most of this logistics advantage now runs on autopilot, with robotics handling about 75% of global delivery volume.

This creates a cycle where higher volumes lead to faster deliveries and lower costs. These improvements naturally attract more shoppers. As they integrate more robots into retail, we project that efficiency will continue to climb.

A Familiar Setup: GOOGL Then, AMZN Now

GOOGL sentiment bottomed in 1Q25 amid “AI loser” concerns and search disruption risks, then re-rated as Gemini progress validated its AI strategy, now trading well above its 10-year average.

We see a similar sentiment and valuation inflection emerging for AMZN.

Amazon’s Moat: Fading or Getting Stronger?

1. Retail Growth Dynamics

Amazon’s dominance in retail is widening rather than merely holding steady. While many traditional moats are being challenged by AI, Amazon is using technology to distance itself from the competition. With more than 40% of the US eCommerce market, the company has reached a level of scale that allows it to position inventory closer to consumers than any other player.

This logistics advantage is now heavily automated, with robotics playing a role in ~75% of global delivery volume. This creates a self reinforcing cycle where higher volumes lead to faster deliveries and lower costs, which in turn attract more customers. As robotics continue to be integrated into processes across the retail operations side, efficiency can continue to increase.

2. Capital Efficiency & ROIC

Amazon looks like a cash hungry machine because retail and AWS cost so much to build. However, the company generated a surprisingly high return on invested capital of 15% in 2025. This proves that the heavy spending on logistics and data centers actually pays off.

Incremental AWS Revenue & Capex

Oppenheimer expects AWS revenue to hit $194.8B by 2027.

By that time, AWS will likely account for 84% of total company spending. Between 2024 and 2027, Oppenheimer estimates that $104.1B in new revenue will outpace $100.9B in new spending. This points to an efficient investment cycle with strong returns. In retail, the setup allows suppliers to effectively fund growth. When revenue grows faster than spending, the infrastructure cycle is maturing and becoming more profitable.

3. The Valuation Anomaly

We find the most compelling part of the thesis in the current valuation disconnect. Applying the trading multiples of physical retailers like Walmart (43.5x NTM P/E) or Costco (48.4x NTM P/E) to Amazon’s retail and advertising segments implies the market assigns little to no value to AWS.

By that logic, anyone buying the stock effectively gets the world’s leading cloud platform and a $68.6B advertising business almost for free.

4. The Data Advantage

Amazon’s competitive edge is further solidified by a data advantage that physical retailers cannot replicate. Beyond knowing the purchase history of every customer, the platform tracks exactly what products were considered and then passed over. This first party data is now being extended beyond Amazon’s own properties through its DSP, allowing advertisers to target consumers across the open web with surgical precision.

How We See It

We view this as a massive dislocation in the market. The valuation gap looks extreme with the stock trading at 10.5x NTM EV/EBITDA.

This sits 43% below the 10-Y average and far below Walmart. While Walmart owns a massive global footprint and continues to build its own delivery networks, the retailer lacks an AWS equivalent. We believe this discount makes no sense. This offers an exceptional entry point for a business in the early stages of an AWS re-acceleration cycle as AI usage grows.

We think the market is offering an opportunity here.

Favorable Set-up for an AWS Re-acceleration Cycle

We believe the setup for AWS looks favorable as the segment enters a clear reacceleration cycle. After hitting a low of 12% growth in mid-2023, the business turned a corner. The trend climbed steadily upward, with growth rates returning to the 20% level as 2025 closed out. This indicates the slowdown has ended and the growth engine is running again.

The backlog growth signals a massive revenue catch-up. The backlog reached $244B at the end of 2025, representing 38% growth. Jefferies projects a surge to $344B in early 2026, especially as major partnerships like OpenAI add to the pile. This pipeline provides a long runway for future revenue.

The profit story appears equally compelling. Operating margins recovered sharply from the lows of early 2023 when they dipped to around 24%.

We saw a strong bounce back with margins hitting record highs of 40% in early 2025. By the end of the year, they achieved a healthy 35%. This level sits comfortably above the long-term average of 32%.

AWS Margin Expands to 35%

Leadership remains confident in AI demand. The CEO notes capital spending follows workloads growing faster than expected. The CFO highlights that margins improved by 0.4% YoY. We believe these factors confirm that the investments in infrastructure already generate strong returns.

AWS Revenue Upside

When we look at Morgan Stanley’s revenue forecast, the estimates imply a yield on Capex that is ~50% below the long term average. This points to meaningful upside surprise potential, and we share that view.

AWS Yield on Capex Below Historical Average

Morgan Stanley’s current model assumes that for every dollar of Capex, the incremental revenue will be far lower than historical trends. Specifically, they project yields between $0.21 and $0.42. This is significantly lower than the long term average, which sits between $0.57 and $0.95. If AWS can deliver efficiency even partially closer to its historical standard, the actual revenue growth will likely exceed Morgan Stanley’s conservative estimates.

Quantifying the Upside of an AWS Separation

Scotia highlights the potential gains from spinning off AWS into its own company. A standalone AWS would likely trade at a higher price than it currently does as part of the consolidated group.

This premium comes from better investor clarity and the removal of retail spending from the valuation. More importantly, it allows AWS to sign cloud partnerships with retail competitors who currently avoid the platform because of conflicts of interest.

The retail business also benefits from a cleaner story. Management becomes directly accountable for how they spend money, and an independent board ensures the focus remains entirely on retail execution.

Historical data from other large-cap tech spinoffs suggests this move could lead to 15-30% in extra returns over the first 24 months. By simply removing the conglomerate discount, the market could surface several hundred billion dollars in total value.

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That brings us to today’s subject: the situation in Iran and its direct implications for the chemical and fertilizer markets.

Let’s start with chemical prices. They have jumped since the Strait of Hormuz was blocked in March and are still climbing as we head into April.

We do not expect this trend to slow down soon. Since key production sites are now being targeted, the squeeze on global supply will only get tighter.

Table of Contents

1. Hormuz Reopening: Timing the Ceasefire

   1.1 Physical Oil & Market Narrative

   1.2 The Strategic Value of the Strait of Hormuz

2. What Industry Leaders Are Saying

   2.1 Dow CEO Jim Fitterling: The 275-Day Unwind

   2.2 Chevron CEO Mike Wirth: Supply on the Ground

   2.3 Growmark on Fertilizer & Food Security

3. Chemical Market and the Iran War Impact

   3.1 Our View on the Petrochemical Market

4. Fertilizer Market and the Iran War Impact

   4.1 Our View on the Phosphate Market

5. Tracking Iran’s Discounted Supply

6. 2 New Favorite Chemical & Fertilizer Stocks Added to the Aurelion Index

   6.1 The Global Leader in Industrial Chemicals

   6.2 A Vertically Integrated Phosphate Pure Play

7. Our Final Take on the Opportunity

1. Hormuz Reopening: Timing the Ceasefire

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Plutus’ official website explains the process very well: www.runplutus.com

Plutus is, in our view, the only platform that allows investors to seamlessly replicate research driven portfolios in their own brokerage account. The execution is reliable, and the team has clearly thought about every part of the experience.

The Aurelion Index currently ranks #2 year-to-date out of 91 portfolios and baskets available on the platform.

We are one of only a few research firms selected by Plutus, joining established names like Citrini Research and Le Shrub.

How It Works

• Simple connection through Interactive Brokers

• $40K minimum investment, set by Plutus

• Simple fee: just a 1% annual AUM fee charged by Plutus, with no performance fee.

Aurelion Research acts 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.

How We Will Run the Strategy

The Aurelion team will continue executing the same mandate that has driven the portfolio’s performance to date: identifying undercovered companies across any industry at moments when their risk/reward profiles are most compelling. Position weights will shift dynamically to reflect our current conviction on each name. We are also targeting a slightly larger portfolio than our current 13 holdings, with several new initiations already underway.

Upcoming Strategies and Baskets

We plan to expand our offering on Plutus with strategies that reflect our core areas of expertise:

1. A pure global commodity-focused portfolio, leveraging our coverage of energy, shipping, mining, and chemicals.

2. A defensive portfolio designed for long-term capital appreciation with lower volatility.

3. A tanker basket, capturing one of the niches where we believe we have a clear research edge.

Access the Aurelion Index on Plutus here

Please send us any questions at contact@aurelionresearch.com

The Aurelion Team

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Disclaimer

Aurelion Research is an independent equity research publisher. All content is provided for informational and educational purposes only and does not constitute investment advice, an offer, or a solicitation to buy, sell, or hold any security. Nothing published by Aurelion Research should be relied upon as a basis for any investment decision.

Aurelion Research is not registered with the AMF, SEC, or any other securities regulator and does not provide personalized investment advice or portfolio management services. Readers should conduct their own independent research and consult qualified financial professionals before making any investment decisions.

Information presented is based on public sources believed to be reliable at the time of publication but is not guaranteed for accuracy or completeness. Aurelion Research undertakes no obligation to update any information, opinions, analyses, or performance data, even if such information becomes outdated or inaccurate.

Past performance, including the performance of the Aurelion Index, is not indicative of future results. The Aurelion Index is a model portfolio presented for research transparency purposes only and is not an investable fund. Returns do not reflect fees, transaction costs, or taxes.

Aurelion Research, its affiliates, and its analysts may hold, may not hold, or may change positions in securities discussed at any time without notice. Content is intended solely for use in jurisdictions where such publication is legally permitted.

Aurelion Research is not a registered investment advisor and does not provide personalized investment advice. Plutus, operated by Namsoft Advisors, LLC, is the SEC-registered investment advisor responsible for managing client accounts on its platform. Aurelion Research acts 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. All decisions regarding the suitability and implementation of the Aurelion Index for any specific client are made exclusively by Plutus in its capacity as registered investment advisor. Past performance is not indicative of future results, and investing involves risk, including the possible loss of principal.

© 2026 Aurelion Research Inc.

We originally set out to write a broader defense primer, but drones kept swallowing every section we wrote. At some point it became obvious they deserved their own report, so that is what we built.

Between the Israel-Iran escalation and the ongoing war in Ukraine, NATO and the U.S. are buying these systems at an unprecedented rate. They constantly need to replenish their stocks and upgrade their fleets to keep up with the pace of technology. These systems are now treated as consumables instead of long-term assets, and that changes the demand profile entirely.

The real task now is finding the best companies to own to benefit from this cycle. That is exactly what we are doing today. But before getting into specific names, let us look at the broader thematic setup, which, quite frankly, looks fantastic.

Beyond the investment case, drones represent the first mass deployment of physical AI, and understanding how this technology is evolving tells you a great deal about where autonomous systems are headed across every industry.

As you can see in the chart above, the global drone market has roughly doubled over a remarkably short period. Total industry revenue surged from $22.5bn in 2020 to $42.0bn in 2025, and it is firmly projected to reach $46.5bn by the end of 2026. Safe to say, this looks like an exceptionally good place to be positioned for the future.

Table of Contents

1. Why Drones, Why Now?

   1.1 The Drone Industry Is Growing Fast

   1.2 The Shift Toward Autonomous Defense

2. Drones: A $400B Market Opportunity

3. Understanding the Industry

   3.1 Types of Drones Available Today

4. Our Top Takeaways

5. Market Overview & Technology Dynamics

   5.1 Market Overview

   5.2 Global Market Outlook

   5.3 Public Defense Spending & Contract Trends

   5.4 Private Capital & Funding Momentum

6. Our Top Picks

7. Favourable Regulatory Frameworks

8. Our Final Take

1. Why Drones, Why Now?

The backdrop speaks for itself. The world has more active conflicts today than it did five years ago, and drones are at the center of most of them. The war between Ukraine and Russia is the most closely watched, a conflict that has dragged on for years with no real end in sight and has become the largest real-world test of drone warfare we have ever seen. But demand goes well beyond that. Israel, Iran, and NATO members are all rushing to build up their inventories. Demand is strong and coming from everywhere.

The question we always ask ourselves when a theme starts getting attention is whether it actually has legs, or whether it is just momentum that fades once the headlines move on. For drones, we think the answer is pretty clear.

The fundamental appeal is simple: a drone does not come with a body bag. When one gets shot down, nobody dies. That changes everything about how willing governments are to use them, how often, at what scale, and how the population perceives attacks on other nations.

And on top of that, they keep getting cheaper and better every year. Countries are fundamentally rethinking how they defend themselves and project power, and drones are becoming a core part of that answer.

We think we are still early in that story.

1.1 The Drone Industry Is Growing Fast

The drone industry is expanding fast, driven by AI capabilities and geopolitical necessity. Modern autonomous drones eliminate the need for onboard pilots, removing casualty risk and keeping personnel off the front line. They operate as networked, intelligent systems that require minimal human input to execute missions.

No matter the source, the drone market is expected to grow rapidly. Over the next decade, Oppenheimer expects total drone hardware, software, and services to grow tenfold, from $45B to $400B globally. Spending splits roughly evenly between multi-rotor systems (hover and manoeuvre) and fixed-wing craft (long distance coverage). Both categories are expanding.

Defense accounts for around 75% of total spending. Global military expenditures currently sit around $3.1T, up 50% over the last five years and on track to double within the next decade. Governments are actively shifting budget away from legacy hardware toward autonomous systems. If that pace holds, the drone market could reach $400B faster than consensus expects.

This growth is driven by three factors:

1. Evolving regulatory environment: Standardized frameworks for beyond-visual-line-of-sight (BVLOS) operations expand drone accessibility and enable remote operations across jurisdictions.

2. Commercial & industrial momentum: New applications including logistics, infrastructure inspection, and agriculture, combined with AI enabled automation, are accelerating adoption in private sectors.

3. Defense priorities: Global rearmament trends and heightened focus on sovereign defense capabilities are driving significant investment in drone technologies.

1.2 The Shift Toward Autonomous Defense

We are currently witnessing a massive shift toward autonomous defense, which is exactly why Oppenheimer expects military spending on these systems to eventually hit 10% of total defense budgets. That is huge for drones. They have become the fastest growing part of physical AI because they are so effective for scouting plus strike missions. Controlling the airspace is now essential for controlling the battlefield.

We see this clearly in Ukraine. Beyond the front lines, governments are rushing to support this tech because owning the drone supply chain has become a matter of national survival. This shift is part of a larger geopolitical race involving satellites, energy, plus AI. We believe this combination will disrupt the traditional defense industry. Future conflicts will likely move toward machine to machine warfare.

2. Drones: A $400B Market Opportunity

The model from Oppenheimer shows we are at a major turning point.

The real story here is the lower skies segment, which alone is expected to grow from $22B in 2026 to nearly $300B by 2035. That means this single category will make up about 75% of the entire industry plus represents nearly 20x growth on its own. Governments are reallocating budgets away from traditional hardware toward autonomous systems. If this pace continues, the drone market could reach those $400B targets far sooner than most expect.

Drone TAM Model ($bn)

The move toward drones marks a fundamental change in how the world works. It is the first time we are seeing physical AI, which are systems that can sense plus act in the real world, deployed on a massive scale. This is a foundational shift on par with the arrival of the internet or electricity.

As autonomy moves into the physical domain, it kicks off a decades long investment cycle focused on real world automation. In the short term, whoever perfects these systems first will likely hold the advantage in Ukraine. Once that technology is proven on the battlefield, we think it will quickly move into self driving transport plus other commercial industries.

Drones Are Expanding Into Industrial & Commercial Applications

Nations are now racing to build their own drone industries by bringing manufacturing back home plus sourcing materials from allies.

They are also moving away from slow engineering plus adopting a faster, tech focused approach. As costs drop plus rules change, drones will become practical for many commercial jobs. Over the long term, these systems will likely form a permanent infrastructure layer in our skies. This creates a massive sensing network that changes how we collect plus use data.

3. Understanding the Industry

Drones have a longer history than most people realize.

The concept traces back to 1849 when Austrian forces deployed explosive laden balloons in warfare. World War I saw early radio controlled aircraft emerge as precursors to modern UAVs. By World War II, drones were used extensively for reconnaissance and target practice. The Cold War accelerated technological development. The term "drone" itself became popular in the 1930s, inspired by the British DH.82B Queen Bee.

In recent decades, drones transitioned from purely military tools to commercial and recreational devices, expanding into photography, delivery, agriculture, and emergency response. We believe this diversification of use cases has grown the total addressable market significantly, and the expansion is far from complete. As regulatory frameworks mature and AI capabilities advance, new applications will continue to emerge, further expanding TAM across both commercial and defense segments.

Today’s drones serve multiple purposes. Military reconnaissance and targeted strikes remain core applications, but civilian uses now dominate volume: filmmaking, infrastructure inspection, environmental monitoring.

As you’d expect, AI and GPS integration have made drones smarter and more autonomous. Future trends point toward urban air mobility and autonomous delivery systems. The technology is only getting sharper. The industry has matured rapidly from experimental military technology into a multi-billion-dollar commercial sector. Regulatory frameworks and AI integration continue to shape the next frontier in urban mobility and autonomous operations.

3.1 Types of Drones Available Today

Drones are classified by design, function, size, weight, purpose, operational characteristics, autonomy level, and regulatory standards.