We had been waiting for the right moment.

Today, that changes, as we believe the country is (finally) reaching a turning point. While this has nothing to do with our timing, yesterday was Canada’s National Day. And what better way to mark it than with a thematic equity basket?

After being the country with the worst inflation in the G7, a housing crisis, and shrinking purchasing power for most citizens, investor expectations had fallen to the floor. Yet Canada is becoming an increasingly compelling place for capital markets… and Carney, our new Prime Minister, is changing things.

The three following charts show why the country’s economy has underperformed other G7 countries over the past decade:

First, since 2020, Canada’s GDP growth has been the lowest, and in fact declined before Carney came in. Unlike the United States, it did not recover quickly.

Second, Canada experienced the largest change in general government gross debt as a share of GDP, at 25%, and that is never something economists like to see…

Finally, Canadian inflation for the selected items shown below has been well above the 2% annual target, significantly affecting consumers.

We think sentiment toward Canada is at the bottom. While clear evidence and indications of this are still relatively weak for now, our experience suggests this could be the starting point for more and more positive policies to come.

In our view, when it comes to expressing a bullish view on the Canadian market, buying the broad index is very unproductive. More on that below.

Our thematic basket includes only the “asymmetric” trends across AI energy demand, renewed defence spending, materials, and much more.

While you can have a bullish view on Canada, you need to be allocated to the few specific sectors and companies that will actually see tangible benefits.

Table of Contents

1. The State of the Canadian Market

2. Why We Are Bullish on Canada

3. Growth Driver 1: Canada’s C$470 billion Defence Plan

4. Growth Driver 2: Importance of Canadian Pension Funds

5. Growth Driver 3: AI’s Power Problem Is Canada’s Opportunity

6. The State of the Canadian Economy

7. In Conversation

   7.1 CIO of a Multi-Billion Dollar Canadian Fund

   7.2 Buy-Side Financials Analyst

   7.3 Canadian Portfolio Strategist

   7.4 Banking Risk Analyst

8. Canadian Equity Basket

9. Key Risks

10. Our Final Take on Canada

1. The State of the Canadian Market

Currently, if investors look at Canada’s benchmark index, the S&P/TSX Composite Index, they might think they’ve already missed the move.

But there is a catch that we intend to exploit.

Based on our discussions with market participants, most investors believe the recent surge has been driven almost entirely by rising gold and silver prices, and that is true. However, this is precisely where we believe the opportunity lies.

The market believes the TSX is overvalued, but that is far from the case.

In fact, the remaining upside lies in companies outside of commodities. Buying the broader index also means taking on heavy, unpredictable exposure to commodity markets, which we view as a poor way to express this theme.

That is why we have built an equity basket designed to benefit from improving country dynamics. The Canadian Equity Basket is composed of 20 high-quality companies we have been following for the past five years, and in some cases with management teams we have met, each also trading at attractive standalone levels on a company-specific basis.

2. Why We Are Bullish on Canada

We believe that under the new government (Carney), a range of positive developments is emerging. From improved investment policies and a diminishing impact from U.S. tariffs, to increased defence spending and easing inflation.

These factors have only just begun to have a modest effect on the broader index.

We are seeing a new Canadian market, one with strong momentum and one that is increasingly viewed by investors as a relatively safe place to allocate capital.

This may be a controversial view, but when it comes to banks and financial institutions, we believe Canada deserves far more credit than it receives. Canadian banks are smaller than their U.S. peers, yet they have historically been more stable. The system is highly concentrated, tightly regulated, and has proven resilient across multiple economic cycles.

That is why we believe the “too big to fail” concept arguably applies even more to Canada than to the US. Canada’s major banks have consistently maintained strong balance sheets, durable profitability, and steady growth, making the Canadian financial system one of the most stable globally.

Beyond this, we also see additional tailwinds emerging. Higher pension fund allocations to domestic equities could become a meaningful source of demand for Canadian assets. At the same time, stronger defence spending would benefit industry and manufacturing. We also see rising power demand from data centers and AI-related infrastructure, which should support Canadian utilities.

3. Growth Driver 1: Canada’s C$470 billion Defence Plan

Canada’s federal Defence Industrial Strategy (DIS) announced a plan to invest C$470B in total defence-related spending over the next decade, including C$180B in procurement and C$290B in infrastructure.

How Defence Spending Is Increasing

This represents C$47B per year in new investment, with Canada also expecting a C$125B boost in economic activity and the creation of 125,000 jobs by 2035.

This is a major change in policy. We are seeing a country and government investing in the growth of its own economy (for once) while also moving toward greater military independence. This is a meaningful development.

Canada has only recently reached NATO’s 2% of GDP defence spending benchmark. Moving toward the 5% target by 2035 would imply about 11% annual growth in defence spending (which would be a lot) over the coming years.

The policy goals are ambitious.

But what are the Canadian government’s main targets?

1. 70% domestic share of defence procurement

2. 50% increase in defence exports

3. 85% increase in defence-related R&D

4. More than 240% growth in industry revenues

We believe the policy direction under the Carney government points to an early-stage comeback, with a clear push to expand Canada’s domestic defence sector.

The setup is improving. Rising geopolitical tensions, increased Arctic activity, cyber risk, and the growing use of AI in military systems are all driving higher defence spending across NATO. In Canada, this is being used both to improve security and to support domestic industry, with effects across manufacturing, technology, and critical resources.

For example, Canada is working to break supply chain bottlenecks and improve trade flows. Carney’s goal is to double non-US exports by 2035. This will require infrastructure expansion, regulatory changes, and removing process bottlenecks, but broader reforms are already starting to take shape.

4. Growth Driver 2: Importance of Canadian Pension Funds

Canada is far above its weight in the pension world.

Canadian pension fund assets rank third globally in size and second only to Switzerland relative to GDP, at roughly 165% of the country’s economy.

That’s a system large enough to move markets.

Much of this comes down to structure. Canada’s largest funds, known as the Maple Eight, collectively control roughly CA$2.7 trillion in assets and run what’s called the “Canadian model”: direct investment, managed in-house instead of outsourced. That gives them the flexibility to write large checks directly into infrastructure, private equity, and real assets, both at home and abroad.

Canada’s pension pool is so large because saving into it is not optional. Nearly every working Canadian contributes to the CPP at a mandatory 11.9% combined rate, a figure that has climbed steadily since it started at just 3.6% in 1966.

All of that money is invested in-house by professional teams instead of being handed to external managers, which keeps costs low and allows policy to influence where capital is allocated. The result is one of the best-funded pension systems in the world relative to the size of the economy, and it means Canada has an unusually large amount of patient, long-term capital available to deploy.

Employee Compensation Matters

Canada’s pension compensation for finance professionals is high and sometimes higher than the private sector. For example, in addition to better working hours, an entry-level analyst will make the same (~$160K) working at a leading private equity firm as at a pension’s private equity fund.

At pensions, in “front office” roles such as hedge funds, infrastructure, real estate, trading, etc., a 30–35-year-old vice president will make $500K+ while working 9 to 5. This is basically unseen in finance (and in the rest of the corporate world). That data comes from some of our friends in those exact positions for 2025.

We have seen several U.S. or European leading managers (Goldman, BlackRock, etc.) get recruited into leadership positions in Canadian pensions.

This system has led Canada’s pensions to actively pick single stocks, allocate by country, etc. This is extremely rare for pensions. The summary is that Canada’s pension compensation, reputation, and work-life balance attract top-tier talent across the world, which has led to a dominant system, large enough that its investments significantly move capital flows in the country.

A Massive Negative Driver in the Last Decade

The Foreign Property Rule kept money in Canada until 2005.

From 1971, pension funds were legally required to hold 90% of assets domestically. That limit was gradually loosened, dropping to 80% in the 1990s and 70% around 2000-2001, before being eliminated entirely in 2005.

The Canadian model shifted the entire strategy, worsening the geography shift. Rather than sitting in public equities at all, Canada’s largest funds moved heavily into private equity, infrastructure, and real assets, managed in-house and increasingly deployed globally. Public equities, especially Canadian, became a smaller slice of these portfolios as private markets took a growing share.

Canada’s Pension Plan, one of Canada’s leading pension funds, shows this clearly.

A Changing Tone

Federal and provincial governments are actively pushing large Canadian pension funds to redirect more of their massive capital pools back into Canada. Driven by rising trade barriers (U.S., mainly), and a desire to boost domestic productivity, the push involves a mix of policy shifts and voluntary commitments.

Mark Carney Unveils Historic $115B Strategy at Canada–UAE Investment Summit

Mark Carney’s (Prime Minister) “Canada Strong” approach is focused on improving Canada’s weak productivity and investment cycle by attracting more long-term capital into domestic growth opportunities.

A key part of the context is that Canadian pension funds manage large pools of capital but allocate a relatively small share to Canadian public equities, preferring deeper and more liquid foreign markets like the U.S.

For now (while it could eventually become), the policy idea is not to force a change in allocation, but to make Canadian listed companies and domestic investment opportunities more attractive on a risk-adjusted basis.

That means improving conditions for capital formation, scaling domestic firms, and increasing the number of large, investable Canadian public companies through better economic policy and market development.

If successful, this would gradually increase the weight of Canadian public equities in pension portfolios. As domestic markets become deeper, more liquid, and more competitive globally, pension funds would naturally rebalance toward Canada without breaching their diversification mandates. We believe the shift would be driven by better opportunities instead of regulatory pressure.

Especially over the past year, during conferences in Montreal and Toronto, our conversations and hearing from key allocators in Canada have consistently highlighted a common theme: investing more domestically.

What stands out is that this is not just political rhetoric.

A portfolio manager at a pension fund telling us directly that they plan to increase allocations to Canada over the coming years carries far more credibility than policy discussions alone, and suggests a higher likelihood that these commitments actually translate into action.

Quantifying the Potential Impact (estimates)

If pensions moved allocation from 4% to 8%, that’s roughly $180B of fresh buying pressure entering, about a 5% increase in the total pool of capital chasing Canadian equities. On its own, that number is not dramatic.

But markets don’t move in a straight line with flows, a few percentage points of new demand can trigger a much bigger reaction:

Mainly, it could attract outside capital. Global asset allocators watch domestic flows as a signal. If Canada’s own pension funds, widely respected as sophisticated, patient capital, start buying back into the local market, that’s a credibility signal to foreign institutions who’ve been underweight Canada for years.

It could pull in passive money automatically. Index funds tracking MSCI / FTSE allocate to countries based on market size and performance, not discretion or preference. If pension buying pushes Canadian stock prices up, Canada becomes a bigger slice of global indexes, and passive funds have to buy more just to keep pace. The buying happens automatically.

It could disproportionately help smaller, less liquid names. The TSX is dominated by a handful of giant banks and energy companies. New buying doesn’t spread evenly. Mid/small-cap names, chronically underfollowed and thinly traded, could see an outsized price reaction from even modest new demand. It doesn’t take much volume to move a stock nobody is paying attention to.

It could lower the cost of capital for Canadian companies. In addition, with Carney’s measure, higher valuations and more buyers mean companies can raise equity more cheaply, and fund growth. They would have less reason to list or relocate abroad in search of deeper capital pools, a complaint that’s driven several Canadian companies to the US in recent years.

It could become self-reinforcing. Higher prices and stronger performance attract more attention from global managers and media, which brings in more capital, which supports prices further. Flow-driven markets can build real momentum once they get going, even from a starting point that looks small on paper. A perfect example is the Japanese market since the start of 2025.

5. Growth Driver 3: AI’s Power Problem Is Canada’s Opportunity

AI is turning into an electricity story in Canada.

Data centers need enormous amounts of power, running around the clock, and the world doesn’t have enough of it. That’s creating a new kind of constraint, and Canada is one of the best-positioned countries to supply it.

Canada has cheap hydro power, abundant natural gas, and the highest-grade uranium deposits on the planet, roughly 100 times richer than the global average. Most countries have one or two of these advantages. Canada has all three.

This is already showing up in how the market is behaving. Tech companies that used to only care about chips and cloud contracts are now negotiating directly with power producers and uranium suppliers, locking in electricity years in advance because they know supply will be tight. Power is becoming a bottleneck for AI growth, and whoever controls reliable supply has real pricing power.

Data Center Buildout

Alberta is at the center of it. Active data centers in the province already total 1.6 gigawatts (GW) of capacity, but planned projects would increase that to 13.2 GW, about eight times more. As of early 2026, more than 30 AI data center projects were waiting for approval in the province.

Alberta has made itself the destination of choice by offering cheap natural gas power, a deregulated electricity market, and fast-tracked permitting, going as far as launching a dedicated “concierge team” to help investors get projects moving.

According to Mordor Intelligence, the Canadian data center market was valued at around $11.5B in 2025 and is expected to reach nearly $25B by 2031, a compound annual growth rate of about 14%. We see this as conservative. It includes the whole data center industry, not just AI-related projects, and forecasts like this are often revised higher as new hyperscale projects are announced.

Just for example the Alberta minister aims for C$100B.

Not every province is participating equally. Quebec, Ontario, and British Columbia have all started restricting new grid connections because they simply can’t keep up with demand, which is part of why so much of the new construction has shifted to Alberta instead. The AI buildout, in other words, is chasing whatever power is available fastest, not just the cleanest or cheapest.

We have seen that the usage of data center electricity is currently drawn from available sources. That shows that costs and political backlash are much lower because it does not raise electricity prices for the whole region yet.

For a market that’s spent the last two decades being defined by banks and energy exporters, having a genuine infrastructure growth story tied to the most talked-about theme in global markets is a real shift.

How We Think About Our Equity Basket

A year ago, Canadian utility names were seen as boring, defensive dividend payers. That’s changing. Companies that generate or distribute electricity are now in the middle of one of the biggest capital spending waves in history, as AI infrastructure gets built out globally and needs somewhere to plug in.

Names in our basket tied to power generation, utilities, and uranium are becoming growth exposure to AI, just approached from the supply side instead of the software side. That’s a meaningfully different investment case than the one most investors are still pricing in, and it’s a big part of why we think parts of this market are still undervalued relative to where the puck is going.

What’s great about them is that you get a mix of dividend income and potential upside from a thematic trend playing out in the stock price.

6. The State of the Canadian Economy

Sentiment toward Canadian equities has shifted from cautious optimism in late 2025 to a more volatility-aware, defensive tone in mid-2026, even as capital continues to flow into the asset class. To put this in context, we believe it helps to look back at how the TSX has performed since before COVID.

Since Carney won the election and became Prime Minister, and as we entered the year after significant value appreciation in 2025, large asset manager ClearBridge noted that it had adopted a more defensive strategy, even while expecting Canadian businesses to benefit from pro-growth government policies.

On that same note, the federal government maintained a positive tone in its most recent Spring fiscal update, noting that improved sentiment is supported by the country’s relative tariff advantage, federal incentives, and increased investment in infrastructure. This optimism, however, has been tested by macro-induced shocks.

A mining sector capital flows report from March 2026 described stagflation, energy fragility, and liquidity risks tied to Middle East macro exposure.

The report also noted that this environment drove retail and institutional capital out of technology and AI names into real assets like gold and critical minerals, where Canada is structurally overweight.

In June, a market outlook piece showed the prevailing mood as cautious optimism, with opportunity mixed with volatility due to Canada’s concentration in energy, mining, and dividend payers rather than US-like megacap tech.

Despite volatility, there has been record-breaking demand for Canadian equity products. Canadian ETFs saw more than $20B in capital inflows, more than double the average 2025 monthly flow, according to NBC Data.

This momentum persisted through the first half of 2026, with assets in Canadian ETFs reaching over $700 billion and year-to-date inflows exceeding $75B.

This is reinforced by capital formation trends. The Spring Economic Update shows Canada leads the G7 in per capita investment inflows, and the 2025 Kearney FDI Confidence Index ranks Canada second among 25 markets.

7. In Conversation:

This section summarizes our discussions with analysts, portfolio managers, and industry experts, and the key insights we took away on current market sentiment.

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We have seen several major changes in global markets:

• Oil prices have fallen sharply, from over $100 to below $75.

• Gold and silver have also declined significantly.

• The Strait of Hormuz has partially reopened.

• The shipping market has been fading (for now).

The ceasefire is now (somewhat) in place.

We picked up a lot of good insights from our discussion with Svein Moxnes Harfjeld, CEO of DHT, arguably a legend in the tanker industry. He scaled DHT from a small tanker leasing firm into a leading crude tanker operator.

In shipping, you have to deal with everything happening at the same time.

Macro factors, geopolitical conflicts, risk premiums, catalysts, and politics all interact and can move the market in either direction. To navigate it successfully and avoid getting burned, we believe it is essential to analyze and continuously monitor the small details that, collectively, can shift this massive market.

These dynamics ultimately affect our daily lives because almost everything we consume is transported by a container ship, bulk carrier, or tanker.

‘‘One thing to remember in shipping: you should never fall in love with a ship.’’

Table of Contents

1. The Current Situation in the Strait of Hormuz

2. Understanding Shipping Market Dynamics

3. In Conversation: CEO of DHT Holdings Inc

   3.1 The Situation in the Strait of Hormuz

   3.2 VLCC Insurance Rates

   3.3 What the Market Is Missing About Tankers

   3.4 Tanker Owner Behavior: Today vs. Past Bull Cycles

   3.5 How to Spot the End of the Tanker Cycle

4. In Conversation: Shipping Analysts & Industry Experts

5. Our Favorite Investment Ideas Across Shipping

6. What Could Go Wrong?

7. Our Outlook for the Shipping Market

1. Current Situation in the Strait of Hormuz

Every day, new headlines report how many ships have transited The Strait or how many tankers have loaded cargo and are now heading toward their destinations.

The problem is that shipping data is fundamentally different from most financial or commodity data. If you look at oil inventories, production, or futures prices on a Bloomberg Terminal, you can generally assume the data is highly accurate, but with shipping, it is a completely different story.

Almost no data provider, even the most expensive ones, has a complete real-time view of global vessel movements. We believe that is one of the main reasons why so many investors misunderstand the shipping market.

As market participants, we rarely have the full picture, and the truth is that we never will. This applies to analysts, investors, economists, and even industry professionals. The information available at any given moment is always incomplete, especially during periods of intensified geopolitical tension.

Even the best commercial data providers, such as Kpler, cannot capture every vessel movement in real time. Their data is among the most complete available, but it is still not perfect. That is also what makes shipping interesting, isn’t it? Yes, shipping is a cyclical business, but one that can deliver substantial returns.

Kpler even acknowledges this itself:

To us, the takeaway is simple: whenever we analyze shipping data, we should always assume there are more ships moving than what we can see on our screen. The dark fleet is difficult if not almost impossible to track.

A Closer Look at a Russian Shadow Fleet Crude Oil Tanker

The market has always agreed that the signals from these clandestine ships (the shadow fleet) can be delayed, disabled, or even cut off, and reporting takes time to filter through the system. Vessel tracking data should be treated as a strong signal of market activity instead of a complete picture of it.

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The name suggests it covers only micro caps, but in reality several small-cap companies were present. We were there mostly for the small-caps, where trading volumes and liquidity are higher, which matters to us. Most companies were U.S., with a few Canadian ones.

We attended the Toronto edition last year and found several interesting ideas there, so we expected this trip to be worth it.

It was very much so.

Out of 138 companies, we narrowed the field to 14 through initial research and conducted 1-on-1 meetings with the CEO or CFO. From there, 6 names stood out as most compelling.

This piece is for investors looking for new ideas. While you should always do your own research, this should give you useful insights gathered from a week of research and in-person meetings with management.

Importance of being critical toward management

Being able to talk directly with management at these conferences is invaluable.

After a few years of doing this, we have developed a few techniques to get them to talk more on what they actually expect from the business. Last year, after the 1-on-1 meetings at Planet MicroCap Toronto, we classified the companies we liked and the ones we dismissed. You can find them here:

For transparency, the 5 companies we identified as compelling have returned an average of 35% since the conference in October 2025, compared to -20% for the 7 we dismissed.

The most important thing is to stay away from promotional CEOs. Last year at the Toronto conference, we fortunately saw right through ZOOMD.

Their goal appears to be to increase the stock price in order to then raise capital… The company (addtech business) ended up losing two major clients without new demand to fill those, which led to a -76% return over 8 months.

We are not adding any of the companies discussed in this piece to our main portfolio, the Aurelion Index, yet.

At this smaller company stage, much of the analysis comes down to whether management is outright promotional or whether they can actually deliver. Most of them were pitching us the dream. We asked several questions designed to keep them accountable and we’re now waiting a quarter or two for proof, alongside additional research on our side, before potentially adding one or two.

For micro and small-cap companies, the risk is generally higher, but some below can honestly become multibaggers.

Some readers may want to buy their favorite names here and be earlier than us, which is a completely fair approach as well. Last year, we used that same process (conference, then further research) and this is how we ended up finding a company in our portfolio.

To the best of our knowledge, everything we discuss is public information.

Structure

We start by ranking all the companies using charts based on:

1. Our estimated risk-reward

2. Short-term versus long-term attractiveness

3. Market capitalization

4. Revenue growth versus EV/EBITDA multiple

We then present the 6 companies.

We also discuss the 8 we dismissed after taking to management. However, we think that depending on your investment style, some may still be a fit, so we have still detailed them. If you want to get the most out of this article with limited time, the best approach is to read the 6 ideas, then quickly skim the dismissed companies in case you find something interesting.

As always, feel free to let us know your thoughts on the companies.

Table of Contents

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If you’re new here and haven’t really looked into CLBT yet, no worries, we’ve included our initial report below, followed by an updated version so you are fully up to date and have a better understanding of what we are discussing in this post.

Before starting our recap of the call with the company, below is what we will cover. We kept it brief and focused on the most relevant points.

Table of Contents

1. Go-to-Market Strategy & Sales Model

2. AI Revenue Potential & Monetisation Strategy

3. Competitive Positioning & AI Disruption Risk

4. Market Perception & Operational Execution

5. Revenue Mix Evolution

6. Long-Term Risk Assessment in an AI Context

7. Our Updated Price Target

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We have seen a number of reports suggesting ways to benefit from the 2026 Football World Cup. Most of them focus on GDP growth or broader economic impact for the three host countries (Canada, the US, and Mexico, or even potential winning countries), or on more speculative ideas such as trading futures, betting markets, or sports betting apps. But we are not traders, and we are not looking at betting-related themes or anything of that sort.

Instead, we identified a company that we expect to benefit not only from the World Cup, but also from other factors that support the long-term story, rather than a one-off event, which is also what makes the opportunity compelling.

Before getting into the company itself, here are a few things that stood out to us.

We believe it is significantly misunderstood by analysts covering the stock and by the market more broadly, and that is where we strongly disagree.

We can understand the sentiment, given that it is a company that was historically highly leveraged with a large debt burden, but that profile has been improving meaningfully over time, and in our view it is now a very different story that the share price has yet to reflect. We believe the setup is compelling for two reasons.

First, the World Cup acts as a near-term catalyst.

Second, it sits alongside our view that Latin America is still in the early stages of a broader bull cycle. That combination is what we find most attractive.

Table of Contents

1. Introducing the Company

2. Investment Thesis

3. World Cup as a Key Catalyst

4. What’s Going On With the Company?

5. Where We Differ From the Market

6. How We Value the Company

   6.1 Valuation Metrics

   6.2 Price Target

7. Key Investment Risks

   7.1 Downside Risks

   7.1 Upside Risks

8. Our Final Take

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However, this can come with a downside, as sometimes you miss local expertise and what is actually being said on the ground. While we like calling someone in that geography, it is never as good as being there multiple days and seeing it with your own eyes.

We have already highlighted Japan in three articles this year (mainly the capital markets side, we go into many other sectors here) and since then, their index and markets are up significantly YTD. Despite the recent increase, we believe the timing is right to enter more significantly Japanese equities given the improved visibility on what is setting up as a fabulous coming years for the country.

This is not just some travel notes. We discuss:

• Why Japan is such a strong opportunity

• Attractive sectors in Japan and well-positioned companies

• Our complete Japanese equity basket

If you are only interested in the concise, actionable part of this thematic equity primer, you can have a look at the more detailed table of contents below. However, you’ll better understand in this intro why the opportunity in Japan is so compelling that we sent our analyst there.

Sadly we do not have Goldman Sachs’ million-dollar travel budget, so why Japan?

Japan is known for a more reserved investor relations culture. Many smaller public companies do not provide English translations. The focus is strongly long term, which makes timing investments more difficult. It may be one of the most widely invested markets globally that local investors have a substantial informational advantage over foreign investors. Right now, Japanese households are increasingly allocating capital to equity markets, which is another reason, in addition to macro factors we discuss below, why the country is well positioned.

The Tokyo Stock Exchange is now forcing companies to improve their financial metrics. While every company claims they are complying on paper, many smaller firms lack English investor relations teams. Being there in person allows you to meet management teams directly to see which company has created plans just to comply and which ones have actual plans to drive shareholder returns.

Global mega-funds have poured billions into Japan over the last year, but they have crowded into the same few massive, famous ones. Hundreds of smaller, highly profitable companies are completely ignored by foreign analysts. International investors are starting to enter Japan, and companies are beginning to shift their marketing and communications toward English:

Our analyst has been learning Japanese for a while and wanted to visit the country, so that makes for a great two-in-one. Also, you should expect another article related to Japanese equities (maybe a stock added to our portfolio), as we have quite a few meetings with Japanese companies coming up.

We also want to note that we are not adding a stock to our main portfolio, the Aurelion Index, but rather creating an equity basket to express our bullish view on sectors in the country. The main reason is that most of the Japanese stocks below exceed the minimum investment on Plutus, where the platform is hosted. We also have meetings coming up with other Japanese equities (that have lower minimum investments) that could potentially be added.

Our analyst landed in Tokyo on June 4, 2026, has spent a few days there, and is now in Osaka, the second-largest city and, according to him, much more friendly than Tokyo. He says the most important thing to do when visiting the country is to arrive with an empty stomach since the food is just so good.

For some of the companies discussed below, he was able to visit their headquarters and sometime speak with employees (in his limited Japanese).

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Table of Contents

0. Japan Research Trip: Introduction

1. Thematic Approach: Top-Down & Bottom-Up

2. Theme 1: Automation & Robotics

   2.1 Stock Idea: NSK Corp. (6471-JP)

   2.2 Stock Idea: Nabtesco Corp. (6268-JP)

3. Theme 2: Glass & Ceramic (Materials)

   3.1 Stock Idea: Nichias Corp. (5393-JP)

4. Theme 3: Banks & Financials in Transition

   4.1 Stock Idea: Mizuho Financial (8411-JP)

   4.2 Stock Idea: Suruga Bank (8358-JP)

   4.3 Stock Idea: Nomura Holdings (8604-JP)

   4.4 Stock Idea: Ichiyoshi Securities (8624-JP)

5. Japan’s Economy: Where Does It Stand Today?

6. Japanese Equity Basket: Top Ideas from the Ground

7. On-the-Ground Findings

8. Key Risks

9. Our Final Take on the Japanese Market

1. Thematic Approach: Top-Down & Bottom-Up

Our investment process combines top-down macro analysis with bottom-up fundamental research. The goal is to make sure every position is supported by a strong long-term theme while also meeting strict valuation and company quality criteria. We treat both approaches as one framework to identify high-conviction ideas, focusing on areas where shifts are still underpriced by the market.

The top-down stage focuses on identifying large macro trends and fundamental shifts in the economy. This includes areas where investment has been limited for years, or where new technology is creating strong demand for specific physical components. Examples include automation, semiconductor equipment, and industrial logistics. In Japan, these trends are especially important given the country’s deep industrial base and role in global supply chains. This step helps narrow the investable universe to sectors with clear long-term tailwinds.

Once a theme is identified, we move to bottom-up analysis.

This focuses on individual companies, looking at financial strength, cash flow generation, market position, and management quality. In Japan, this often highlights firms with strong balance sheets, niche global dominance, and improving capital allocation through dividends and buybacks.

We prefer businesses that sit in critical parts of global supply chains and are starting to shift toward higher-value products or services.

By combining both approaches, we aim to avoid overpaying for hype and instead focus on companies that are both structurally supported and financially strong.

2. Theme 1: Automation & Robotics

Everyone loves hyping up the artificial intelligence boom and smart factory software. Writing the most brilliant code on earth becomes completely useless the moment a robotic arm shakes while trying to tighten a bolt. The entire automation boom actually bottlenecks at the physical joints and gears.

Evaluating this sector requires drawing a strict line between the companies that assemble the final robots and the companies that forge the internal parts.

For decades, Japanese brands defined the modern factory floor by building massive, single purpose industrial arms. Today, that legacy manufacturing business faces significant challenges. The big money is rapidly pivoting away from machines that blindly repeat one programmed motion. The global market is chasing general purpose robots powered by advanced artificial intelligence. We are talking about agile systems that learn from experience and perform a wide range of tasks across completely different settings.

The numbers show a growing challenge for traditional robotics manufacturers. Industrial robot demand is expanding at a relatively modest pace compared with the broader intelligent automation market, projected to reach $370B by 2040.

China continues to invest aggressively in manufacturing scale and cost competitiveness, while the US is directing significant capital toward AI and software development. In this environment, Japanese robot manufacturers will need to strengthen their software capabilities and AI integration to maintain their competitive position as automation systems become increasingly intelligent.

We believe this dynamic creates a challenge for investors seeking exposure to automation. Rather than focusing on companies competing to sell the final assembled robot, we prefer to focus on specialized component suppliers.

For Japanese equities, these businesses provide exposure to the growth of automation and robotics while benefiting from a broad customer base and limited dependence on any single platform. We see the most compelling opportunities in companies producing precision gearboxes, linear motion guides, and heavy-duty bearings. These components translate digital commands into precise physical movement at the mechanical level.

Precision Gears for Robotics

The durability of this model is based on physical constraints.

Unlike software, precision hardware cannot be updated quickly; it requires long development cycles, specialized metallurgy expertise, and highly capital-intensive manufacturing. These components also operate under constant mechanical stress, often running 24 hours a day, which places strict demands on reliability.

As a result, once a supplier proves consistent performance, particularly in components such as harmonic drives or strain wave gears, relationships tend to last due to strict qualification requirements and high switching costs.

Beyond core motion systems, component manufacturers are expanding into higher-value areas such as planetary roller screws, multi-axis force sensors, and tactile sensors that enable robotic feedback. This reflects a gradual shift from standalone parts toward more integrated subsystems that combine hardware and built-in control functions. These companies also benefit from strong positions in high-reliability end markets such as healthcare, elder care, and defense, where purchasing decisions prioritize proven performance over cost.

High-Precision CNC Manufacturing for Humanoid Robots

Ultimately, advanced robotics systems cannot function without ultra-precision mechanical components. While global competition is intensifying in robot platforms and software systems, the underlying motion hardware remains highly specialized. China may lead in scale, and the U.S. in software, but both still depend on high-precision mechanical suppliers to build working systems.

And this is where Japan enters the game. This supports focusing on the component level, where exposure is linked to the broader expansion of industrial automation rather than competition between individual robot manufacturers.

We now turn to our first stock idea, which best represents this core thesis.

2.1 Idea: NSK Corp. (6471-JP) - Machinery

NSK is a compelling industrial transformation story, sitting at an inflection point between its legacy automotive-heavy business and a growing exposure to robotics and advanced motion systems. While bearings remain the core profit base today, it is gradually repositioning toward higher-value applications in actuators, integrated motion systems, and product lifecycle management (PLM).

We see the key investment case in the gradual upgrading of its product mix. Demand is shifting toward more precise and intelligent motion systems, particularly in robotics and advanced manufacturing equipment.

Actuators, which function as the mechanical “muscle” of robots, are a key focus of this transition, alongside system-level solutions that integrate motion and control rather than individual components. At the same time, NSK is developing PLM capabilities that extend the business model beyond one-off hardware sales toward longer-term service relationships, including monitoring, maintenance planning, and replacement cycles. This increases the connection between installed equipment and recurring revenue streams over time.

PLM (Product Lifecycle Management) Model

Overall, we view NSK as being at an early-stage inflection where its stable but mature bearings business continues to generate cash, while incremental exposure to robotics and advanced automation creates a longer-term re-rating opportunity.

We believe this shift is important because it moves the business model from selling individual parts to providing more complete motion solutions. Bearings remain the main source of stable cash flow, but are increasingly viewed as a mature, lower-growth segment that helps fund the transition.

Here is an example of the products they manufacture, which include core mechanical components such as bearings that are widely used in robotics, machine tools, and a broad range of industrial applications.

Main Catalysts Ahead

The most important catalyst is the planned integration with NTN Corporation. Announced in May 2026, the companies signed an agreement to create a joint holding structure, with completion expected in October 2027. The combined group would generate over ¥1.7T in annual revenue.

We see this as a major consolidation step in the Japanese bearing industry, aimed at reducing direct competition, improving scale efficiency, and strengthening the combined group’s ability to invest in next-generation motion technologies such as robotics and advanced industrial systems. The main objective is scale and efficiency: reducing overlap, improving procurement, and increasing investment in next-generation technologies such as robotics and predictive maintenance.

Another key initiative is the partnership with Accenture.

This focuses on improving efficiency through automation and artificial intelligence across manufacturing and internal operations.

“Partnering with Accenture represents a bold step in NSK’s evolution toward a management model that continuously drives structural reform and growth investment in tandem,” said Akitoshi Ichii, President and CEO of NSK. “At its core, this collaboration is about management reform that unlocks the full potential of our frontline workforce. Through talent development and skills advancement, we will strengthen operational capabilities.”

The goal is to reduce costs and redirect resources toward higher-value product development. Finally, NSK is simplifying its business structure. We believe the separation of the automotive steering business into a standalone unit reflects a gradual move away from lower-growth legacy activities, allowing the company to focus more on robotics, actuators, and advanced motion systems.

The Financials: Funding the Transition

The near-term financial outlook shows a stable business, providing a reliable cash base to support its long-term transformation. Management expects net sales of around ¥1T and operating income of ¥42B for the upcoming year. This should generate sufficient cash to fund investment in new growth areas, while demand in traditional machine tool markets continues to stabilize globally.

The core operation of making bearings and heavy mechanical parts is acting like a steady, predictable cash machine right now. Instead of borrowing money or taking on heavy debt to kickstart their robotics pivot, they are completely self funding the entire operation. They are taking the predictable profits from their old school factory clients and using that cash to build out the high tech supply chain of tomorrow. This financial cushion gives them a secure runway to shift toward higher margins without worrying about near term market disruptions.

Medium-Term Management Plan (2028)

NSK’s plan outlines a clear push to reshape the profitability profile of the business by FY2028, with a focus on turning scale into higher-quality earnings.

Profitability: Operating margins are expected to more than double from 4.1% to above 8.0%. The main driver is the industrial machinery division, where margins are targeted to rise from 3.3% to ~10% as higher-value automation components gain share. The automotive segment is also expected to improve, moving from 4.3% to 7%, supported by a continued exit from lower-margin products.

Capital efficiency: The focus is on making capital work harder. ROE is targeted to rise from 3.5% to 8%, while ROIC increases from 2.6% to 6%, reflecting more disciplined capital allocation and improved returns from core operations.

Financial discipline: This improvement is expected to be achieved without stretching the balance sheet. Net debt-to-equity is expected to remain below 0.4x, keeping the company flexible while it executes this transition.

What About Valuation?

NSK currently trades at an NTM EV/EBITDA of 3.3x, a level we view as reasonable given the company’s transition toward higher-value robotics and automation exposure. This valuation is further supported by a very conservative balance sheet, with minimal net debt and a solid cash position. In our view, this creates an attractive risk-reward setup, with limited downside given the balance sheet strength and meaningful optionality from the ongoing business mix shift.

Our Final Take on NSK

Overall, we see NSK as an industrial business in transition, with a stable bearings base continuing to generate cash while incremental exposure builds in robotics, actuators, and more advanced motion systems. The opportunity lies in this gradual mix shift, where improving capital efficiency and optionality in next-generation applications support the longer-term equity story.

2.2 Idea: Nabtesco Corp. (6268-JP) - Heavy Robotics

We think Nabtesco plays a critical role within the robotics ecosystem. Nabtesco is an industrial equipment company currently going through a massive transformation. The core of their business is making precision reduction gears for heavy robotics. To put it simply, these gears act as the joints of a robot arm.

They take the fast spinning of an electric motor and turn it into smooth, heavy lifting power that can stop exactly where it needs to down to the millimeter. Because these parts require extreme precision, Nabtesco holds a massive global market share and faces very little direct competition.

The main reason we are looking at them now is a major change in what they sell. On January 1, 2026, management finalized a deal to move 70% of their older, less predictable hydraulic equipment division into a joint venture with Italy based Comer Industries. By removing this volatile construction machinery segment, Nabtesco becomes a much cleaner and highly focused robotics company.

We expect this deal to free up cash and management focus, allowing the company to concentrate more on the higher-value automation market.

The financial results are already showing that the business is turning a corner. On April 30, Nabtesco reported first quarter revenue of ¥83B, beating market expectations easily. Their operating profit jumped nearly 70% to reach ¥8.2B.

The most important detail from that report was the gear division, which saw sales grow by ¥4.8B in just three months. This growth tells us that the long period where customers were just burning through old inventory is officially over. Factories are finally spending money again and ordering new parts.

They are also preparing for the coming era of physical AI, which in our view is already at the door. The company has developed a Monocrank product, a series of compact precision reduction gears designed for high-precision motion control.

These systems are engineered to deliver high rigidity and strong load capacity in compact formats, making them suitable for advanced robotics and automated machinery where accuracy and durability are critical.

Looking ahead, management expects to bring in ¥327B in sales and ¥27.7B in operating income for the full year 2026. Because they dominate their specific niche, their operations generate enough cash to fund their own growth.

They do not have to rely on expensive debt to build new factories or develop new technology. They have a very clean balance sheet, and the market is still pricing them as a slow moving industrial conglomerate rather than a focused automation play. We view this as a great opportunity to own a critical piece of the global robotics supply chain right as factory demand is waking back up.

What About Valuation?

Nabtesco currently trades at a next twelve months EV/EBITDA multiple of 10.3x, which we view as reasonable given its ongoing business mix shift. The company holds a strong position in critical motion control components used in factory automation, placing it within an important part of the robotics supply chain.

While software and cloud businesses continue to trade at higher multiples, we believe long-term value also exists in the physical infrastructure that enables automation. At current levels, investors gain exposure to core robotics hardware at a relatively modest valuation. In addition, the separation of the legacy heavy machinery division reduces cyclicality and simplifies the business profile.

This makes Nabtesco easier to understand as a more focused automation components company. Overall, we see a stable setup, supported by solid cash generation and some optionality if the market begins to re-rate the business toward its automation exposure.

Our Final Take on Nabtesco

Nabtesco generates stable industrial cash flow while gradually increasing its exposure to precision components used in factory automation. The business remains tied to mature end markets, but its role in robotics-related systems gives it a clearer direction over time. Recent simplification of the business improves visibility and reduces cyclical noise. Overall, we see a steady industrial name with optionality linked to automation demand over the medium term.

3. Theme 2: Glass & Ceramic (Materials)

The global expansion of artificial intelligence infrastructure is accelerating a critical transition within the glass and ceramics sector. While software and applications capture public attention, we believe the physical bottleneck remains centered on advanced hardware production. The market focus slowly but surely is shifting away from speculative software models and moving directly toward the specialized materials essential for manufacturing next generation processors. We expect the accelerating buildout of data centers to eventually translates directly into surging demand for semiconductor production equipment (SPE) components.

Why We Believe This Theme Is Compelling

We see this theme as a compelling investment case, offering a pure “picks and shovels” exposure to the AI buildout. Designing faster chip architectures is of limited value if fabrication facilities cannot physically manufacture the silicon at scale. As semiconductor geometries continue to shrink toward increasingly advanced nodes, the manufacturing process requires higher levels of thermal stability and chemical purity. Glass and ceramic material suppliers play an important role in enabling this technological progress.

Specialized materials, including high-purity quartz and advanced technical ceramics, are essential inputs used in the extreme environments of modern lithography and etching equipment. By focusing on the material layer, we gain direct exposure to the billions of dollars flowing into data center infrastructure while avoiding the binary risks tied to software platforms or individual chip designers. These suppliers benefit from strong underlying advantages, high switching costs, and meaningful pricing power, which supports their ability to capture a durable and highly profitable share of the technology cycle.

Current Inflection & Macro Drivers

The transition from factory construction to active equipment installation marks a key catalyst for the sector. Global semiconductor manufacturing capacity is experiencing a major geographic expansion, with large-scale capital expenditure turning into physical tool orders. Like we said earlier, these specialized glass and ceramic parts are consumable elements that degrade during production, meaning a larger installed base of equipment directly triggers a compounding replacement cycle. We are witnessing an inflection where volume demand accelerates as advanced manufacturing facilities scale up operations.

Automation in Semiconductor Manufacturing

The Industrial & Energy Baseline

Complementing this growth, the defensive portion of the sector is supported by shifting global utility frameworks, particularly the accelerating momentum behind nuclear power plant restarts. Nuclear energy infrastructure operates under strict regulatory mandates that dictate scheduled component updates irrespective of macroeconomic trends. We believe this dynamic creates a reliable consumption cycle for premium seals, specialized gaskets, and insulation. This baseline provides a great counterweight to the cyclical semiconductor market, stabilizing overall corporate cash flow and protecting aggregate margins.

3.1 Idea: Nichias Corp. (5393-JP) - Thermal Insulation

Nichias aligns well with our investment thesis in the glass and ceramics sector. It operates across five segments: plant construction and sales, industrial products, high performance products, automotive parts, and building materials.

While legacy activities provide a stable earnings base, the main growth drivers are concentrated in the high performance and industrial segments. These divisions position the company to benefit from demand in advanced Semi manufacturing as well as nuclear energy-related maintenance and restart activity.

Key Product Categories

Semiconductor Equipment & Material Advantage

Within the high-performance products segment, Nichias is exposed to the Semis equipment supply chain through high-purity seals and precision thermal insulation used in production tools. However, it is not a direct pure-play, which in our view adds a degree of diversification and reduces single-end-market risk.

As chip manufacturing shifts to more advanced nodes, process conditions become more demanding, which increases wear on these components and drives a replacement cycle linked to fab utilization rates. This positions Nichias within a consumable part of the Semi value chain, linking it to capital investment in chip manufacturing capacity and the ongoing expansion of data center infrastructure.

Energy & Industrial Plants Business (31.6% of Revenue)

This division stabilizes corporate earnings by turning heavy industrial engineering projects into a predictable maintenance service. The team specializes in thermal insulation work, meaning they wrap massive factory piping networks in heat trapping materials to prevent energy loss and reduce carbon emissions.

To minimize disruption for clients, technicians use a specialized heat retention recovery method to fix or replace insulation on active, fully running pipelines. They also deploy mobile service trucks that act as rolling fabrication shops, driving directly to a customer site to cut and fit custom seals immediately.

We think the primary driver to monitor here is the expanding schedule of nuclear power plant restarts in Japan. Nuclear facilities are subject to strict safety regulations that require routine component updates and insulation replacements on a fixed timeline, largely independent of economic conditions.

Through close integration with these high-security utility networks, we expect Nichias to secure long-term, high-margin maintenance contracts that help stabilize revenues even during broader economic slowdowns.

Industrial Products Business (19.6% of Revenue)

This business serves as the foundational cash cow that funds the company’s broader capital allocation strategy. The product catalog centers on everyday, high volume safety consumables that heavy factories require to remain operational.

This includes industrial gaskets, which are specialized sealing rings squeezed between pipe joints to stop high pressure steam, oil, or toxic chemicals from leaking out into a facility. It also covers rock wool insulation, created by melting natural stone and spinning it into fireproof fibers to protect industrial furnaces, as well as durable pipe linings that protect steel infrastructure from corroding when transporting abrasive fluids.

While we believe this segment does not offer the same growth pace as the semiconductor-related division, it provides a stable and defensive revenue base. Heavy manufacturing plants simply cannot operate without these sealing and safety products. They depend on them for continuous operation and safety compliance. Because these components must be regularly replaced as they wear out, the division generates recurring cash flows over time.

Advanced Products Business (16.8% of Revenue)

This segment is the company’s main growth engine and serves as a key partner to semiconductor equipment manufacturers. Instead of producing basic materials, it focuses on advanced components that chip factories need to replace regularly.

For example, it manufactures fluid transport systems made from PFA, a high-performance plastic designed to withstand very high temperatures and strong chemicals without breaking down or contaminating silicon wafers. It also produces piping heaters that keep process gases at stable temperatures to prevent blockages in production lines, as well as advanced chemical filters that remove microscopic particles before they can damage chips.

As semiconductor features continue to shrink, we expect the manufacturing environment to become more demanding. The specialized plastic and rubber components supplied by Nichias naturally wear out under these conditions, meaning they must be replaced regularly. This creates a steady replacement cycle, turning what would otherwise be a traditional industrial business into a more recurring revenue stream that grows alongside global data center demand, while reducing exposure to the boom-and-bust cycles of the broader technology sector.

Autoparts Business (20.7% of Revenue)

This is a mature legacy division that functions as a near term cash contributor rather than a target for future expansion capital. Nichias supplies major automakers with brake shims, air compressor seals, and heat resistant resin parts.

Brake shims are thin rubber or metal layers fitted onto the back of brake pads to dampen vibrations and stop cars from squealing when they slow down. The division also produces protective barriers that insulate delicate vehicle electronics from intense engine compartment heat.

Profitability remains stable today, supported by decades-long relationships with leading automotive manufacturers. However, the automotive industry is undergoing a gradual shift from internal combustion engines toward electric powertrains. Since EVs do not require conventional gas engines, complex air compressors, or traditional surrounding insulation systems, we expect part of this product range to face a shrinking addressable market over the next decade.

As a result, we view this segment more as a steady source of cash to be harvested and reinvested elsewhere, rather than a driver of future equity upside.

Building Materials Business (11.3% of Revenue)

This division is the least critical element of the core investment framework, operating as a localized domestic business inside Japan. The portfolio includes fireproof ceiling and wall panels for commercial buildings, flexible fireproofing wraps for structural steel beams, and raised access flooring systems.

We think this segment faces growth limitations as it is closely tied to commercial office construction and renovation cycles within a highly mature Japanese real estate market. This limits its global scalability and pricing power compared with segments such as semiconductors or nuclear energy.

Its primary role within the corporate structure is to keep local factories operating at high utilization and absorb manufacturing overhead, rather than to act as a meaningful driver of future earnings growth.

That said, there is one positive: it provides a stable, predictable base of activity that helps overall group operations through the cycle. This includes products such as raised flooring systems, which are widely used in corporate offices and data centers to create underfloor space for power and data cable management.

Capital Allocation & Enhanced Returns

Nichias is currently shifting its business mix from a stable industrial player toward a higher-margin technology supplier. For FY2026, the company targets net sales of ¥270B, representing an increase of ¥18.1B YoY. Growth is primarily driven by the advanced products segment, which contributes ¥13.9B, offsetting softer trends in legacy automotive and building materials businesses.

This shift supports stronger operating leverage, with operating income forecast at ¥45B, up ¥8B versus FY2025, helping absorb rising domestic labor costs.

Nichias has structured this expansion within a disciplined two-year capital framework of ¥83B. This is funded by ¥66B in operating cash flow and ¥17B in cash on hand. Capital is allocated across three areas:

1. Growth investment (¥24B): Capacity expansion and recurring capex to support demand visibility.

2. Strategic investment (¥29B): R&D and automation initiatives, including infrastructure such as its liquid hydrogen experimental facility.

3. Shareholder returns (¥30B): Direct returns to investors through dividends and buybacks, with ¥18.4B already distributed through FY2025.

For FY2026, management is increasing distributions.

The company is guiding to a total annual dividend of ¥65 per share, consisting of a ¥58 ordinary dividend and a ¥7 special dividend linked to its 130th anniversary. In addition, Nichias is launching a share buyback program of up to ¥5B.

This mix shift is already flowing through the income statement. Operating income is forecast at ¥45B, up ¥8B versus FY2025, giving the company more flexibility to absorb higher costs while continuing to invest in growth areas.

Expected Recovery Across Key Segments

The Energy & Industrial Plants segment remains the stable earnings base of the business. The main focus, however, is the FY26E recovery profile across the rest of the group. Following a weaker FY25, both Advanced Products and Industrial Products are expected to rebound, while Building Materials and Auto Parts continue to show steady, gradual improvement.

That said, the assumptions for Advanced Products are demanding. A near doubling in returns within a single year is a high bar, and it will depend on whether demand actually picks up as expected. At this stage, delivery on execution and demand trends matter more than the upside shown in the model.

A Look at Valuation

The stock trades at 11.5x NTM EV/EBITDA and 20.4x NTM P/E. While the EV multiple looks reasonable for an industrial transitioning into higher-value components, the earnings multiple reflects that a lot of the re-rating is already priced in. At this level, returns depend less on multiple expansion and more on execution in the advanced products segment and continued margin delivery.

4. Theme 3: Banks & Financials in Transition

We believe the narrative for Japanese financials is shifting away from a simple recovery trade toward a more durable margin expansion story, driven by Bank of Japan rate normalization. In simple terms, rates are moving up from extremely low levels toward more normal conditions after years of near-zero policy, which allows banks to earn more on loans and reinvest cash at higher yields.

A terminal policy rate of 1.25% and 10-year JGB yields above 2.0% by early 2027 would meaningfully improve earnings for megabanks, as higher domestic yields feed directly into lending spreads and reinvestment income. Under a 1.5% policy rate scenario, and excluding volatile equity gains, this translates into stronger net interest income and improved profitability.

The key point is operating leverage: as interest rates rise, revenue increases faster than costs. This supports a path for ROE to move toward the 13% range, which in turn could justify higher price-to-book multiples above 2.0x over time.

This improvement is also happening alongside a clear pickup in domestic lending, with Japanese bank loan growth rising to over 5% YoY in 2026.

The key shift is that banks are increasingly relying on real loan growth rather than financial market income or portfolio effects. In other words, they are deploying more capital into a growing domestic credit market, where higher interest rates also improve returns on each loan they make.

At the same time, household financial behavior is changing in a more supportive direction for banks. Cash &deposits have fallen below 50% of total financial assets, while investment trusts and equities have risen above 20%. This gradual reallocation supports higher fee income through wealth management platforms and increases the importance of distribution and advisory businesses within Japanese banks.

There are still transitional challenges. Banks will need to actively manage large JGB portfolios as the Bank of Japan reduces its market presence, which can create short-term volatility in earnings. However, this impact is increasingly offset by stronger core lending income and growing fee-based revenue.

Offshore risks remain an important offset, particularly exposure to the US credit cycle, private credit markets, and areas such as data center financing. These segments can introduce earnings volatility if global credit conditions tighten.

However, we believe the domestic setup continues to look strong, supported by rate normalization, improving loan growth, and a steady shift in household capital allocation toward investable assets.

4.1 Idea: Mizuho Financial Group (8411-JP)

Mizuho FG’s share price has come under pressure recently due to (1) declining expectations for a BoJ rate hike and (2) reports of insider trading involving employees at Mizuho. We view this weakness as an attractive entry point to accumulate the stock. We expect EPS growth to continue outperforming market expectations, supported by ongoing share buybacks and upside in net profit.

Within the megabank space, Mizuho retains strengths in large corporate banking and global investment banking, while combining relatively high sensitivity to interest rates with a conservative credit profile. Although the recent misconduct-related headlines have weighed on sentiment, we believe the market reaction is excessive when viewed against historical precedents. Continued buybacks and earnings upside should support further EPS growth and drive positive estimate revisions, leaving additional upside potential from current levels.

4.2 Idea: Suruga Bank (8358-JP)

Suruga Bank is in the middle of a turnaround, moving from restructuring into a more stable growth phase. The key driver is its Mid-Term Business Plan (April 2026–FY2028), where management targets a consolidated ROE of 11% or higher. Alongside this, the bank is strengthening shareholder returns, with a payout ratio expected to rise toward 40% or more, supported by ongoing share buybacks.

Several catalysts could support a re-rating. A potential removal of remaining FSA administrative actions would fully clear past regulatory overhangs and improve operational flexibility. At the same time, Suruga is expanding through partnerships, most notably with Credit Saison, aiming to build new retail channels, expand fee-based income, and reduce reliance on traditional lending.

Despite improving fundamentals, the stock continues to trade at a discount to book value. If management delivers on ROE targets, continues to clean up legacy credit costs, and sustains capital returns, the gap between valuation and earnings power should narrow over time. This makes Suruga a classic recovery setup, where execution on a clearer strategy is the main driver of upside.

4.3 Idea: Nomura Holdings (8604-JP)

Nomura Holdings is Japan’s largest brokerage and investment bank, combining domestic wealth management with global wholesale operations. Over the past year, it has benefited from stronger retail participation in Japanese markets, as households gradually shift savings from cash into investment products.

This provides a solid base for the wealth management business, although overall earnings remain cyclical and sensitive to market conditions and cost pressures.

For FY2026, results were mixed but solid. Net revenue rose 15% to ¥2.16T, with net income reaching ¥362.1B, translating into a return on equity of 10.1%, in line with long-term targets. However, momentum weakened in Q4, where net income fell 19% QoQ to ¥73.9B. Costs also increased, with full-year non-interest expenses up 15% to ¥1.62T, driven by higher compensation, acquisition-related costs, and an impairment in the investment management division.

Nomura currently trades at ~11x earnings and offers a dividend of ¥51 per share, implying a payout ratio of 41%. While the valuation and yield look reasonable, they also reflect the cyclical nature of the business and earnings volatility typical of global brokerage operations. International operations were notably weak in Q4, with pretax income from overseas down 82% QoQ.

Overall, the investment case depends on whether Nomura can control costs and stabilize its international business, while continuing to benefit from steady growth in domestic investment activity. We still see the setup as attractive.

4.4 Idea: Ichiyoshi Securities (8624-JP)

Ichiyoshi Securities is a Tokyo-based retail broker with a $259M market cap, currently trading at 11x trailing earnings. The business has been steadily shifting toward a “stock-type” model, closer to a wealth management structure, with recurring AUM fees now covering 80.2% of operating costs, up from 60% in 2023.

This brings the company closer to breakeven on fixed costs, where incremental fee income flows through at high margin. On profitability, it earns a TTM ROE of ~14.5% and trades at 1.7x book value, supported by a clean earnings profile with limited reliance on non-core income such as investment gains or interest income.

Dividend momentum has been strong. Payouts have increased from ¥17 per share in 2024 to ¥30 in November 2025, and most recently to ¥58 in March 2026, including an anniversary-related top-up. With a 50% payout target, the implied forward yield is around 6%, which remains attractive.

Looking ahead, rising participation in Japanese equity and investment trust markets should continue to support flows into retail brokers like Ichiyoshi.

With over two-thirds of revenue already coming from recurring wealth management fees and a strong ROE profile, we see scope for the stock to trade at a higher multiple than the current 11x earnings, with potential re-rating toward 14–15x if execution and market conditions hold.

Back in late April, we published a more in-depth report on the Banks & Financials transition (reallocation) theme, along with what we see as some of the best ways to position for this major shift in Japan’s capital allocation.

5. Japan’s Economy: Where Does It Stand Today?

Japan is often a difficult market to read. What looks strong at first glance is not always strong underneath, and in other cases the opposite is true. It is rarely a simple or linear story. The main questions today are how long the AI-driven rally in Japanese equities can continue, and what direction interest rates and Bank of Japan policy will take. These two factors are now central to market direction.

At the same time, Japan offers a broader set of investment themes beyond AI and Semis. These include rising interest rates, ongoing corporate governance reform, and growth concentrated in specific strategic sectors of the economy.

Within this, the AI and semiconductor cycle remains a key driver of sentiment and earnings. AI-related exports now account for roughly 20% of Japan’s total exports, placing the tech supply chain on similar footing with the automotive sector. Strength is also spreading across the value chain, from semiconductor equipment and memory to tighter bottlenecks such as optical components, testing tools, and cooling systems.

Japan’s Semiconductor Toolmakers

Corporate earnings are already reflecting this momentum, with domestic electrical equipment and precision instrument companies guiding for strong profit growth into FY2026. At the same time, capacity expansions in memory and related segments are expected mainly from 2028 onward, keeping supply conditions relatively tight in the medium term.

Overall, we see the durability of the AI-driven cycle as an important driver for Japanese equities going forward, alongside the path of monetary policy.

We believe the government agenda in Japan is only just getting started, or at least that is the hope. Over the past six months, activity has been dominated by budget work and election-related processes, which have limited visible policy progress. Attention now turns toward agenda-setting and execution.

Japan’s Prime Minister Takaichi

The post-election “honeymoon” period is fading, and the coming months will be an important test of follow-through from policymakers. The current growth strategy is increasingly shaping around industrial policy with a stronger defense component. We are witnessing a gradual shift toward using defense demand to support dual-use technologies, linking national security priorities with broader industrial innovation. Don’t be fooled, it won’t be all perfect.

Overall, policy is moving toward a more competitive and resource-focused approach, with greater emphasis on fiscal discipline and sovereignty. This marks a shift away from the more traditional, broad-based fiscal growth policies of the past, and we see this as supportive for investors and the market.

Then, of course, when we talk about the Japanese economy, one key point is energy security. Japan produces very little oil domestically, so it relies heavily on imports, making it more exposed to global supply shocks, particularly from the Middle East. Strategic oil reserves also offer only limited flexibility in a disruption scenario.

Japan Steps In Again as Yen Slides on Oil Prices

Recently, Japan’s crude inventories have moved away from historical patterns. While 2025 levels remained stable ~351M barrels, 2026 data shows a sharp and unusual decline. Following a significant drawdown of its SPR, inventories fell from March highs to ~276M barrels by the end of May.

That said, we are confident Japan will continue to diversify its energy sources. The country is already restarting and building new nuclear plants, while also scaling renewable energy capacity. Over time, this should provide a more balanced and resilient energy mix.

Now, on the economic growth level, that is where things can become more complex. There is still a meaningful degree of uncertainty around Japan’s growth outlook, which is also one of the key reasons we sent an analyst on the ground in Japan, to build our own view of how the economy is actually evolving in real time. The objective is to go beyond headlines and get a direct read on conditions as they are experienced on the ground.

Japan’s economy has held up relatively well despite several challenges in recent years. Growth is expected to continue at a moderate pace, supported mainly by consumer spending and domestic demand, even as global conditions remain less supportive. As wages and prices gradually rise after years of low inflation, policymakers face a balancing act between keeping inflation near the 2% target, maintaining fiscal stability, and supporting long-term growth in the context of an ageing population and a shrinking workforce.

On the positive side, Japan is in the process of gradually building what we believe will become a more resilient economy. This is being supported by targeted strategic investments designed to help offset potential risks such as demographic pressure, weaker purchasing power, and external shocks, including disruptions in regions like the Strait of Hormuz.

On the policy side, the government is actively supporting the development of large-scale data centers outside of major hubs like Tokyo and Osaka, with new projects emerging in regions such as Hokkaido and Kyushu. These programs are designed to reduce developer costs and can offset construction expenses by up to ¥30B, while also encouraging regional investment.

Hokkaido Data Center Development Map

Looking at near-term macro tailwinds for 2026, real wage growth is starting to materialize, with real wages now back above 2%. The Prime Minister’s accommodative fiscal and monetary stance is aimed at supporting domestic demand, while inflation remains relatively stable. Importantly, real wage growth has recently returned to positive territory over the past months.

Consumer Price Index (CPI) & Wage Growth

Finally, on the real GDP outlook, the picture is stable rather than exciting. Growth is expected to average around 1% in real terms over 2026 to 2028. It is not a high-growth environment of course, but this remains consistent with Japan’s profile as a mature, ageing economy with slower expansion.

The support comes mainly from domestic demand, particularly consumption and wage growth, while external demand remains more uneven. In this context, Japan is less about strong cyclical acceleration and more about steady, low but positive growth, which we believe will continue to be supported by policy stability and gradual improvements in real income conditions.

6. Japanese Equity Basket: Top Ideas from the Ground

We have built a 9-stock equity basket of Japanese companies that we believe are well positioned to benefit from a market that remains somewhat overlooked, but still offers significant pockets of value and opportunity.

You can download the spreadsheet here as well:

Aurelion Japanese Equity Index

9.79KB ∙ XLSX file

Download

Download

Detailing what we said in the introduction, we are not adding any of these stocks to the Aurelion Index, our main portfolio.

Readers may ask why, given our positive view on the country.

First, our analyst still has time on the ground engaging directly with company management, which remains important in refining conviction and identifying the strongest near-term setups.

In addition, adding certain Japanese equities on Plutus (where our portfolio is hosted) increase the minimum investment threshold for APAC names, and we prefer to keep accessibility as broad as possible. That said, we view this equity basket as an attractive way to express the improving backdrop in Japan.

It offers diversification across key themes, reducing the impact of company-specific volatility while maintaining exposure to higher-quality opportunities. In our view, it provides a more targeted and potentially more efficient way to play the cycle compared to broad index exposure.

(Readers can decide to automatically replicate this basket in their brokerage account through Plutus at runplutus.com)

Now let’s go through the companies we selected.

You’ll notice the 9-stock basket doesn’t carry every name we covered in depth. For Mizuho, we remain constructive on it, but the NEXT FUNDS TOPIX Banks ETF (20% of the basket) already holds Mizuho at roughly 16% of the fund, so we capture that exposure through the ETF instead of doubling up with a concentrated single-name position. The name we left on the sidelines is Nabtesco mainly because it creates a very high minimum investment for our Japanese equity basket. With those two exceptions, the basket reflects essentially all the ideas in this report.

It would be too repetitive to go through each company one by one, as we have already covered most of them either in this report or in our previous Japan Financials report. Instead, we will step back and explain the framework more broadly, which we think is more useful for readers. When it comes to finding investment ideas in Japan, the key is not to approach it like the US market.

The dynamics are different, and what works in one does not necessarily translate to the other. Japan does have a large number of net-nets (companies trading below net asset value), but that is not our main focus. Many of these names are also too small in market cap and liquidity for us to include in our portfolio.

As a result, our basket is deliberately diversified across sectors.

In automation and robotics, for example, we prefer not to own the most direct pure plays. Instead, we focus on adjacent companies that supply critical components needed to build these systems.

In glass and ceramics, Nichias is a good example. It is a large, diversified industrial company with exposure across multiple end markets. While diversification can sometimes dilute focus, in this case we see it as a strength, giving the company multiple levers of demand and stability across cycles.

Then, on the financial side, including insurers, non-banks, and banks more broadly, this is one of the largest sectors in Japan, alongside autos and other major industries. Given what is happening in the economy, the new political leadership, and the renewed upward pressure on interest rates, we think this area still has meaningful upside. In our view, there is fuel left in the tank.

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6. On-the-Ground Findings

Inflation in Japan appears to be in an early but noticeable phase after decades of near-price stability. A clear example is the restaurant sector, where ramen shops have historically anchored prices around the ¥1,000 level, effectively positioning ramen as an affordable “working-class meal.” Operators are now struggling to maintain this price point as input costs rise, forcing gradual menu adjustments and, in some cases, pushing consumers toward cheaper alternatives or reduced discretionary spending.

Food inflation is also visible in staples such as rice, which has seen sharp price increases. In response, the government has released portions of its national rice reserves to stabilize supply. This reflects a shift toward more active intervention after years of deflationary pressure and limited price dynamics.

Wage growth, however, remains limited. Based on local discussions, salary adjustments are not keeping pace with rising living costs, which suggests that real income pressure is beginning to build. The combination of higher prices and stagnant wages is creating a mild squeeze on household purchasing power, even if from a very low inflation base. Despite this shift, Japan remains significantly cheaper than Western economies on a broad basket of everyday expenses. Food, transport, and housing costs are still materially lower than in Canada.

However, imported or globally priced goods such as electronics (e.g., iPhones) stand out as disproportionately expensive relative to local income levels, highlighting the gap between Japan’s domestic cost structure and global pricing benchmarks. This also reinforces the pressure on household purchasing power, particularly for high-value discretionary items.

From a macro perspective, demographics remain a key constraint. The population is aging rapidly, increasing reliance on public spending and raising long-term fiscal pressure. At the same time, political sentiment on immigration appears to have shifted, with less openness compared to previous cycles, limiting one potential adjustment mechanism for labor shortages and population decline.

Energy security is another important consideration, but government support has so far helped limit the impact on households. Costs have remained manageable for citizens, and a large share of daily mobility relies on public transport rather than private car usage. Japan still maintains significant exposure to imported energy and has historically relied on diversified supply agreements and strategic reserves. While there are ongoing partnerships and efforts to diversify supply, dependence on imports remains a key vulnerability, particularly in the event of geopolitical disruptions affecting key shipping routes such as Hormuz.

Overall, the field observations point to a transition economy: moving away from prolonged price stagnation, facing emerging inflation pressures, constrained wage dynamics, and persistent demographic headwinds, while maintaining fundamental strengths in affordability and industrial organization.

7. Key Risks

The biggest risk scenario remains energy.

Japan has so far avoided a real supply shock, helped in part by its large oil reserves, which cover roughly 200 days of demand. At the same time, the government has stepped in to limit the impact on households, introducing subsidies to keep energy prices lower since March, including a US$19B supplementary budget to fund additional electricity and gas support during the summer peak period, as well as an extension of gasoline subsidies.

A Look at Shibushi National Oil Storage Station in Kyodo

This helps smooth the short-term impact on consumers, but it also highlights the underlying exposure Japan still has to imported energy. If global supply conditions tighten further, or if geopolitical tensions persist, the pressure on both inflation and public finances could increase. In that context, delays in Middle East peace talks, if prolonged, could become a more material risk for supply stability and pricing, especially given Japan’s reliance on imported energy inputs.

We can see below that Middle East tensions are weighing on the Reuters manufacturing confidence index. Not as severe as 2020, of course, but the trend is clearly weakening, with confidence falling at a steady pace in recent months. If the conflict between Iran and the US persists for too long (which remains uncertain), we believe the index could easily move below zero.

Lastly, another risk is that Japan’s 5-year inflation breakeven has been rising toward nearly 3%, up from around 2% before the recent Iran-related spike in energy prices. This suggests that medium-term inflation expectations are becoming higher and more sensitive to global commodity and geopolitical shocks. Nothing alarming enough to cause major concern at this stage.

That said, we view this more as something to monitor rather than a change in our broader outlook. From what we are observing from the ground, it is not a major concern, but it is noticeable.

8. Our Final Take on the Japanese Market

Overall, we are bullish on the Japanese market and economy.

At first sight, from abroad, looking at our screens, the picture was less clear, but with our analyst on the ground, we are more confident in our view that the market is no longer a simple recovery story. It is instead a mix of improving domestic demand, gradual policy normalization, and strong industry-specific growth pockets, particularly in AI-linked hardware and selected industrial segments. At the same time, macro conditions are becoming more balanced, with wage growth, inflation, and capital flows slowly moving in the right direction.

However, Japan is not a linear story. Energy exposure, global credit conditions, and the strength of external demand remain important factors. The key, in our view, is that Japan now offers a wider set of opportunities beyond traditional recovery trades, with more dispersion and more bottom-up alpha.

If there’s anything you’d like to learn more about in Japan, or any specific companies you’d like us to look into, let us know in the comments below. Our analyst will be there for some time.

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• Full access to our entire library of reports. Currently 100+ reports.

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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.

After an intense Q1 2026 earnings season and a meaningful number of companies in our model portfolio running up (and some down), we are doing an update on every holding.

Quite a few stocks have been exited and added since the start of the year, either because the thesis played out or the risk/reward became less attractive.

Even though we cover these stocks regularly in separate posts and in our Substack chats, getting a clean view in one place just makes sense.

Every stock that we hold and mention here is a company we believe is a buy right now. In our view, there are no “old stocks” that have run up too much. If there were, we would have removed them and of course announced it.

We always try to speak with the management teams of our companies, usually the CEO, CFO, or Investor Relations, and have included what they told us below. We believe this is one of the best ways to develop a long-term edge and a deeper understanding of a company compared to the market.

In addition to having a specific thesis for each company, most of our holdings are supported by broader investment themes, which we believe make them compelling investments over both the short and long term.

With 19 companies, we keep the article concise and only discuss value-add information. Links to the full in-depth report for each company are included for further reading.

Our model portfolio, that we called the Aurelion Index, consists of our current highest-conviction equities, and is available to paid subscribers here.

As always, anyone can view the real-time performance on Plutus here. This is what it looks like as of June 4 (117% since inception on June 30, 2025):

Thank you for following our work. Below are our current best ideas.

Several more are on the way!

Feel free to ask questions in the comments, we always try to answer all of them.

Current Portfolio Positions (June 4, 2026)

Read more

That said, we did not agree on everything, and that is totally fine.

We spent a long time discussing the Strait of Hormuz, the timing, and exactly what happens to physical oil flows the day it reopens, whether fully or partially.

We debated how markets tend to react when a massive supply shock finally unwinds. The biggest takeaway from those discussions was the level of uncertainty, even among the people closest to the oil market.

Nobody knows the exact timing of a reopening, the early flow dynamics, or whether prices will overreact the way they always do in oil markets. And unless your name is Donald Trump, you’re not getting that answer anytime soon.

Three weeks ago, we were very vocal that oil prices were heading lower.

Unlike most institutional analysts, strategists, or macro experts, we gave you a definitive stance on the commodity. We did not stay safely neutral. As independant analyst, we have the freedom to call it exactly as we see it.

In our opinion, oil is easily the hardest commodity to predict or forecast because of how deeply it runs through the global economy. It is one of the world’s most important resource, directly tied to nearly everything we consume.

There is a loud contingent of oil experts who love to tell you that oil is headed straight to $150 per barrel. We have been hearing that same narrative for a long time now, but the market is clearly tired of it. Just look at the actual price action.

If you have been holding long oil positions for a while, hopefully it was not using short-term crude oil futures.

We got a lot of criticism for our view. Most of it came from oil bulls who took our bearish stance way too personally. Losing money can have that effect on people. The personal attacks were irrelevant to our thesis, but they were great free marketing for Aurelion Research, so we will take it.

Ultimately, the thesis played out. Oil went down. We nailed the direction.

But being right on a commodity price direction does not mean every argument that got you there was flawless, and a few people reminded us of exactly that.

We also received genuinely constructive feedback, which we always welcome, as we believe that is how analysts, fund managers, and anyone serious about this business improve over time. These discussions were highly valuable and are also part of why we are reassessing our view on oil prices today.

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Table of Contents

1. Introduction: The Next Inflection in Crude Oil

2. What History Tells Us About Oil

   2.1 How Iran’s Leadership Thinks About Oil

   2.2 Oil Trade Under Iran’s Revolutionary Government

3. Supply vs Demand: Who Is Winning?

   3.1 Where Global Oil Supply Stands

   3.2 The Reality of Global Demand Growth

4. How Oil Inventories & Reserves Look

   4.1 China Has Plenty of Oil in the Tank

   4.2 The U.S. Has Limited Room for Error

5. Oil Prices: The Road Ahead

   5.1 Scenario 1: Strait of Hormuz Reopens in June

   5.2 Scenario 2: Strait of Hormuz Reopens in July

   5.3 Scenario 3: Strait of Hormuz Reopens in August

   5.4 Scenario 4: Strait of Hormuz Reopens in September

6. Our Final Take on Oil

2. What History Tells Us About Oil

We believe the current bullish oil narrative relies heavily on geopolitics while underweighting the physical market. In the short term, oil prices can react materially to headlines. Trump says something and oil moves higher or lower.

Iran responds and it moves again, higher or lower. That said, while geopolitics is always part of the equation, it isn’t what defines the underlying balance. The key drivers remain physical flows, production trends, and demand trends.

As the legendary oil trader Marc Rich (often referred to as the “King of Oil” and founder of what became Glencore) used to say, “I don’t trade politics, I trade oil.”

We believe the key dynamic is that production growth outside OPEC provides only a limited additional buffer and does not fully offset current supply disruptions, a factor we overlooked in our previous analysis.

As a result, while we remain bearish, the balance of risks is now less one-sided than before. The main offset instead comes from weaker demand across key consuming regions, which is declining in response to higher prices.

This creates a more complex setup than consensus positioning suggests and helps explain the relatively muted price action despite frequent references to supply disruption and elevated inventories.

Our initial view overemphasized the speed of demand destruction. We expected greater pressure in the $100 to $110 range, but demand has proven more resilient, with clearer signs of weakness likely emerging as prices approach $120 and becoming even more pronounced above $140.

The main bullish counter-argument remains a prolonged disruption to oil flows, such as a sustained closure of the Strait of Hormuz (SoH) extending through the summer. Even in that scenario, we believe the market retains some near-term defensive buffers, though they are not unlimited and would gradually erode if the disruption persisted into late summer and early autumn, becoming increasingly concerning from a market balance perspective.

China has quietly accumulated a massive strategic stockpile of over one billion barrels, while the US has historically shown a willingness to aggressively empty its Strategic Petroleum Reserve to cap skyrocketing prices.

However, we must also emphasize a key risk that was underweighted in our previous analysis. If the Strait of Hormuz remains closed into August, the market would face increasing supply stress as U.S. reserves would not last indefinitely.

Continued drawdowns would eventually push inventories toward operational minimums, tightening the physical balance and shifting the market regime.

For this reason, our bearish view is time-dependent. If a closure extends beyond the end of July, the depletion of these emergency buffers would materially change the setup, and we would need to reassess our view.

In the meantime, we see these oil reserves acting as a shock absorber. As a result, in most scenarios, politically driven price spikes are likely to run into demand destruction before becoming sustained moves. We therefore remain focused on the physical balance rather than headline volatility.

2.1 How Iran’s Leadership Thinks About Oil

Marc Rich is known for having traded extensively with Iran during periods of heightened geopolitical tension. As he described it: “We bought the oil, we handled the transport, and we sold it. They couldn’t do it themselves, so we were able to do it.”

Despite the strong anti-Western rhetoric coming out of Tehran, Marc Rich observed that oil trade remained highly transactional in practice. In his words, “They were very respectful. They were very correct. They needed to sell the oil, and we were able to buy it. We paid them in a way they could use, and they appreciated that.”

We believe this shows that even under intense geopolitical pressure, oil flows are ultimately driven by economic necessity rather than political rhetoric.

As a result, we view a prolonged and complete closure as a low-probability but high-impact scenario that would become material over time through more severe inventory depletion and extremely tight physical balances.

2.2 Oil Trade Under Iran’s Revolutionary Government

Rich revealed that the Iranian regime knew exactly where its oil was ultimately being sold. As the oil trader described, the regime prioritized cash flow over public rhetoric: “He [Ayatollah Khomeini] told me that he did business with us, and the Ayatollah regime knew I was going to sell it to Israel.”

This period points to a broader pattern in oil markets: even under strong political positioning, trade often remains driven by economic necessity. When fiscal pressures are high, revenue considerations tend to outweigh public rhetoric.

We believe this reflects well how geopolitical tensions interact with physical oil flows today, including key transit routes such as the Strait of Hormuz, where incentives still strongly favor keeping barrels moving.

3. Supply vs Demand: Who Is Winning?

The debate over whether supply tightness or weaker demand is driving the physical market has become more pronounced. Some sell-side research points to historically low inventories and scenarios of Brent reaching $140–150 per barrel, while macro analysis argues that such outcomes would normally require stronger confirmation from physical flows. In our view, the market is currently shaped by both tighter supply conditions in specific regions and more resilient demand, making the balance more nuanced than either extreme narrative suggests.

In practice, the key offset is demand resilience on one side and visible weakness in consumption on the other. While supply conditions remain tight in specific regions, broader demand trends are softer, which helps explain why prices have not sustained higher levels despite repeated supply disruption headlines.

Looking forward, short-term volatility linked to geopolitical disruptions, including risks around the SoH, may continue to create spikes in pricing. However, institutional estimates still point to a market that rebalances into surplus once logistical conditions normalize, implying that higher prices would eventually need to be met with demand adjustment or production response.

Also, we wanted to point out that it is a bit strange, while not surprising to us, that many investors seem to want much higher oil prices. Of course, the goal is to make money, but the higher oil goes, the more it hurts demand. Sustained levels of $150–200 would ultimately be negative for demand and global growth. It feels like, in practice, they are implicitly betting on a very extreme scenario.

3.1 Where Global Oil Supply Stands

The IEA data provides a useful reference point, but it does not capture the full complexity of global oil flows, which are inherently difficult to measure precisely in real time. This is also supported by periods of SPR releases, which have helped stabilize markets but cannot be sustained indefinitely.

Within that context, non-OPEC supply has increased from 66.8M bpd in 2019 to 73.8M bpd in 2026, driven largely by North America, which rose from 25.5M bpd to 30.1M over the same period, providing a consistent buffer to global markets.

The table shows that global oil supply is not falling even though OPEC is producing less. Higher production from non-OPEC countries offsets that decline, keeping total supply broadly stable at around 103.6M bpd in 2026.

The following scenario illustrates how a supply disruption could evolve. Global supply declines to a low of 94.5M bpd in April 2026, reflecting the immediate impact of a transit chokepoint disruption before recovering thereafter.

However, the projection shows a rapid recovery, with production climbing back to 108.5M bpd by 2026 end. We believe this recovery is already reflected in prices, as the market is assuming a normalization of flows through the SoH as early as July or August. This explains the muted price action, as positioning already anticipates the return of disrupted barrels and the gradual rerouting of exports.

3.2 The Reality of Global Demand Growth

The baseline annual metrics show global oil demand increasing modestly rather than accelerating. Total World Crude Oil Demand has risen from 104.6M bpd in 2024 to an estimated 106.0M bpd in 2026. This limited progression is consistent with a gradual flattening in consumption, particularly across mature markets.

OECD demand remains broadly stable at 46.1M bpd, while China’s growth has essentially stalled, moving from 17.4M bpd in 2025 to 17.5M bpd in 2026.

The seasonal trends show how demand evolves over the year.

After an early peak in February 2026, consumption declines through the spring months, bottoming near 100.5M bpd in April and May, reflecting the typical seasonal slowdown in a softer overall demand environment.

The pattern then typically recovers toward year-end levels of ~106.2M bpd, consistent with normal seasonality. However, what stands out is not the level itself, but the lack of upside acceleration relative to prior cycles. We believe this reflects a market where demand is becoming more price-sensitive, which helps explain why sustained higher prices tend to lose momentum more quickly.

4. How Oil Inventories & Reserves Look

So far, the global market avoided a massive shortage because of a few temporary fixes. Storage tanks are being drained, ships are taking longer routes around the Middle East, and Western countries are exporting more crude.

Recently, Japan’s crude inventories have broken away from historical trends. While 2025 levels remained stable around 351M barrels, 2026 data shows a sharp and unusual decline. Following a significant drawdown of its SPR, inventories fell from March highs to nearly 276M barrels by the end of May.

This dramatic draining of emergency reserves suggests the market has been operating on borrowed time. Once these strategic drawdowns slow and shipping lanes normalize, the return of normal flows will meet a global market that may lack the capacity to absorb them. This is also why we believe a reopening of the Strait of Hormuz, even partially, is becoming increasingly important.

Yet, focusing only on these reported oil inventories doesn’t tell the whole story, because relying strictly on reported figures misses a critical piece of the puzzle.

One of the true reason the physical market hasn’t completely broken is the volume of unreported flows, such as shadow fleets and alternative supply channels, quietly moving barrels outside the official reporting channels.

While the reported numbers make it look like there is very little room for error, these hidden barrels help absorb the impact of geopolitical shocks. This keeps the real-world market more insulated than the official inventory data suggests.

And here is some unexpected hope if things get really ugly, a scenario we didn't anticipate for 2026. We could potentially end the year with both Venezuelan and Russian oil either unsanctioned or seeing very loose enforcement, a prospect that seemed highly unlikely at the start of the year.

Venezuela’s crude output recovery is no longer speculative. Production rebounded swiftly following the capture of President Maduro and the lifting of the US naval blockade, reaching around 1.25 Mbd this month.

Driven by policy shifts in Washington and the issuance of new operating licenses, Venezuelan output has responded quickly, with production trending toward 1.5 Mbd by 2027. Current forecasts point to an increase of roughly 600,000 bpd from recent lows, bringing output to a near-term target of 1.3 Mbd.

We can also see clear supply resilience in Russia, where seaborne exports have held steady at nearly 3.5M barrels per day. Even with ongoing Ukrainian drone attacks targeting key refinery and port infrastructure, Russian oil is flowing.

4.1 China Has Plenty of Oil in the Tank

Asian refineries are cutting back fuel production as margins weaken. However, the key point is that Chinese demand for refined products has not fully recovered, leaving a visible gap in regional demand.

We expect this trend to persist for some time.

Chinese refiners are keeping operations muted and remain on the sidelines. State-owned majors such as Sinopec plan to keep production flat through June and July. Typically, summer marks peak driving season and stronger fuel demand, but this year they are largely not following the usual seasonal pattern.

The issue is that refining in China is a difficult business right now.

High pump prices and a weak economy are weighing on consumption. On top of that, the accelerating shift toward electric vehicles (EVs) is further eroding what should be peak seasonal demand. The data shows that major state refiners missed transportation fuel sales targets in both April and May.

Despite production already being cut to multi-year lows, gasoline and diesel inventories remain near two-year highs. Supply is still exceeding domestic demand for transportation fuels.

To survive this, refiners stopped buying expensive crude.

That helped margins recover from a disastrous -$60/bbl in mid-April to -$2/bbl today. Even so, we believe Chinese refiners are unlikely to meaningfully increase throughput while they are still losing money on every barrel processed.

4.2 The U.S. Has Limited Room for Error

We would like to say official inventories are not approaching low levels, but the reported data suggests the Western safety buffer is gradually tightening.

Commercial inventories sit at ~442M barrels, near the lower end of the 5-year range, reducing the market’s flexibility to absorb disruptions when physical flows tighten. Despite this, we remain bearish on oil prices, as we expect the Strait of Hormuz to reopen. However, we believe near-term conditions are still tight enough that the market cannot comfortably absorb additional shocks.

The SPR provides an additional layer of flexibility, though it has been materially reduced to ~365M barrels. Its role as a stabilizer remains relevant, but its ability to respond to a sustained disruption is more constrained than in prior cycles.

In our view, the SPR primarily buys time rather than offsetting a prolonged supply shock. This aligns with our earlier assessment that the situation was less extreme than initially feared, while still acknowledging that resilience fades the longer a disruption persists. Over time, economic incentives always matter.

A prolonged closure would represent an even more significant loss of revenue for Iran than current conditions, creating a financial incentive to restore flows and increasing pressure on key stakeholders to support a resolution.

Now, let’s look at U.S. oil production, which looks much better than the SPR.

The production trajectory for 2026 clearly looks stronger than it did in prior years, or at least higher. Output is holding steady above 13.6M bpd through May, and we believe moving toward 14.0M in the near term is a reasonable outcome.

While the rapid growth rates of previous cycles have eased, U.S. crude production remains at record highs in absolute terms. We believe this sustained output continues to put steady downward pressure on global oil prices.

This also helps explain why bullish geopolitical narratives often fail to hold. U.S. producers are consistently adding a large base of supply each day, which cushions the impact of disruptions and reduces the longevity of news-driven price spikes.

With output already high, any further softening in global demand would quickly push the market into surplus, reinforcing our bearish view on oil prices.

5. Oil Prices: The Road Ahead

We think oil prices are entering a more uncertain phase, shaped by tight near-term balances, geopolitical risk, and shifting demand conditions. Near-term moves will depend less on narrative and more on how supply and inventories evolve through the summer. It will be an important period to watch.

Our view is that the longer the SoH remains closed, the more pressure builds on global oil supply. We expect the Strait to reopen sometime in July, or at least in August. If we move through the summer without a resolution, the market would likely face a much tighter supply setup than what is currently priced.

We are not perma bears, despite how some interpreted our last post. Our stance is more balanced. We are cautious on oil under current conditions, as we do not see the current setup leading to higher prices given expectations of a relatively quick reopening. That view is still reflected in the forward curve, where the market is pricing a gradual decline in crude oil prices over the next four years.

In other words, while spot oil remains high today, buyers are locking in progressively lower prices for future crude oil delivery.

Important: Every following oil price scenario is based on WTI crude oil prices in USD, not Brent crude or any other.

5.1 Scenario 1: Strait of Hormuz Reopens in June

We currently see oil trading in a volatile range between $85 and $105, driven by the ongoing US–Iran dynamic. If the Strait reopens in June, which represents our best case scenario, we would expect prices to steadily move down. However, we do not expect a total collapse to $60-65.

Under this best case scenario, we see oil at $80.

5.2 Scenario 2: Strait of Hormuz Reopens in July

A July reopening aligns with current baseline forecasts from geopolitical strategists, which assume the chokepoint remains closed through the end of next month. Under this timeline, we believe marginal price gains would likely peak early in the third quarter as congestion in the Persian Gulf begins to ease.

An early summer resolution would have a meaningful market impact. The release of barrels held up behind the chokepoint would immediately relieve the physical tightness that has characterized the first half of the year.

Under this scenario, we see oil at $85.

Because global demand cannot comfortably sustain these elevated price levels over the long term, a July normalization would likely trigger a relatively rapid correction toward historical averages, catching aggressive paper traders off guard.

5.3 Scenario 3: Strait of Hormuz Reopens in August

An August reopening pushes the timeline further into the summer and tests the limits of reported global inventories. We think this delay redirects attention toward political timelines, particularly as domestic cost of living pressures rise ahead of the upcoming US elections.

While Washington retains military options to attempt an earlier reopening, extending the closure into August means navigating a fragile ceasefire environment where the risk of indirect escalation remains elevated.

Financially, an additional month of closure forces commercial buyers to continue drawing down emergency reserves and rely more heavily on alternative, higher cost supply channels. Prices would likely remain high for longer, but would still face a clear ceiling rather than a sustained breakout.

Under this bear case scenario, we see oil at $100.

When the Strait eventually reopens in August, the return of normal flows would hit a market where demand has already been weakened by months of high costs, triggering immediate downside pressure on prices.

5.4 Scenario 4: Strait of Hormuz Reopens in September

A September reopening would trigger severe market tighteness, as a prolonged closure would deplete strategic reserves and drive widespread panic around global supply availability. Under this scenario, we see WTI at $110.

6. Our Final Take on Oil

W believe the market is currently driven more by headlines than by the underlying physical balance. Strong non-OPEC supply continues to provide a meaningful buffer to global markets, while demand has remained more resilient in the short term but shows signs of regional weakness.

Strategic reserves and inventories continue to absorb shocks, limiting the pass-through into prices. As a result, the market looks more balanced than the prevailing narrative suggests. We therefore remain focused on physical flows, where supply still appears sufficient in most reasonable scenarios.

The world needs lower oil prices to keep growing.

Reasonable oil prices have historically supported higher quality of life.

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.

We do not add positions often. When we do, it is because we have done the work, the timing is right, and we have genuine conviction. This is one of those moments.

It operates in one of the most defensible corners of the semiconductor value chain. The kind of business where customers do not switch suppliers, where expertise takes decades to build, and where the AI infrastructure wave creates demand that has nowhere to go but up. Very few companies in the world can do what this one does, and that is precisely why we want to own it.

While the world debates which AI model wins, China is building the infrastructure to make the entire debate irrelevant. And while most investors are focused on who makes the chips, we think the real opportunity sits one step earlier. In what makes the chips possible in the first place.

China is quietly winning the chip war. Morgan Stanley estimates the domestic self-sufficiency ratio has gone from 10% in 2021 to 41% in 2026, with industry projections pointing to 86% by 2030.

We know that sounds optimistic. But think about BYD. A decade ago, most people in the West had never heard of them. Today they are the largest electric vehicle company in the world, outselling Tesla in most markets. That did not happen by accident. When China commits to leading a sector, things tend to move faster than the rest of the world expects.

Semiconductors are following the same path. US export restrictions only accelerated that by removing any remaining hesitation in Beijing. Cutting off access to leading edge technology turned chip self-sufficiency from a long term goal into a national obsession backed by unlimited resources.

We want to be clear about something. We are adding this name because the fundamentals and timing align, the way they always have at Aurelion. This has nothing to do with chasing AI momentum. We have been early on oil tankers, dry bulk, uranium, and financial companies. We apply the same discipline here.

The segment we are most focused on within this theme is Wafer Fab Equipment, or WFE. Every time chip complexity increases, manufacturers need more equipment to process each wafer. That relationship is not going away.

According to Counterpoint Research, total WFE revenues grew 12% YoY in 2025 to $143.1B, driven directly by AI infrastructure buildout and surging demand for leading edge logic, High Bandwidth Memory, and advanced packaging.

The top five manufacturers alone grew revenues 14% to $114.6B. Counterpoint forecasts another 11% growth in 2026, reaching $159.1B.

The more complex the chip, the more equipment it takes to build it. That is the thesis, and it compounds with every new generation.

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Three of the most consequential companies in the world are heading to public markets within months of each other:

• SpaceX just filed for what would be the largest IPO in history

• OpenAI expected to file in the coming days, targeting a September listing

• Anthropic is eyeing October at a $900B+ valuation

Combined, these companies are targeting a market cap of $3.5 trillion, and could collectively raise over $195 billion in fresh capital. To put that in context, the dot-com era’s three largest IPOs combined raised less than $30 billion.

We created three summary cards to make comparisons easier. Some metrics are based on our estimates, explained in more detail further below.

As the chart below outlines, the valuation trajectory has been spectacular across all three companies.

Below, we dive into each company’s financials and value them. More importantly, we explore how AI sentiment and thematic investing are shifting as these IPOs approach. In our view, several AI names will continue running up.

That said, to successfully make money with these companies, whether buying or shorting, investors need to understand where sentiment and the thematic narrative are heading, not rely on a financial model.

If you have been following our work, you would rightly guess these companies do not fit our typical investment criteria. However, we believe they carry significant implications for sentiment and the AI thematic across global capital markets.

We have argued for a long time that looking only at fundamentals, such as cash flow, margins, and multiples, misses the full picture. The vast majority of fundamental bottom-up funds have underperformed in recent years by ignoring broader market thematics and sentiment.

This is why thematic investing is becoming increasingly important.

Market themes are driving more and more of overall returns.

Which leads to a simple question: if you do not own these large-cap AI companies, will you get left behind?

Table of Contents

1. SpaceX: The Craziest IPO Ever Filed

2. OpenAI: The Billion-Dollar Loss Machine

3. Anthropic: The Fastest-Growing Company in History

4. IPOs Side by Side

5. Implications for the AI Thematic

6. How to Use Thematic Investing

7. Bubble or Not? A Simple Argument

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1. SpaceX (SPCX): The Craziest IPO Ever Filed

The S-1 IPO filing reads like a sci-fi novel.

Here are some of the facts that caught our attention the most:

SpaceX filed for the biggest IPO in history.

At a targeted $1.75T valuation, it would be the largest public offering ever. The company posted $18.7B in revenue in 2025 but still lost $4.9B, and has burned through $37B in cumulative losses since Musk founded it in 2002.

Musk’s bonus requires colonizing Mars. His compensation package, potentially worth $737B, is split into two milestones.

The first, worth ~$583B in stock, only vests if SpaceX reaches a $7.5T market cap and builds a permanent colony on Mars with at least one million inhabitants.

The second, worth around $154B, requires orbital data centers delivering 100 terawatts of annual compute. Without much research we can confidently say that “colonize another planet” is a first for a CEO performance metric.

Anthropic is paying $1.25B per month to rent Musk’s GPUs. The deal runs through May 2029 and could total over $40B, making it one of the largest compute contracts ever signed. X AI overbuilt its data center capacity, usage of its chatbot Grok declined, and the spare GPUs are now being rented to a direct competitor.

Musk holds 85.1% of voting power while serving as CEO, CTO, and Chairman simultaneously. His Class B shares carry 10 votes each. Even after the IPO dilutes his stake, voting control stays above 50%. He functionally cannot be fired, challenged, or overruled by any shareholder or board combination.

SpaceX spends more on AI than on rockets. AI infrastructure capex hit $12.7B in 2025 and $7.7B in Q1 2026 alone, roughly four times the space segment’s R&D budget for Starship. The company that put astronauts in orbit now pours the majority of its capital into GPU clusters on the ground.

The claimed total addressable market is $28.5T, about 25% of global GDP. SpaceX calls it “the largest actionable total addressable market in human history.”

The breakdown: $26.5T in AI, $1.6T in connectivity (Starlink), and $370B in space launch. In other words, SpaceX is telling investors that rockets are the sideshow.

Starlink is enormous. Subscribers grew from 2.3M in 2023 to 10.3M by March 2026. The connectivity segment generated $11.4B in revenue in 2025, 61% of total company revenue, and unlike the AI division, it’s already profitable. Starlink alone would rank as one of the most valuable telecom businesses on Earth.

1.1 The AI Trojan Horse

Strip away the rockets and the Mars rhetoric. SpaceX is filing to go public as an AI infrastructure company that happens to own rockets.

In 2025, SpaceX spent $12.7B on AI infrastructure, four times what it spent on Starship R&D. In Q1 2026, $7.7B went to AI capex out of $10.1B total.

That’s 76 cents of every capital dollar flowing into GPU clusters.

The AI segment lost $6.4B in 2025 and another $2.4B in Q1 2026. But Starlink prints enough profit to fund the burn, and the IPO will pour gasoline on the fire.

The strategy has three layers.

Layer 1: Rent what you have. X AI overbuilt and Grok usage declined. So SpaceX turned its Colossus data centers into a cloud business overnight. Colossus is the world’s largest AI supercomputer cluster. Anthropic now pays $1.25B per month for access to 200,000+ Nvidia GPUs across Colossus 1 and Colossus 2 in Memphis.

Layer 2: Buy the application layer. Cursor is an AI-powered code editor that exploded across the software world, crossing one million paying users faster than almost any SaaS product in history. Revenue went from $500M in May 2025 to $3B by the time of the filing.

Cursor already uses X AI compute as a customer. If SpaceX owns it outright, it controls both the GPU infrastructure and the tool millions of developers use every day. Same logic that led Apple to build its own chips: control the full stack so nobody can squeeze you in the middle. SpaceX secured the right to acquire Cursor for $60B, 30 days after the IPO closes. That’s a 20x revenue multiple.

Layer 3: Move the data centers off the planet. In January 2026, SpaceX filed with the FCC to deploy up to one million satellites functioning as orbital data centers.

Solar-powered. In space, there are no cooling costs, water or permitting fights. Morningstar’s analysts noted this would require roughly 6,667 Starship flights per year, 530 times the current global launch mass to orbit.

SpaceX needs investors to believe it could work eventually, and the $26.5T AI TAM claim in the S-1 is designed to make that case. The filing even lists capital deployment targets for “Moonbase Alpha,” a lunar outpost intended to manufacture AI satellites and launch them via magnetic accelerator.

1.2 The Hidden Stakeholders

Before a single retail investor touches SPCX on June 12, a small group of early backers will be sitting on some of the greatest investment returns in history.

Alphabet: $900M to $100B+. In 2015, Google & Fidelity jointly invested $1B when SpaceX was worth ~$12B. In Q1 2025 alone, Alphabet booked $8B in unrealized gains from its SpaceX position, 25% of its total net income that quarter. Most Alphabet shareholders have no idea it’s there, buried in “other income.”

Founders Fund: $20M to roughly $60B. Peter Thiel wrote the check in 2008, after three consecutive rocket failures, when SpaceX was weeks from bankruptcy. Now diluted to roughly 3.5%, that stake is worth nearly $60B at IPO pricing. The single largest return on a single investment in venture capital history.

The Bitcoin stash. Buried in the balance sheet: 18,712 Bitcoin at a fair value of $1.29B. Cost basis was $661M, roughly $35,320 per coin.

This was more than double what on-chain trackers estimated. Over 10,000 BTC were sitting in custodial arrangements invisible to blockchain analytics. SpaceX now holds more Bitcoin than Tesla, making Musk the controlling figure behind the two largest corporate Bitcoin positions outside of Strategy.

1.3 One Man’s Company

Elon Musk will step onto the Nasdaq trading floor on June 12 holding more concentrated corporate power than any individual in modern American history.

He serves as CEO, CTO, and Chairman simultaneously, controlling 93.6% of Class B stock, which carries 10 votes per share, translating into 85.1% of total voting power. Even after the IPO, control remains above 50%. He cannot be removed, and he appoints the board.

On the capital allocation side, the company has also spent $131M on Cybertrucks from Tesla. We believe this raises questions about how capital is being allocated and shows how much spending happens within Musk’s own companies.

SpaceX Spent $131M on Cybertrucks

1.4 SpaceX Financials

A look at segments:

Space: Launches rockets for governments, NASA, and commercial customers, and is developing Starship, the next-gen vehicle designed to carry 100x more payload at a fraction of the cost.

Connectivity: Starlink, a global satellite internet service beaming broadband from 9,600+ satellites to 10.3M paying subscribers across 164 countries.

AI: The merged xAI and X (formerly Twitter) business, which includes the Grok chatbot, X’s advertising platform, and a massive GPU data center operation now being rented to outside customers like Anthropic and Cursor.

Starlink is the engine. Revenue nearly tripled from $3.9B in 2023 to $11.4B in 2025, with operating income going from $469M to $4.4B. It prints cash.

ARPU is declining ($99 to $81/month) as SpaceX pushes into cheaper markets, but subscriber growth (2.3M to 8.9M) is more than offsetting that.

$4.1B in revenue but it lost $657M in 2025 because Starship R&D is eating the profits from Falcon launches. The rocket business funds itself, barely.

AI is the money pit. $3.2B in revenue against $6.4B in operating losses in 2025. This segment didn’t exist at this scale until xAI and X were folded in.

Capex alone was $12.7B. The Anthropic deal ($1.25B/month starting mid-2026) should change this picture dramatically in the second half of this year.

At the total company level: $18.7B in revenue in 2025, up 33% from $14B in 2024. The company was actually profitable in 2024 ($791M net income) before the xAI merger dragged it back into the red. Total capex hit $20.7B in 2025, more than the company’s entire revenue the year before. SpaceX is spending faster than it earns, betting everything on the infrastructure paying off at scale.

1.5 The $2T Valuation

The summary of SpaceX valuation is simple: standard DCF and SOTP models break down entirely here. The $1.75 - 2T valuation is entirely a momentum and sentiment play.

What Wall Street is Saying:

Dan Ives (Wedbush Securities) is a bull. He called it “the largest IPO in stock market history” and sees SpaceX at the center of a multi-decade AI and space growth cycle. He predicts an 80% chance SpaceX and Tesla merge by 2027.

Morningstar (Franco Granda) is more measured. They put fair value between $1.1T and $1.7T using a sum-of-the-parts model and flagged that only 3-4% of shares will float, meaning 20-30% price swings are likely (versus 10-15% for Tesla) simply because the tradeable supply is so thin.

Quilty Space (Chris Quilty), the satellite industry’s go-to analyst, projects Starlink alone tracking toward $20B revenue and $14B EBITDA in 2026 with 16.8M subscribers. His numbers imply Starlink could justify a $400B+ standalone valuation on its own.

The bear case, floated by several unnamed analysts, values SpaceX closer to $700–800B on a present-value basis, arguing the $1.75T target assumes too much speculative premium for orbital compute and Mars, which may never generate meaningful revenue.

Reconciling $2T

The only way to get close to a $1.75-2T valuation is to assign around $1T of value to the potential of space data centers. Otherwise, it makes no sense, even with absolutely ridiculous multiples.

We do not like using revenue multiples, but this was the only way to build some sort of framework here. If SpaceX does not develop space data centers, the company is worth at most $700B in our view.

We have added the excel spreadsheet if you want to play with multiples and revenues to see the valuation it implies.

Spacex Sotp Valuation

10.5KB ∙ XLSX file

Download

Download

What Is SpaceX Really Worth?

Here, it would be misleading to treat SpaceX like a normal company by evaluating fundamental cash flows and discounting them back. We know the company will not trade like this, so doing that is completely useless. It would probably give a valuation closer to one-fifth of the current $1.75-2T goal.

For reference, $175-185 per share is the current ballpark for the $1.75T target.

Forecasting a long-term growth rate is also completely useless and will depend heavily on geopolitics and the advancement of global technologies.

The real question is: what is the probability that the TAM materializes, and that SpaceX captures a large share of it?

Our biggest issue with this valuation is that every segment has to go perfectly and revolutionize its market. To justify a 25x revenue multiple, Starlink would need to become the most widely used data connection platform on the planet. The space launch segment also needs to continue growing and avoid pricing pressure or loss of market share to new competitors.

For the AI segment to be worth 45x revenue, it needs to maintain the current sentiment and hype in the market, while SpaceX also has to deliver new ways to monetize its AI infrastructure. And finally, SpaceX needs to become the dominant and first major player in space data centers.

Now that we have established that the financials do not support this valuation, the key question is whether continued support from Elon Musk, political tailwinds, and major AI players like Anthropic, OpenAI, and Microsoft will sustain momentum around the company. If that narrative remains intact, the stock could plausibly open near a $2T valuation and move higher from there.

It will all come down to sentiment and headlines.

Of course, we will not be adding this company to the Aurelion Index when it goes public. However, we will focus on themes and beneficiaries linked to it. We now have more visibility on suppliers, contracts, and spending patterns, which will help identify companies positioned to benefit from SpaceX’s massive spending.

SPCX lists June 12.

2. OpenAI: The Billion-Dollar Loss Machine

OpenAI is rumored to file in the coming days, just after SpaceX went public with its filing. Goldman Sachs and Morgan Stanley are leading. Target: Q4 2026 listing, possibly September, at a valuation between $852B and $1T.

The company is generating ~$2B per month in revenue, hit a $25B annualized run rate by March 2026, and counts 900M weekly active ChatGPT users, 50M consumer subscribers, and 9M paying business users. Enterprise now makes up over 40% of revenue and is on track to reach parity with consumer by end of 2026.

OpenAI is losing roughly $1.22 for every $1 of revenue. Internal forecasts project a $14B loss in 2026, roughly 3x worse than 2025. The company expects cumulative losses of $44B from 2023 through 2028 before turning profitable in 2029.

In March 2026, OpenAI closed the largest private funding round in history: $122B at an $852B post-money valuation. That round itself expanded from an earlier raise at $730B pre-money announced in February.

2.1 The IPO Race

This is a three-way race for public market capital. SpaceX goes first (June 12). OpenAI targets September. Anthropic is eyeing October at $900B+.

Dan Ives at Wedbush: “Getting to public markets first is very important. It sets a valuation, you’re the first to meet with investors, and there’s an advantage.”

OpenAI Revenue Path

The Loss Story

OpenAI’s own internal forecast leaked by The Information shows the company does not expect to turn a profit until 2029, at which point it projects $100B in revenue. To reach that level, it plans to spend $200B through the end of the decade, with 60–80% allocated to compute for training and inference.

OpenAI does not own its compute. Unlike SpaceX (which owns Colossus), OpenAI relies almost entirely on Microsoft Azure. CFO Sarah Friar has described this as a deliberate “light balance sheet” strategy, partnering rather than owning, with contracts structured flexibly across providers and hardware types.

The upside: no massive infrastructure on the books. The downside: no owned infrastructure as a moat, and Microsoft takes a cut of everything.

The Restructuring

As you might know, OpenAI was started as a non-profit with great goals and virtues. It turned into a for-profit organization to get ready for an IPO.

Sam Altman, who has repeatedly stated he’s not interested in wealth and took no equity in the company, was spotted driving a beautiful $4M Koenigsegg Regera, and the public perception officially went down the drain. While he was already wealthy prior to OpenAI this was just too much for the public eye.

2.2 Valuation

Private Valuation

OpenAI’s last private round valued it at $852B.

The IPO targets $1T+. Here is the rough math:

Our Take On Valuation

We are staying far away from OpenAI.

The first reason is that we believe revenue is at high risk due to increased competition from several other chatbots (Anthropic, Gemini, Grok, etc.).

Several initiatives have failed, such as their video creation tools. We believe the company’s recent announcement regarding the integration of ads into the platform is also a sign that the firm is in a difficult position.

Sentiment and public perception of the company are declining. We think that reaching $100B in revenue by 2029 is a far-fetched goal, and the revenue multiple could take a hit as well, implying a much lower valuation.

For example, if OpenAI misses consensus this year and the run-rate at year-end becomes $20B due to increased competition, we might apply “only” a 20x revenue multiple; the valuation would then be slashed in half to $400B.

Every dollar they invested in prior models has essentially gone to zero, as nobody uses those older versions anymore. If they cannot continue to improve their models and a competitor beats them, the company could lose significant value.

Anthropic faces the same issue, but its valuation looks more “attractive” in comparison to OpenAI.

3. Anthropic: The Fastest-Growing Company in History

Anthropic has not filed an S-1. No listing date is set. But the trajectory is clear: the company is closing what is likely its final private round ($30-50B at $900B+ valuation), has engaged Wilson Sonsini for IPO preparation, and is in early talks with Goldman Sachs, JPMorgan, and Morgan Stanley. Target: October 2026 listing. Bankers expect the offering could raise more than $60B.

The numbers behind this are unlike anything private markets have ever produced. Anthropic grew from $1B in annualized revenue in December 2024 to $9B by December 2025 to $30B by April 2026. Sacra estimates the run rate hit $43B by April. TechCrunch’s sources put the real figure closer to $40B.

No enterprise technology company in recorded history has compounded at this pace and scale. The valuation has increased 16x in 14 months, while revenue has expanded roughly 45x over the same period.

Eight of the Fortune 10 are Claude customers. Over 1,000 enterprise customers now spend more than $1M annually, up from just a dozen two years ago. Enterprise now accounts for 80% of revenue.

Unlike OpenAI, which leads in consumer applications, Anthropic is positioned as an enterprise-first business. This is more sticky revenue.

The Claude Code Phenomenon

Claude Code, Anthropic’s agentic coding tool, launched publicly in May 2025. It reached $1B in annualized revenue within six months. By February 2026, it had grown to $2.5B in run-rate revenue.

3.1 The Loss and Spending Story

Anthropic is not profitable. Internal projections leaked by The Information show $11B in losses in both 2026 and 2027, with profitability expected in 2028.

But here is where Anthropic separates from OpenAI: the cash burn path is dramatically more efficient. Anthropic forecasts its burn dropping to roughly one-third of revenue in 2026 and 9% by 2027. OpenAI expects burn to stay at 57% of revenue in both years. By 2028, OpenAI projects operating losses equal to three-quarters of revenue. Anthropic expects to break even.

Compute Infrastructure

Anthropic does not own its compute. It rents capacity from Amazon (AWS), Google Cloud, and SpaceX.

50x valuation increase in 28 months. At $900B valuation on a confirmed $30B run rate, the company trades at 30x forward revenue. If the real run rate is closer to $40B, as TechCrunch reports, the multiple compresses to roughly 22x. Still expensive.

But Anthropic reaches profitability three years before OpenAI while generating higher revenue and spending roughly 4x less on training.

There are two key implications from this:

1. At both a $1 trillion valuation, we believe Anthropic is a much better investment than OpenAI.

2. You can lose your money and dominant position extremely fast in this chatbot era. This means those 30-40x revenue multiples are definitely not realistic over the long term. However, if OpenAI sustains around a 34x multiple, Anthropic is likely to trade at similar levels as well.

4. IPOs Side by Side

Anthropic leads the pack in revenue growth:

SpaceX could be profitable if it did not spend on AI:

We want to highlight that we used revenue multiples, which we do not typically prefer, to illustrate what they imply for valuation. However, these revenue multiples are highly uncertain, and both valuations and share prices are ultimately driven by sentiment rather than a financial framework.

At current expected IPO valuations, we believe the best investment is Anthropic, but it remains highly speculative and dependent on politics, technological advancements, and overall AI sentiment in global markets.

Of course, as a note, we always aim to be transparent, and we are not planning to buy Anthropic personally. We believe our portfolio offers a better risk/reward profile than those three.

5. Implications for the AI Thematic

1) These three companies will trade on sentiment.

If these companies IPO at the valuations they are targeting, they will largely trade on sentiment and AI-related news, as their valuations are not justified using a fundamental approach. Significant swings should be anticipated.

2) Large index concentration in AI will increase.

3) The AI theme will attract even more attention. With suppliers being discussed on earnings calls, customers becoming better known, and greater visibility into where capital is flowing from these companies, we believe several AI beneficiaries will continue to rally.

The bull case for the AI Thematic:

Three mega-IPOs (SpaceX, OpenAI, Anthropic) are all lined up for summer/fall 2026. Every AI CEO has a direct financial incentive to talk up AI valuations before and after their listing. That’s months of relentless positive narrative, roadshows, and media cycles, all hitting at the same time.

You should expect more Joe Rogan podcast appearances from those CEOs.

China re-entering the AI race is generally supportive for the AI thematic at a high level, as it reinforces demand and global adoption, but it can also introduce longer-term competitive pressure on pricing and margins.

Put it together: a hot IPO summer with the biggest listings in history, AI CEOs on every stage, and China confirming the thesis. That’s a strong tailwind for AI valuations through the end of 2026.

6. How to Use Thematic Investing

We have mostly been focusing on industries other than AI over the last year, as the argument was there were better risk/reward opportunities elsewhere.

We are currently working on potential AI beneficiaries. Our criteria are extensive, and finding the right company has taken time. We are looking for real demand, strong fundamentals, a company with a long history as well as a good valuation.

The portfolio has done very well without AI names, but adding some (limited) AI exposure before an IPO frenzy is a great capital allocation in our view.

Click here to view historical portfolio performance

Below, we are sharing our approach to thematic investing. Whether it is an AI company or a gold miner, the process uses the same framework:

1) Identify an attractive investment theme

There has to be an attractive entry point. It needs to answer the question: why is now the right time for this theme?

2) Pick companies benefiting from the theme through a fundamental approach

Using typical fundamental analysis such as competitive positioning, discussions with management, financial modeling, etc. The important point here is that we do not pick 50 companies tied to the theme. We pick 1 or 2 companies that should both perform well on their own and also benefit from the theme.

3) Actively monitor the company

The most important part of investing is knowing when to exit. Monitoring the company allows us to determine when it is time to exit based on the company’s fundamentals. However, another very important point is that this monitoring provides first-hand insights into the drivers of the theme.

4) Company insights flow back into the theme

Sometimes, you can be among the first to identify signals from a company indicating that a theme is ending or shifting direction. Then you come back to step 1: is the theme still attractive? Have the beneficiary companies changed?

You can see that this framework is more of a cycle than a simple sequence of steps. All of it is done through a concentrated approach.

You cannot do all of this for 200 stocks. But if you select your 20 highest-conviction stocks using this approach, we believe it offers a strong risk/reward framework for investing and outperforming the market.

Of course, sometimes standalone company opportunities are so compelling that they work extremely well even without being tied to a broader investment theme, and those opportunities should be pursued.

As you know, you can view the portfolio’s positioning here: Aurelion Index

Below is an example that fits our framework well, where we highlight a lesser-discussed AI beneficiary.

7. Bubble or Not? A Simple Argument

A simple argument for the case that there is still some leg up to the AI thematic is this chart below prepared by Roundhill investments.

In 2000, valuations ran far ahead of fundamentals. This time, fundamentals are largely driving the move.

This summer could be a driver of continued multiple expansion for large AI companies through ongoing marketing efforts.

However, it will be important to monitor whether earnings continue to grow at a strong pace, as otherwise sentiment could shift quickly.

We are aware there is much more to be discussed about these companies, the state of the market, and AI. So feel free to leave your comments or questions below. Always happy to discuss!

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.

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.

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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.

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 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 Defensive Portfolio

• Shipping Basket

• Japanese Equity Basket

• Canadian 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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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.

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.

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

Paid Substack subscribers can access the real-time portfolio here (please scroll to the bottom of that page).

You will also receive our trades through the Substack chat here.

A reminder of what you get as a paid subscriber:

• ~2 reports per week. Stock ideas, thematic research, commodity, and more.

• Full access to our entire library of reports. Currently 100+ reports.

• Live access to our actively managed portfolio: the Aurelion Index. All stocks are backed by in-depth research.

• Access to our real-time trades & rationale. As a reminder, this is not investment advice, please conduct your own research.

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Our latest stock addition:

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

The Aurelion Team

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.

© 2026 Aurelion Research Inc.

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!

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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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