We had been waiting for the right moment.

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

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

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

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

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

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

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

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

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

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

Table of Contents

1. The State of the Canadian Market

2. Why We Are Bullish on Canada

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

4. Growth Driver 2: Importance of Canadian Pension Funds

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

6. The State of the Canadian Economy

7. In Conversation

   7.1 CIO of a Multi-Billion Dollar Canadian Fund

   7.2 Buy-Side Financials Analyst

   7.3 Canadian Portfolio Strategist

   7.4 Banking Risk Analyst

8. Canadian Equity Basket

9. Key Risks

10. Our Final Take on Canada

1. The State of the Canadian Market

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

But there is a catch that we intend to exploit.

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

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

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

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

2. Why We Are Bullish on Canada

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

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

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

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

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

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

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

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

How Defence Spending Is Increasing

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

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

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

The policy goals are ambitious.

But what are the Canadian government’s main targets?

1. 70% domestic share of defence procurement

2. 50% increase in defence exports

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

4. More than 240% growth in industry revenues

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

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

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

4. Growth Driver 2: Importance of Canadian Pension Funds

Canada is far above its weight in the pension world.

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

That’s a system large enough to move markets.

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

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

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

Employee Compensation Matters

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

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

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

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

A Massive Negative Driver in the Last Decade

The Foreign Property Rule kept money in Canada until 2005.

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

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

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

A Changing Tone

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

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

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

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

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

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

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

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

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

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

Quantifying the Potential Impact (estimates)

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

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

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

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

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

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

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

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

AI is turning into an electricity story in Canada.

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

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

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

Data Center Buildout

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

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

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

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

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

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

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

How We Think About Our Equity Basket

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

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

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

6. The State of the Canadian Economy

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

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

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

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

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

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

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

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

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

7. In Conversation:

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

Read more

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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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.

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.

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

Read more

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

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

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

The Chernobyl Disaster (April 26, 1986)

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

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

Table of Contents

0. Introduction

1. Why Uranium, and Why Now?

   1.1 The Timing Looks Right

   1.2 Supply Can’t Keep Up With Demand

   1.3 The AI Electrification Boom

2. What Is Uranium?

   2.1 Origins & Physical Traits

   2.2 The Power Of Uranium

   2.3 The Lifecycle of Uranium

3. Nuclear Energy 101

   3.1 Inside the Power Plant

   3.2 Reactor Types in the U.S.

4. Uranium Global Demand Outlook

   4.1 The U.S. Needs More Nuclear Power

5. Uranium Global Supply Outlook

   5.1 The Supply Story Will Break

6. Who Are the Big Players?

   6.1 Cameco (Canada)

   6.2 Kazatomprom (Kazakhstan)

7. Where Uranium Prices Are Headed Next

8. Our Favorite Stock Ideas

   8.1 Uranium Stock: Top Idea #1

   8.2 Uranium Stock: Top Idea #2

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

10. Why Only Nuclear Meets AI’s Power Requirements

    10.1 Nuclear vs Solar: The Reality of Scalable Power

11. What About Kazakhstan?

12. Key Risks to the Bull Case

13. Our Final Take on Uranium Market

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1. Why Uranium, and Why Now?

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

1.1 The Timing Looks Right

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

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

With uranium, the re-rating has already begun.

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

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

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

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

1.2 Supply Can’t Keep Up With Demand

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

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

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

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

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

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

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

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

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

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

But we believe this is only the beginning.

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

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

1.3 The AI Electrification Boom

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

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

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

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

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

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

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

2. What Is Uranium?

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

2.1 Origins & Physical Traits

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

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

2.2 The Power Of Uranium

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

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

2.3 The Lifecycle of Uranium

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

Nuclear Fuel Cycle:

Refining the Raw Material

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

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

Manufacturing the Fuel

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

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

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

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

Energy Production & Recycling

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

3. Nuclear Energy 101

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

3.1 Inside the Power Plant

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

Inside the Core of a Nuclear Reactor

3.2 Reactor Types in the U.S.

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

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

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

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

4. Uranium Global Demand Outlook

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

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

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

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

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

Meanwhile, demand keeps climbing across every scenario.

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

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

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

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

4.1 The U.S. Needs More Nuclear Power

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

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

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

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

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

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

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

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

5. Uranium Global Supply Outlook

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

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

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

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

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

5.1 The Supply Story Will Break

And these two following charts prove exactly that point.

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

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

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

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

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

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

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

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

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

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

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

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

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

6. Who Are the Big Players?

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

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

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

6.1 Cameco (Canada)

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

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

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

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

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

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

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

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

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

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

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

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

6.2 Kazatomprom (Kazakhstan)

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

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

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

Kazakhstan: Uranium Mines & Nuclear Legacy Assets

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

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

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

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

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

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

7. Where Uranium Prices Are Headed Next

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

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

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

We believe uranium prices could reach $100 in 2026.

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

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

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

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

8. Our Favorite Stock Ideas

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

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

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

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

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

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

Introduction: Why LatAm and Why Now?

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

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

Latin America Poised for a 2026 Political Shift

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

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

Every capital market is set to outgrow its underlying economy.

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

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

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

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

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

The Regional Breakdown

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

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

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

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

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

Table of Contents

0. Intro: Why LatAm and Why Now?

1. The LatAm Bull Case (2026-2035)

   1.1 Potential Returns: The 2030 Outlook

   1.2 Valuation: Room for Re-Rating

2. Brazil Is Our Top Pick

   2.1 Brazil is Just Too Cheap

   2.2 The Spring Bull Case

   2.3 Supply & Demand Squeeze

   2.4 Great Capital Rotation

   2.5 Brazil’s Fiscal & Inflation Outlook

   2.6 Resolving the Crowding Out Problem

   2.7 Our Favorite Brazilian Stock: A New Portfolio Addition

   2.8 Perspectives on Cost of Capital

   2.9 Our Final Take on Brazil

3. The Argentina Experiment

   3.1 Opening Up the Economy

   3.2 A Concrete Economic Recovery

   3.3 A History of Turmoil

   3.4 Debt Profile & Liquidity Squeeze

   3.5 Argentina Bull Case

   3.6 Energy Turnaround

   3.7 Mining & RIGI Catalyst

   3.8 Our Final Take on Argentina

4. Colombia: High Upside on Hold

   4.1 Colombian Energy Squeeze

   4.2 Election Catalysts & LT Optionality

   4.3 Debt Profile Ahead of the Vote

   4.4 Our Final Take on Colombia

5. Chile: A Safe Haven in Latin America?

   5.1 Unlocking the Investment Backlog

   5.2 Copper Prices & Sovereign Strength

   5.3 Tax Cuts & Capital Market Reforms

   5.4 Our Final Take on Chile

6. Mexico: At a Turning Point

   6.1 The Current Reality

   6.2 Scenarios & Regional Upside

   6.3 Our Final Take on Mexico

7. Our Final Take on Latin America

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1. The LatAm Bull Case (2026-2035)

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

Key Themes Converging in LatAm

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

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

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

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

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

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

1.1 Potential Returns: The 2030 Outlook

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

Three specific threads tie the whole story together:

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

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

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

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

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

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

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

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

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

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

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

1.2 Valuation: Room for Re-Rating

Latin American equities still have massive room for multiple expansion.

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

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

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

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

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

2. Brazil Is Our Top Pick

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

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

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

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

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

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

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

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

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

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

2.1 Brazil is Just Too Cheap

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

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

2.2 The Spring Bull Case

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

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

2.3 The Supply & Demand Squeeze

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

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

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

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

2.4 The Great Capital Rotation in Brazil

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

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

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

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

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

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

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

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

2.5 Brazil’s Fiscal & Inflation Outlook

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

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

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

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

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

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

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

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

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

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

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

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

2.6 Resolving the Crowding Out Problem

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

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

The Path to Rebalancing

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

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

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

2.7 Our Favorite Brazilian Stock

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

Embraer: A Multi Decade Growth Story

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

A Balanced Business Mix

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

Geographically, it is very well positioned in the West. North America accounts for 59% of its $7.4B in annual revenue, followed by Europe at 24%. This footprint allows the company to capitalize on the massive demand for private jets and the need for airlines to replace aging regional fleets in the US.

The Ten Year Roadmap

Embraer has a very clear plan for the next decade.

For 2026, revenue is expected to reach between $8.2B and $8.5B. This near term growth is being driven by its current successful platforms, including the E2 commercial jets and the Praetor executive line.

Looking further ahead, it expects to hit double digit revenue by 2030 as it accelerates deliveries of its current aircraft. By 2035, the focus shifts to Eve Air Mobility, its subsidiary developing electric vertical take off and landing (eVTOL) aircraft. Eve is expected to be the main driver of growth in the next decade as urban air travel takes off. With a huge $31.6B backlog and a high margin services business to lean on, it is moving from a period of recovery into a decade of serious expansion. We find the setup very compelling.

Financial Performance & Cash Generation

The company’s financial recovery is clearly visible in the steady climb of revenue over the last few years. After hitting a low point in 2020 at $3.77B, sales have grown every year to reach $7.57B in 2025.

For 2026, EMBJ expects this momentum to continue with a target range between $8.2B and $8.5B. This growth shows a business that has moved past its recent struggles and is now operating at a much larger scale.

Equally important is the company ability to generate cash. After heavy losses in 2019 and 2020, the business has remained cash flow positive for five straight years. Even with elevated spending to ramp up production, it generated $491M in free cash flow last year. For 2026, management expects at least $200M in free cash flow. While conservative, this allows the company to fund growth and support its $31.6B backlog without adding debt.

Strategic Backlog & Expansion Projects

EMBJ’s order backlog has grown at a 16.5% CAGR since 2020, reaching $31.6B in 2025. It could approach $50B when including existing purchase options.

The backlog is also becoming more diversified. While commercial aviation remains the largest segment, we believe growth in executive aviation and defence adds a more stable, long-term revenue base.

To convert this massive backlog into actual sales, the Brazilian company is focusing its capital spending on three major expansion projects.

Executive Aviation Production. A $90M investment is currently underway to increase production capacity in both Brazil and Melbourne, Florida. This expansion is designed to match the rising demand for private jets and ensure the company can meet its delivery targets through 2027.

Services: OGMA Engine Line. Through its OGMA subsidiary, it has invested $105M in a brand new Pratt & Whitney engine maintenance line. This facility began operations in April 2024 and is expected to reach full ramp up by 2030, contributing roughly $650M in annual revenue as it services the global fleet.

Services: North American MRO. It is also investing $70M to expand its Maintenance, Repair, and Overhaul (MRO) capabilities in Fort Worth, Texas. This project aims to support a 50% increase in NA commercial aviation clients by 2027. By positioning these services close to its largest customer base, it is securing high margin, recurring income for years to come.

Improving Returns & Market Consensus

The company is now consistently creating value for its shareholders by keeping its Return on Invested Capital (ROIC) well above its cost of capital.

After a difficult period with negative returns in 2020, the business has staged a strong recovery. By 2024, ROIC rose to 10.2% and is expected to reach 10.8% by 2026. We see this as confirmation that Embraer is not only growing, but also becoming more efficient at turning investments into profit.

Return on Invested Capital (ROIC)

Market expectations for the business are also on the rise.

Analysts have steadily increased their forecasts for both revenue and earnings through 2028. Revenue consensus for 2026 sits at ~$8.39B, with projections climbing toward $9.67B by 2028.

Similarly, EBIT forecasts show a strong upward trajectory, with earnings expected to grow from $777M in 2026 to $935M by 2028. We believe these rising estimates reflect a growing confidence in the company’s ability to execute its massive backlog and maintain its current momentum.

Financial Projections & Valuation

Our estimates reflect a business entering a period of steady, profitable expansion. We project total sales to grow from $8.4B in 2026 to over $13B by 2030, maintaining a low double-digit growth rate throughout the decade. This top-line growth is accompanied by expanding margins, with Adj. EBITDA margins expected to climb from 12.3% to nearly 15% as it benefits from its high-margin services business and more efficient aircraft production.

Historical Context

Looking at the historical EV/EBITDA multiples, the company currently trades at 11.5x, which is in line with its long-term average and closely tracks its peer, Airbus. After the extreme volatility of 2019-2020, the valuation has stabilized. We believe this multiple is well-supported by its improving Return on Invested Capital (ROIC) and its clear path to reaching $13B in revenue by 2030.

Key Valuation Assumptions

• Predictable Revenue: The confirmed $31.6B backlog provides high visibility for continued sales growth over the next several years.

• Margin Expansion: We expect margins to continue scaling, following a similar trajectory to Airbus as production efficiency improves.

• Cash Flow Strategy: While heavy capital investment will impact free cash flow conversion in the near term, the company has already successfully paid down its debt.

• Shareholder Returns: With a clean balance sheet, cash generated after capital investments is expected to be directed toward share buybacks.

This operational strength translates into significant cash generation. Free Cash Flow is projected to rise steadily, reaching nearly $1B annually by 2030. This strong cash position allows the company to maintain a very clean balance sheet, with net debt expected to stay below $300M.

Quick technicality: Embraer trades on the NYSE at a 4:1 ratio relative to its shares on the Brazilian stock exchange. Therefore, to arrive at a comparable price target, we have multiplied our derived per-share value by 4 to get $76.7 in 2026. If you want to buy it on the Brazilian stock exchange, our price target would also need to be converted using the current BRL/USD exchange rate, which is around 4.98. This results in a price target of approximately R$95.

Based on these projections, we see a highly compelling valuation.

Using an 11.0x EBITDA multiple, our model points to a value per share of $19.2 in 2026, scaling to $34.2 by 2030. This represents a total upside of 163.8% over the next four years, or an expected share price CAGR of 21.4%.

We believe this more than justifies our bullish stance on the stock as it delivers on its long term flight plan.

2.8 Perspectives on Brazilian Cost of Capital

A great way to look at the Brazilian market is through different tiers of capital. Morgan Stanley compares this to how TV rights work in European football. While there are hundreds of clubs, the few that make it into the Champions League get a disproportionate share of the money.

The “Champions League” of Capital

In LatAm, getting into the MSCI index is like winning those TV rights.

It opens the door to a global audience and an investor base that can diversify risk much more easily. Companies that operate globally and earn in hard currency benefit from a lower cost of capital because they can lean on the US risk-free rate and stay insulated from local volatility.

On the other hand, domestic mid and small-cap companies are in a different league. They are mostly funded by local players who are stuck with a 14% Brazilian risk-free rate plus a high risk premium. These local investors have fewer ways to diversify, so they see risk through a much narrower lens and demand much higher returns to compensate.

MS strategy has been to identify stocks that are transitioning from local players into the global “Champions League” category. Axia (AXIA3) is a clear example of this migration. In 2022, its ownership was 91% local. Today, that has fallen to 72% as foreign investors have stepped in.

The growth of AI is the main driver here. It has turned the utility sector into a global play, allowing companies like Axia to diversify domestic risks better than any local investor could. In just three years, Axia’s P/E has jumped from 4x to 13x. This has closed the valuation gap with its US peer, Sempra, from 70% in 2023 to just 30% today.

We are not saying this is necessarily the best way to frame it, but we found it interesting to highlight, as we always like to look at how different investors are positioning across markets.

2.9 Our Final Take on Brazil

Brazil remains the heavyweight of the region, offering a mix of steady growth and attractive valuations. While the economy is expected to slow slightly toward ~1.6% growth, its scale and leadership in global commodities make it a core allocation in any Latin American portfolio.

The story is mainly about interest rates and fiscal policy. The central bank has begun cutting rates from a 15% peak, but they remain elevated to contain inflation. At the same time, public debt sits near 80% of GDP, with markets waiting for greater fiscal clarity before increasing exposure.

The overall foundation, however, remains solid.

Brazilian equities currently trade at a steep discount to historical levels. There is value in major iron ore and oil producers, which generate strong cash flows regardless of domestic conditions. Large banks remain resilient in a high-rate environment, while quality retailers should benefit as rates decline and consumption improves.

Brazil does not offer the near-term upside of Argentina, but it provides greater stability and liquidity. It acts as the region’s main stabilizer, and current valuations offer an attractive entry point for long-term positioning.

3. The Argentina Experiment

Argentina provides a fascinating look at a country attempting to force a massive economic shift. The political changes and deep fiscal reforms happening under Javier Milei represent the most significant transformation Latin America has seen in nearly thirty years. However, for this narrative to hold up over time, the country desperately needs to kick off a new cycle driven entirely by capital deployment.

The primary challenge is incredibly simple. Argentina just needs cash. The local pension fund system is a shadow of its former self, and the mutual fund industry is virtually nonexistent. While the everyday retail crowd is active, you cannot build a reliable long term market on that kind of volatility. Right now, locals heavily prefer trading crypto or simply hoarding US dollars. Neither of those habits creates a foundation for a healthy domestic market.

Because of this dynamic, we believe Argentina stands apart from the rest of the region. It is pursuing one of the most aggressive growth agendas, while remaining heavily dependent on external financing to sustain it. This creates a fragile setup, as foreign capital tends to exit quickly at the first sign of instability. Developing a domestic capital market grounded in credible governance is the most urgent and complex challenge ahead.

Everything comes down to a complete lack of trust in the local monetary system. Rebuilding that confidence is the only way forward. Whether the Milei administration pursues this through a truly independent central bank or full dollarization, both paths are highly complex and would require significant constitutional changes. That is the key test we are watching.

Political Momentum and the 2026 Legislative Push

Argentina enters 2026 with a highly clarified political landscape and a strengthened reform mandate following the October 2025 midterm elections.

The vote confirmed broad public support for President Milei, with his coalition securing over one third of the seats in both chambers. Its share rose from nearly 28% to 42% in the lower house and from 18% to 33% in the Senate, materially reducing impeachment risk and improving governability.

Since the midterms, Congress has already approved the 2026 national budget, a labor reform aimed at lowering costs and encouraging formal job creation, and the Law of Fiscal Innocence Presumption, which facilitates the return of US dollars into the formal financial system.

The momentum is accelerating. In his March address to Congress, Milei announced a plan to submit 9 consecutive rounds of ten bill packages every month through 2026. This aggressive agenda targets a complete overhaul of the Penal Code, alongside comprehensive tax and electoral reforms, aiming to fully modernize institutions and reorganize the state.

The Macroeconomic Turnaround

The policy objectives for 2026 are clear.

The goal is to establish a baseline for sustainable growth, regain normal market access, protect the disinflation trend, and maintain fiscal discipline. The central bank is focused on rebuilding reserves and remonetizing the economy, targeting between $10B and $17B in purchases.

The underlying macro conditions are improving.

Fiscal accounts are in surplus, and GDP growth for 2026 is projected at ~3.5%. Inflation has converged to ~3% per month, with further disinflation expected through the second half of the year.

After declining 29% in 2025, the sharpest drop in the region, the peso has stabilized since the midterms and has recently appreciated alongside reserve accumulation. With IMF support and a clearer FX framework, Argentina is positioned to regain access to international capital markets this year.

The Valuation Disconnect & Upcoming Catalysts

It is not too late to lean into the Argentina trade. Confidence has surged since October, pushing country risk down dramatically.

The EMBI spread has compressed to ~6.0%, a massive recovery from the 27.0% seen in late 2023. With government approval holding above 40%, the combination of a fiscal surplus, lower risk premiums, and ongoing reforms will support a deep earnings recovery and significant valuation upside.

Currently, a glaring performance gap exists between equities and bonds. While sovereign fixed income has rallied hard, pushing bonds to ~70 to 80 cents on the dollar, MSCI Argentina remains practically flat in USD terms, trailing its Latin American peers. We view equities as severely undervalued relative to fixed income right now.

The primary reason for this lag is a lack of passive flows. While the rest of the region benefited from massive inflows early this year, Argentina was excluded due to its status as an MSCI standalone market.

The ultimate catalyst for the equity market will be the initiation of an MSCI reclassification consultation. If reform momentum and policy continuity hold, this consultation could begin later this year. A successful move would put Argentina back on the radar of passive investors, potentially unlocking $2.3B in inflows with an upgrade to Emerging Market status by 2027 or 2028.

To get there, authorities are actively lifting capital and foreign exchange constraints while improving regulatory clarity. While hurdles remain, including limitations for foreign institutions and the need for greater English language disclosures, the direction of travel is undeniable.

A more predictable managed float regime, continued reserve accumulation, steady legislative progress, and alignment with the US administration provide a highly constructive setup for the rest of 2026.

3.1 Opening Up the Economy

Historically, Argentina has kept its economy closed off.

The ratio of trade to GDP is surprisingly low at just 25% for a small country, largely because of heavy protectionist policies. The Milei administration is making a massive push to change this by slashing tariffs, cutting taxes, and signing new trade deals to finally open the country to the rest of the world.

Agriculture & the LatAm Connection

Right now, the economy leans heavily on commodities. Of the $87B in goods exported in 2025, ~60% came from primary products and agriculture.

The oilseed complex, which is mostly soy but includes wheat and corn, pulls in ~$26B a year. That makes up 30% of all exports, leaving the country highly exposed to droughts and shifting commodity prices. Interestingly, over 40% of these exports stay right here in Latin America. The Mercosur agreement plays a big role in this. Over the last thirty years, Argentina has expanded its footprint in LatAm and Asia while losing ground in Europe.

Brazil is the absolute biggest buyer, taking 18% of total exports in 2024, mostly in industrial goods and autos. The US and China follow at 8% each, with China mainly scooping up food products like soy.

3.2 A Concrete Economic Recovery

The data below shows a clear V-shaped recovery taking hold. After a tough period where the economy fell by 1.9% in 2023 and 1.3% in 2024, reforms are starting to show results. Growth is expected to bounce back strongly, with GDP rising 4.5% in 2025. Instead of a one-time spike, this then levels off into steady growth of 3.5% in both 2026 and 2027. This shift from decline to stable growth is the foundation of the investment thesis.

The most impressive change is happening with inflation.

The stabilization plan is steadily reducing price pressures across the economy. From a peak of 118% in 2024, inflation is expected to drop to 31.5% in 2025. It continues trending lower from there, reaching 22.4% in 2026 and a more manageable 13.2% by 2027.

Argentina Macro Forecasts

This rapid disinflation is not what we would consider an accident. Strict fiscal discipline is what is driving the disinflation in inflation entirely.

The government is maintaining a primary fiscal surplus, at 1.8% of GDP in 2024 and projected to stay between 1.5% and 1.7% through 2027. By refusing to overspend, the administration has removed the main driver of historical inflation, helping convince the market that this time is different.

Alongside cooling prices, the currency environment is becoming more predictable. The official exchange rate is following a controlled adjustment path, moving from 1,031 pesos per US dollar in 2024 to an expected 1,700 by 2026. This gradual adjustment, combined with a stabilizing current account, gives foreign investors greater visibility and confidence to enter the market without the risk of sudden currency shocks.

3.3 A History of Turmoil

Argentina has a long history of economic turmoil despite being incredibly rich in natural resources. The country has faced frequent currency crashes, massive budget gaps, high inflation, and multiple defaults over the last two decades. The core issue usually traces back to the government spending far more than it brings in, and then trying to mask the problem by artificially controlling the exchange rate.

The 2023 crisis is a perfect example of this dynamic. The government ran a deficit near 4.5% of GDP while actively holding the currency down. That combination completely drained their international reserves to a negative $11B by November 2023 and pushed inflation to an aggressive 25% month over month by the end of that year.

The Human Cost and the Rebound

These constant shocks have hit the population hard. Real wages collapsed by 40% from their 2017 peak, crushing purchasing power across the board. This severe drop pushed the poverty rate to a peak of roughly 50% in 2024.

We are finally seeing a real turn. As the recent stabilization plan takes hold and the economy actually rebounds, inflation is cooling off. This direct improvement allowed poverty to decline below 31.5% in the first half of 2025, showing that the core economic engine is starting to work again.

The Banking Challenge and the Opportunity

Years of high inflation and past banking shocks, like the forced conversion of dollar deposits to pesos back in 2002, have completely stripped money out of the official economy. People simply stopped trusting the banks.

By December 2025, the total supply of money in the system dropped to just 16% of GDP, which is well below the 21% average we saw from 2010 to 2019. US dollar deposits are also incredibly low at a mere 6% of GDP.

A shallow banking system is a huge drag on business growth because companies cannot get the credit they need to expand. It also severely limits the ability of the government to refinance its debt obligations locally.

But this extreme low base is exactly where the upside lies. Because the system is so empty right now, there is massive room to remonetize the economy and expand credit as confidence returns. Locals currently hold an estimated $200B in assets safely tucked away outside the country.

The government just passed a tax amnesty law specifically designed to convince people to bring those hidden dollars back into the formal banking system. If even a small fraction of that wealth returns, it will flood the local market with liquidity and completely transform the credit landscape.

3.3 The Debt Profile and the Liquidity Squeeze

At first glance, central government debt appears elevated at roughly $455B, or ~70% of GDP. That headline overstates the true burden. Once intra-public sector holdings are excluded, which carry minimal refinancing risk, the effective debt stock falls to about $255B, or nearly 40% of GDP.

Within that, ~$96B is owed to official creditors such as the IMF, with longer maturities and more structured repayment profiles. This framing excludes central bank liabilities, provincial debt, and potential legal obligations tied to past disputes, all of which sit outside the core sovereign balance but remain relevant for the broader macro picture.

The real problem is liquidity. The debt profile is heavily front loaded with an average maturity of just five years. On top of that, ~60% of it is denominated in hard currency. When you combine those fast approaching due dates with severely low international reserves, it creates a massive liquidity squeeze.

Navigating the IMF

The country has a long and complicated history with the IMF. After a massive $56B agreement in 2018 and a failed attempt to refinance it in 2022, the program completely fell apart by 2023 because the previous government missed almost all of its targets.

The Milei administration managed to revive the relationship.

In April 2025, they secured a fresh $20B agreement, cleverly front loading $15B of those funds directly into 2025. This new plan focuses entirely on keeping the budget balanced and stacking up foreign exchange reserves. In total, Argentina owes the Fund nearly $56B, with these specific loans typically paid back over a seven to eight year window.

Returning to the Global Bond Market

The local bond market has been through massive swings. After a long lockout, the country finally regained access to global debt markets in 2016, only to restructure almost all of its foreign currency bonds again in August 2020.

Recently, government dollar bonds have rallied hard on the back of the new stabilization plan, hitting their highest prices since that 2020 restructuring.

While the sovereign government is still fighting to get fully fluid market access due to low reserves and near term maturities, the momentum is clearly building. In the meantime, the private sector is stepping up. Corporations and provinces have successfully issued nearly $10B in global bonds since October 2025.

The Political Calendar Hurdle

The biggest obstacle to lasting change is the incredibly short political cycle. Frequent elections make it exceptionally difficult to pass deep economic reforms through Congress. It also creates a bad habit where governments often increase spending right before elections.

The calendar is packed. The country elects one third of the Senate and half of the Lower House every two years, with presidential elections every four years. Because primary elections happen months before the general vote, the campaigning cycle drags on for a long time. All eyes are now on the October 2027 presidential election, which will be the ultimate test to see if this new economic direction has the political backing to last for the rest of the decade.

3.4 The Argentina Bull Case: Unmatched Upside

When you look across the Latin American landscape for the rest of the decade, the upside potential is incredibly asymmetric, and Argentina sits entirely in a league of its own. In the Spring bull case scenario for 2030, the projected returns for the region are strong across the board.

The broader Latin American index is expected to nearly double, but Argentina completely shatters the curve, projecting a massive 176% total upside over the next few years.

What makes this projection so powerful is the actual composition of that return. This is not just a story about cheap stocks getting slightly more expensive. If you look at the breakdown in the data, the vast majority of that 176% upside is driven directly by explosive US dollar earnings per share growth, rather than just a simple valuation rerating. While multiple expansion will certainly play a role as country risk drops and foreign capital returns, the core engine of this massive bull run is pure fundamental business growth.

This earnings explosion perfectly captures the fundamental shift happening on the ground. As the administration executes its deep economic reforms, stabilizes the currency, and unlocks massive sectors like energy and mining, corporate profitability is positioned to skyrocket. Companies that have survived decades of severe capital controls and hyperinflation are suddenly being unleashed into a normalizing pro business environment.

We believe this creates a rare setup. For capital willing to position ahead of the crowd, Argentina offers the most compelling high conviction growth story in the entire emerging market universe. The scale of the earnings growth potential completely separates it from its regional peers, making it one of the most obvious bet for the rest of the decade.

3.5 The Energy Turnaround

The energy picture is where the Argentina story gets really exciting. Thanks mostly to the Vaca Muerta shale formation, the country holds the second largest unconventional gas reserves and the fourth largest unconventional oil reserves globally. We are watching a massive turnaround play out in real time.

The energy trade balance completely flipped from a $4.4B deficit in 2022 to an $8.6B surplus in 2025. That is the highest number on record, and the trajectory suggests it will keep growing. Total oil production has surged to ~850,000 barrels per day. To put the impact into perspective, fuel and energy now make up 12% of exports. That is a huge jump from just 4% back in 2016.

On top of that, new domestic infrastructure like the Moreno pipeline is actively boosting local gas supply. This completely eliminates the need to buy expensive fuel from outside the country. Looking further ahead, new floating LNG projects could push export capacity even higher starting in late 2027.

The Historical Gap

To understand the true scale of this opportunity, you have to look back at the history. Argentina has a long legacy with oil and gas. They made their first discovery over a century ago. At one point, the country actually produced more oil than Brazil. Today, the situation is completely reversed. Brazil pumps out ~4.8M barrels per day, which is roughly 5x more than Argentina.

The reason for that massive gap comes down to decades of policy instability and heavy energy nationalism. Privatizing the state energy company YPF and then nationalizing it again 13 years later severely crushed the potential of the entire industry. For the past two decades, energy companies operated under incredibly difficult conditions. Growth was suffocated by regulated prices at the pump, strict capital controls, and severely restricted access to the heavy equipment needed to actually drill. But that history is exactly what makes the current setup so powerful. Unlocking the oil and gas sector is one of the clearest paths to bringing real stability to the broader Argentine economy.

The Vaca Muerta Catalyst

The entire bull case rests squarely on Vaca Muerta.

While geologists knew the formation was rich in hydrocarbons all the way back in the 1930s, the true scale was not confirmed until around 2010 when fracking technology finally took off in the US.

From a geological standpoint, Vaca Muerta rivals major US shale basins such as the Permian, Eagle Ford, and the Bakken. But when we look at actual well data, Vaca Muerta is outperforming US peers.

Over the past few years, the local teams have really figured out the rock. Productivity and extraction rates have improved dramatically. Looking at the best in class average well productivity for the first year of production, Vaca Muerta is delivering 30,000 barrels per 1,000 feet of lateral.

That completely blows past the Permian Delaware at 21,000 and the Bakken at 20,000. The rock quality here is undeniably world class, and the formation is widely viewed as one of the most promising shale plays in the entire world.

Now that the productivity is proven and the political backing is firmly in place, the next step is actually moving the oil. The historical bottleneck for Vaca Muerta has always been evacuation capacity. You can pump all the oil you want, but you need pipes to get it to the coast. This is exactly where the massive capital expenditure is going right now.

The existing infrastructure, including the Oldelval pipeline and local refineries, handles the current load but caps future growth. The real game changer is the upcoming Vaca Muerta Sur pipeline project, known as VMOS. This specific project completely unlocks the basin. Starting in Q4 of 2026, VMOS will add 180,000 barrels per day of new evacuation capacity.

It is going to scale incredibly fast from there.

By 2027, that pipeline alone will carry 550,000 barrels per day. By 2028 and beyond, VMOS reaches a massive 700,000 barrels per day. When you combine this new pipe with the existing network, it essentially doubles the total takeaway capacity of the entire region compared to where it sits today. This massive infrastructure buildout is the exact catalyst needed for Vaca Muerta to finally reach its full production potential.

3.6 Mining and the RIGI Catalyst

Mining is the next massive catalyst for foreign capital.

Argentina sits on the third largest lithium reserves and the sixth largest copper reserves in the world. Metals exports hit $6.4B in 2025, driven mostly by gold, but the central bank projects the mining trade balance could top $15B by 2030 as copper and lithium rapidly scale up.

To understand the urgency behind this push, you have to look at the global copper market. Following unprecedented supply disruptions in 2025, the market has officially shifted into a steep deficit. Demand is set to expand ~3% annually for the rest of the decade, driven heavily by rising electrification, the global energy transition, and massive power needs for artificial intelligence and data centers. Forecasts show the global copper deficit widening to 2M tonnes by 2030 and hitting a staggering 8M tonnes by 2035.

Argentina is perfectly positioned to help fill this massive gap, representing over 1M tonnes of potential new supply over the next decade.

However, developing new greenfield projects in the country comes with significant technical hurdles. The local mining industry is less developed compared to neighboring jurisdictions. Miners face a challenging starting point, often needing to build entirely new infrastructure like water desalination plants and pipelines coming all the way from the Pacific.

Furthermore, these projects sit at significantly higher altitudes than most active operations on the Chilean side. Because of these logistical hurdles, future supply additions face steep costs. The average capital intensity sits ~$27,000 per tonne, which is 30% higher than 2020 levels. For completely new greenfield projects, that cost pushes well above $30,000 per tonne.

Given the massive expense and the long duration of mining investments, securing firm legal and fiscal protection is an absolute requirement for developers to commit capital. This is exactly why the government launched the Regime of Large Investments, known as RIGI. We believe this framework provides the exact incentives needed for strategic projects requiring over $200M in capital.

In February 2026, the government formalized an expansion of this decree to include upstream hydrocarbon activities on underdeveloped blocks, setting a minimum commitment of $600M for those specific energy plays. To keep the momentum going, the administration recently simplified the rules and extended the entire program through July 2027.

The financial perks within RIGI are highly attractive. Companies get their corporate income tax rate slashed from 35% to 25%. They receive total exemptions on export tariffs after three years, the removal of value added tax prepayment requirements, and accelerated depreciation.

Crucially, the regime grants them free access to US dollars linked to their project export revenues starting in the third year, while guaranteeing absolute legal and fiscal stability for thirty years. The framework is working, and capital is already moving fast. Most major copper projects have already submitted applications to secure these protections. So far, RIGI has received over $70B in project proposals, with $26B already officially approved. Almost 70% of this total is tied directly to mining, while energy makes up the rest.

We are seeing concrete timelines form rapidly.

The Vicuna mining project in the San Juan province has already mapped out $7B in capital expenditure between 2027 and 2030. In the energy space, a massive $15B liquefied natural gas project is actively moving forward, and the government expects even more capital to flow in shortly as these regulatory frameworks cement confidence.

3.8 Our Final Take on Argentina

The country is executing the most aggressive and necessary economic pivot in recent history. While the historical risks are well documented, the market is severely underpricing the actual progress happening on the ground right now. We are officially moving past the fragile early stabilization phase and directly into a period of massive capital deployment.

With inflation rapidly cooling, a sustained fiscal surplus, and billions in foreign direct investment actively lining up for energy and mining, the foundation for a sustainable economic boom is firmly in place.

The combination of world-class hard assets, a deeply undervalued equity market, and a government committed to lasting economic change creates a rare setup. For capital willing to look beyond recent history, Argentina stands out as one of the most compelling asymmetric growth stories in the emerging world for the rest of the decade, though it is not without risks.

4. Colombia: High Upside on Hold

While Colombia has significant upside potential in a true bull scenario, we believe it remains too early to position aggressively. Notably, the country was largely excluded from major regional 2030 upside projections due to high political volatility. Realizing its full potential requires the next administration to enforce strict fiscal adjustments and reduce fixed spending to bring the debt-to-GDP ratio closer to 40%.

The market is currently pricing in a B+ rating, implying more than two full downgrades. If a market-friendly outcome materializes, we could see spread tightening of around 150 basis points, back toward levels not seen since 2021. However, until valuations become more attractive or clearer political signals emerge, we think patience is still required.

The Political Catalyst

Political cycles completely dictate equity performance in Latin America. Center right victories consistently trigger massive rallies, while leftward shifts lead to heavy selloffs. After a rally driven by pure business fundamentals in 2025, the local COLCAP index is now moving entirely on election expectations and foreign capital flows.

Our base case points toward a potential regime change, which would force a major upward rerating for Colombian equities. Conversely, a continuation of the current leftist policies presents severe downside risk for the market.

The State of the Race & Legislative Safety Net

Currently, Ivan Cepeda leads the first round polling, but the landscape is highly fluid. The ultimate deciding factor will be the massive block of undecided and centrist voters. Because rejection rates remain elevated across the board, the candidate who successfully consolidates the orthodox vote has the absolute clearest path to winning the final runoff.

Fortunately, regardless of the presidential outcome, the recent legislative elections created a powerful safety net. Congress is divided. This split legislature provides immediate institutional checks against extreme policy proposals from the executive branch, effectively forcing the next administration to negotiate and govern closer to the political center.

4.1 The Colombian Energy Squeeze

Colombia is facing a severe domestic gas shortage that is forcing a complete rethink of its energy strategy. Domestic gas production fell 17.1% YoY to ~794M cubic feet per day in 2025. The reserve picture is also weak.

As of 2024, the country only had enough gas reserves to last 5.9 years at current consumption levels, down from 6.1 years in 2023. The daily supply shortfall is already near 200M cubic feet, roughly 20% of total demand, and is expected to rise to 310M next year according to the national commodities exchange. We see this widening gap as increasing pressure on imports and forcing a rapid shift in how the system is being supplied.

The Forced Return to Coal

To keep operations running, local industries are abandoning the idea of cheap domestic gas and turning to alternatives. LPG and coal are the top choices to fill the yawning gap. Because domestic coal is significantly cheaper than imported LPG, which is partly sourced from the US Gulf Coast, small and medium sized businesses are actively reverting to burning it.

As the head of the National Federation of Coal Producers, Carlos Cante, noted, industries realize the era of cheap gas is over. This industrial pivot represents a massive defeat for the Petro administration and its aggressive push to completely eliminate fossil fuels, especially since solar energy still accounts for a tiny fraction of the overall energy mix.

The LNG Bridge

To address the immediate gap, the country is working to expand its import capacity. The existing 475M cubic feet per day SPEC terminal outside Cartagena will increase by about 12% next year, with generators absorbing most of the supply to prepare for El Niño events. A wave of new offshore liquefied natural gas projects is also moving forward.

Two smaller 60M cubic feet per day projects have reached final investment decisions and will begin operations in September. This includes Caribe LNG, led by Course2 Energy LLC and Andalusian Energy, which will supply distributor Empresas Publicas de Medellin. Ecopetrol will launch a similar facility at Buenaventura on the Pacific coast.

The outlook for larger scale proposals is much less certain.

Ecopetrol and Frontera Energy aim to kick off a 400M cubic feet per day floating terminal in Cartagena in December. Transportadora de Gas Internacional is planning a similar sized project off La Guajira for January.

Further out, Amazonica LNG is pushing a 150M cubic feet per day project near Barranquilla for late 2027, backed by supply agreements with Vitol Group, while Cienaga LNG hopes to dock a 400M terminal in 2028. While these proposals far exceed actual requirements, project directors openly admit that many will fail to secure necessary financing to reach construction.

4.2 Election Catalysts & Long Term Optionality

The ultimate fix for the gas deficit depends heavily on the upcoming May elections. The Petro administration banned hydraulic fracturing back in 2022, but leading presidential candidates are actively looking to bring it back to unlock domestic supply. Looking further out, Ecopetrol and partners like Brazil’s Petrobras are targeting deepwater Caribbean gas deposits by 2030.

Gustavo Petro at the UN General Assembly in New York

Furthermore, pending cross border pipeline repairs, the easing of US sanctions could eventually open the door for direct pipeline imports from neighboring Venezuela.

4.3 Smoothing the Debt Profile Ahead of the Vote

Colombia is actively buying back a portion of its outstanding global bonds. This marks the third operation of its kind over the past year as part of a broader strategy to reduce borrowing costs right before a highly contested presidential race. The government is using cash to repurchase notes with maturities ranging from 2035 all the way to 2061. Public credit chief Javier Cuellar stated last week that authorities expect to retire roughly $4B in bonds, with the current tender offer set to expire at 5 PM on April 24.

The main goal is to reassure bondholders and stabilize markets amid rising concern over the national accounts. The budget deficit is now projected at 6.7% of GDP this year. Investor concerns intensified last year after the administration suspended the legal fiscal spending cap.

That deteriorating financial picture recently prompted S&P Ratings to cut the sovereign credit score further into junk territory. The agency explicitly cited the persistently large fiscal gap and a high overall debt burden. Given this immense pressure, the buyback serves as a strategic defensive move.

As UBS strategist Pedro Quintanilla noted, the tender is structured to encourage participation without requiring the government to overpay. In practice, clearing these maturities is a sensible step for a sovereign facing rating pressure and elevated political uncertainty ahead of the May election.

4.4 Our Final Take on Colombia

While Colombia can screen as a market with deep value opportunities, we do not believe the current risk profile is attractive, and patience is the right approach. Our strategy is to wait out the political noise.

We prefer to stay on the sidelines until the upcoming elections are complete and the policy direction becomes clearer. Once that uncertainty fades, high-conviction opportunities will be easier to identify and act on with conviction.

From a positioning standpoint, we are not a big fan of large state-backed energy players and avoid names like Ecopetrol (EC). That said, we do see strong value in select local Colombian equities that trade outside US ADRs, but we prefer to cover those in a follow-up report.

5. Chile: A Safe Haven in Latin America?

Chile is currently enjoying strong momentum backed by clear policy direction and a wave of investor optimism. During the 2025 fiscal year, the local IPSA index delivered an exceptional 72% return in US dollar terms.

This rally was remarkably broad, with every single component of the index posting gains. The banking, retail, and real estate sectors led the charge, alongside industrial giants like LATAM Airlines and SQM.

The Political Turning Point

The primary driver of this performance was a major shift in investor positioning ahead of the presidential election. Markets anticipated a move toward a more pro investment administration, a view that was confirmed by the election of Jose Antonio Kast. Confidence remains high as the market looks toward his economic policies for the 2026 to 2030 period, supported by the appointment of a highly technical and proficient cabinet.

Macroeconomic Resilience & Tailwinds

The Chilean economy proved much tougher than expected throughout 2025. While initial estimates pointed to 2% growth, the economy is now on track to expand by as much as 2.3% thanks to a surge in investment during the second half of the year. Several key factors are supporting this recovery:

• Copper prices remain at record highs, providing a meaningful boost to the national accounts and export revenues.

• New pension reforms are increasing savings within the $239B private pension system, strengthening domestic capital formation.

• The adoption of a new sectoral permitting law is beginning to cut regulatory delays and unlock project execution across key industries.

• Business confidence has broadly improved, supporting stronger corporate profitability and improving investment across the economy.

The 2026 Trajectory

As we move into 2026, Chilean equities are expected to continue their upward trajectory. Early indicators point to corporate earnings growth in the high single digits, providing a solid base for the market.

Beyond strong commodity prices, the economy is also benefiting from the restart of previously stalled infrastructure projects, particularly data centers and transportation. Economic projections for 2026 remain positive, with GDP growth expected at 2.5%. This expansion is driven by a 4.6% increase in capital formation and a steady rise in consumption. While constraints in copper production might slightly moderate the overall headline numbers, the broader economy is showing consistent improvement.

There is also a major potential catalyst on the horizon.

The administration is pursuing a politically sensitive tax reform aimed at lowering corporate tax rates. If this legislation passes, it would likely trigger another significant move higher for equity valuations by immediately boosting earnings per share and stimulating further domestic investment.

5.1 Unlocking the Investment Backlog

A principal driver for 2026 is the implementation of new permitting legislation designed to cut through years of bureaucratic red tape.

This framework is expected to reduce processing times by 30% to 70%, effectively unlocking a massive investment pipeline valued at $165B.

The timing is critical. The convergence of a new administration with a more efficient regulatory system is a major catalyst for accessing an expanded investment backlog that has been stalled for years.

This $165B pipeline is broken down into 3 major categories:

While this capital will be deployed over the next decade, it provides an immediate and substantial stimulus to the heavy construction and engineering sectors. The downstream effects will likely drive increased employment and consumer spending, supporting a tactical bias toward the banking and consumer discretionary sectors.

Strategic Commodities & Infrastructure

The incoming Kast administration is moving to leverage record high global prices for copper, molybdenum, and silver. These commodities are vital to both Chile’s export portfolio and global technology supply chains. To support this growth, significant investment is flowing into essential infrastructure, including port facilities, desalination plants, and logistics networks.

Chile is also emerging as a key player in the rare earth elements market through the Penco module owned by Aclara Resources. This project offers a high quality, non Chinese supply of heavy rare earths. By April 2026, Aclara reached the final stages of the environmental review process, positioning Chile as a critical partner for Western supply chains.

The Green Hydrogen Frontier

New industries are also beginning to expand the investment backlog.

A major milestone occurred in December 2025 with the approval of a bill promoting the green hydrogen industry. This legislation includes a $2.8B tax incentive program designed to stimulate domestic demand through 2030.

The bill creates a targeted tax framework to encourage producers to set up operations in the Magallanes and Chilean Antarctic regions, leveraging strong wind resources. It includes corporate tax exemptions and VAT relief on imported equipment. While it is in the final stages of Senate approval, it already adds to Chile’s investment appeal.

5.2 Copper Prices & Sovereign Strength

The Kast administration is well positioned to restart mining investment after a decade of stagnation, supported by copper prices at record highs of $6.03/lb as of April 22 2026. This environment attracts capital while also improving public finances through higher export revenues, royalties, and corporate taxes. These inflows are rebuilding fiscal strength.

By early 2026, Chile’s sovereign wealth funds reached a combined value of around $14.1B, with the Pension Reserve Fund (FRP) rising above $10.5B.

The budget was based on a conservative copper assumption of $4.35/lb. With spot prices nearly $2.00/lb higher, Chile is generating a significant fiscal windfall. This is improving government finances and supporting the country’s stable A-range credit rating outlook.

Market Dynamics & Deficits

After averaging $4.51/lb in 2025, copper prices are projected to average $5.00/lb throughout 2026 and 2027. Several factors are pushing prices higher:

• Supply Constraints: Persistent mine disruptions and regional supply bottlenecks are tightening the market.

• Global Demand: Massive growth in electric vehicles, power generation, and grid infrastructure continues to soak up available supply.

• Refined Deficit: The global market for refined copper is facing an estimated deficit of 350,000 metric tons for 2026.

Speculative interest also remains high, with thousands of net long positions across the London Metal Exchange (LME) and COMEX, signaling expectations of further gains and reinforcing the upward momentum in copper prices.

Production Challenges & Recovery

While copper prices remain high, production volumes have faced significant volatility. As shown in the monthly tracker, Codelco mine production in early 2026 started at levels notably lower than previous years, following a trend of persistent output decline that bottomed out in 2023 and 2024.

However, there are signs of stabilization. Yearly production data indicates that while output dipped to 5.25M metric tons in 2023, it recovered to 5.55M in 2024 and 5.45M in 2025. A critical component of this output is the split between concentrates and SX EW production.

Currently, copper concentrates account for ~75% to 79% of total Chilean production, while SX EW (a leaching and refining process) makes up the remaining 21% to 25%. Maintaining the scale of concentrate output is key for Codelco to benefit from the current market deficit and elevated prices.

This production recovery, paired with the surge in copper prices, is providing the financial momentum necessary for Codelco to manage its debt load.

As of late 2025, the company net financial debt stood at ~$23.8B. Improving production figures throughout 2026 will be essential to ensure the company can continue to improve its earnings and slowly work down this leverage, maintaining its role as the primary engine for the Chilean state coffers.

5.3 Tax Cuts & Capital Market Reforms

Chile’s newly appointed Finance Minister, Jorge Quiroz, takes office on March 11 with a highly ambitious plan for his first ninety days. The government intends to introduce major reforms by April 1 and hold final congressional votes by September. The primary goals are to simplify business regulations, reduce taxes, and achieve ~$6B in government savings. Quiroz openly admits the first 6 months will be challenging. To build immediate momentum, his strategy relies on sending very short and highly focused bills to Congress right away, which should significantly speed up the approval process.

The economic agenda is focused on passing pro-business reforms, easing investment constraints, and keeping tight control over public spending.

The key proposal is a large corporate tax cut. The government plans to reduce the rate for medium and large companies from 27% to 23% over four years. Firms could lower it to 20% by hiring workers currently in the informal economy and paying compliant wages. Small businesses would benefit from a fixed 12.5% rate. Because the administration lacks a legislative majority, passing the bill will require negotiation with opposition lawmakers. If approved, the reform would lift corporate profits and support valuations.

At the same time, the administration is pushing a new investment framework to provide legal and financial certainty for domestic and foreign investors. It targets large projects focused on technology transfer and workforce training.

While details are still pending, the framework is expected to follow models from Argentina and Peru, offering tax stability and deductions linked to capital spending. To support the financial sector, the government is considering removing capital gains tax on infrequently traded shares and reintroducing tax integration. These measures aim to increase trading activity, attract new investors, and deepen the local stock market.

5.4 Our Final Take on Chile

Chile is currently positioned as an attractive market with a 60% total index upside projected through 2030 in MS best case scenario. While this is lower than the triple digit projections for Argentina or Brazil, Chile offers a much more balanced risk profile and a unique internal growth story that is now starting to play out.

The Drivers of Upside

The projected 60% upside is split almost evenly between corporate earnings growth and a valuation re-rating. We expect roughly half of this gain to come from US dollar earnings growth, which is being supported by record copper prices and the new wave of industrial investments. The other half is driven by a price to earnings re-rating. As the Kast administration implements its pro investment agenda, we expect the market to reward Chilean equities with higher multiples, reflecting the return of long term policy stability.

Relative Positioning in Latin America

Chile stands out in the regional landscape for its strong institutional framework. Unlike Mexico, where upside is limited by political uncertainty and judicial changes, Chile is moving in the opposite direction by reducing regulatory barriers and cutting corporate taxes to unlock investment.

Argentina offers higher upside, but it comes with much greater volatility and execution risk. Chile sits in a more balanced position, offering a better risk-adjusted return than the Latin American average when accounting for stronger legal and fiscal stability.

Overall, Chile offers investors exposure to growth in green energy and mining without the political volatility seen elsewhere in the region. The current entry point also leaves room for meaningful upside as the market adjusts to the new economic framework over the next 4 years.

6. Mexico: At the Turning Point

Mexico stands at a critical turning point. Long term success depends on capturing the massive trend of moving production closer to the US while keeping the budget under control and the legal system reliable. The market reflects this tension, with valuations trading well below historical peaks as the world waits to see how the country handles its current challenges.

6.1 The Current Reality

Economic growth stays below potential through 2026.

High uncertainty surrounds the mid year trade review with the US and Canada, while slower American growth weighs on Mexican exports and business spending. A major question for the economy is whether it can move from “Brownfield” to “Greenfield” investment.

Brownfield vs. Greenfield Growth

Most investment in Mexico has been “Brownfield,” meaning companies are simply expanding or upgrading their existing facilities.

This provides a steady but slow boost to the economy. To see a real surge in growth, Mexico needs “Greenfield” investment, where companies build entirely new factories and infrastructure from scratch.

As the chart below shows, this type of investment takes longer to start but eventually creates a much steeper wave of growth. Currently, Mexico sits at a point where Greenfield projects are just beginning to pick up, but they require a strong and stable trade framework to truly take off.

The Credit Gap & Inflation

Lower interest rates offer no quick fix for the current slowdown. Because very few people in Mexico use formal bank credit, rate cuts do not easily lead to more consumer spending or business expansion. At the same time, high inflation driven by rising wages keeps the central bank cautious.

This combination makes it difficult to stimulate the economy through traditional means, leaving the country heavily dependent on external trade and the successful transition to large scale new construction projects.

6.2 Scenarios & Regional Upside

The government aims to cut the budget deficit but still needs to fund major energy and infrastructure projects. A primary concern remains the recent removal of independent regulators and judicial changes which raise questions about how fairly contracts will be enforced.

In the MS base case, the trade review passes without major disruptions, but domestic political shifts cap growth. While some manufacturing moves to Mexico, other firms choose the US for complex projects to avoid legal risks.

The Valuation Gap

When compared to its neighbors, Mexico shows the most limited potential for a market re-rating. As the chart illustrates, the projected 45% upside for Mexico through 2030 is almost entirely dependent on corporate earnings growth. Unlike Chile or Argentina, where a significant portion of the upside comes from the market paying a higher premium for stocks, Mexico lacks that valuation tailwind. People remain hesitant to pay more for Mexican assets while institutional and legal questions linger.

MS Bull & Bear Scenarios

In a Bull Case, political reforms cause less disruption than expected and a US productivity boom driven by AI creates strong demand for Mexican goods. This could push growth toward 2.5% and trigger a wave of new factory construction. In the Bear Case, rising US protectionism is the main risk.

If the US turns more restrictive, the trend of moving production to Mexico could weaken as companies shift operations back to American soil. Combined with institutional weakness at home, this would cause private investment to dry up and lead to stagnant growth.

6.3 Our Final Take

We agree with MS projecting a 45% total index upside for Mexico through 2030, the lowest among major Latin American markets. Unlike Chile or Brazil, almost all of this gain must come from corporate earnings growth rather than the market paying a higher premium for the stocks. People remain cautious about the price they pay for Mexican assets until there is more clarity on the rule of law and the future of the North American trade relationship.

7. Our Final Take on Latin America

Latin America enters 2026 as a region of sharp contrasts.

Overall growth remains modest at ~2.1%, but the real story is the divergence between countries. The region is shifting away from broad macro trends toward country-specific dynamics driven by political change and global demand for green energy materials.

The Growth Leaders

Chile and Argentina offer the most compelling turnaround stories.

In Chile, a pro-investment administration and record copper prices are driving optimism. In Argentina, the shift toward a market-oriented economy has unlocked significant upside, though with much higher risk. These are the markets with the strongest potential for re-rating as sentiment improves.

The Large Markets

Brazil and Mexico provide scale but face more constraints. Brazil remains attractive through banks and commodity leaders, but high rates and debt limit upside. Mexico benefits from supply chain relocation toward the US, but faces trade uncertainty and legal changes that weigh on sentiment.

The Path Forward

We believe success in Latin America over the next four years depends on selectivity. The strongest opportunities lie in companies exposed to the global energy transition, such as copper and lithium producers, and in businesses benefiting from more stable domestic policy environments.

While challenges remain, improving policy is creating a more supportive environment for long-term value creation.

The Aurelion Team

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Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modeling assumptions. This report reflects independent analysis by Aurelion Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice.

This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

We start with a simple thought experiment to make a complex shift easy to understand.

The year is 2021. You are Hiromi Yamaji, incoming CEO of the Tokyo Stock Exchange under Japan Exchange Group. At this time, the Nikkei index is still down 20% from highs last seen in 1990, marking 31 years of negative returns.

By 2022, the share price of Japan Exchange Group (JPX) itself has been stagnant since highs in August 2015, earning around 0% annual price returns over 7 years. If you want to create shareholder value in this situation, you clearly have a difficult task ahead of you.

First, let’s rewind a bit. The Japanese equity market has been stagnating for decades - why? Though the issue has been multifaceted, two primary reasons come to mind:

Firstly, the risk-averse tendency of many Japanese executives, a trait shared with much of the rest of Asia, has led to many companies hoarding cash or investment securities earning low returns, strangling shareholder value, instead of returning cash to shareholders or investing for new growth. This works against shareholder value because equity investors fundamentally need a return of capital at some point, or else there is no reason to invest. This dynamic created years of stagnant stock prices and low economic growth.

Secondly there is the cross-shareholding issue. Many Japanese companies are publicly traded subsidiaries of much larger parent corporations, usually controlled by said corporations. This works against shareholder value in two ways. For one, it decreases the free float of company shares, making them more illiquid, and illiquidity always carries lower valuation multiples with it.

More importantly, public market investors prefer to feel confident that if necessary, corporate policies can be changed by the democratic process of the market. Shareholders vote to elect board members to represent them and oversee corporate processes. If necessary shareholders can generally vote out board members who do not act in the shareholder’s fiduciary interest, at least in the U.S. In Japan, things have been different.

Take Toyota Boshoku (3116.T), Toyota's primary seat supplier. Toyota Motor owns 31% of the company, with the broader Toyota group controlling well over 40%. The result is a supplier whose margins have been compressed to a fraction of what comparable independent peers like Adient or Lear earn globally. Every year Toyota demands price-downs from its suppliers, and Boshoku has no leverage to resist — Toyota is simultaneously their largest customer and their largest shareholder — any price increase would be seen as a slap in the face.

Minority shareholders watching gross margins erode have had no recourse: they cannot vote out the board because Toyota controls the vote, and they cannot demand strategic change because Toyota's interests as a customer override their interests as fellow shareholders.

Decades of value transfer from minority Boshoku shareholders to Toyota Motor shareholders is the visible cost of this governance structure. Toyota Boshoku is one example among many in Japan.

Today roughly 25% of the entire market capitalization of the Tokyo Stock Exchange consists of cross-shareholdings, down from 60% in 1990 (per McKinsey). That is 25% of the publicly traded economic might of an entire nation sitting trapped, earning low returns, stagnate on the balance sheet.

These dynamics work against the market and the economy as a whole, and they work directly against you, the Japan Exchange Group. You want people to trade more stock. You want people to invest, to take risks, to put money to work in the economy — but if any shareholder value that gets created is dampened by these forces, almost nobody has a real reason to own Japanese equities, and your profits stagnate. So… what can you do about it?

Table of Contents

1. The Reforms

2. The Results

3. Japan Exchange Group

4. Stock Idea #1: Ichiyoshi Securities (8624.T)

5. Stock Idea #2: Nomura TOPIX Banks ETF (1615.T)

6. Stock #3: Our Favorite Idea Added to the Portfolio Today

7. Basket Positioning

8. Key Risks to the Thesis

9. Our Final Take on the Japan Financials

1. The Reforms

Being Japan’s only stock exchange operator, you control exchange listings for the entire equity market. You also control the TOPIX index, a prestigious index inclusion for Japanese companies.

Beginning in April 2022, you restructure the 5 segments of your equity market into a simpler 3 segments — Prime, Standard, and Growth.

You change listings and delisting criteria for these segments, essentially forcing listed companies into compliance with these criteria, including mandates against cross-shareholdings. This began the unwinding of cross-shareholdings, which has been a massive boost to Japanese equity valuations on its own over the past four years.

In October 2022 you begin overhauling the TOPIX index to hold more compliant companies, to hold them in a more efficient manner. The TOPIX tracks the broad Japanese equity market as the preferred index over Nikkei.

If a company can get into the TOPIX, passive institutions across Japan regularly buy their shares, supporting stock prices, and it brings a similar level of prestige as an S&P 500 inclusion might for an American company.

Following your promotion to Group CEO of the Japan Exchange Group, in March 2023 you tell corporate executives to stop destroying shareholder value. Literally, the reform is titled “Action to Implement Management Conscious of Cost of Capital and Stock Price”, telling corporate managers almost flat-out, “change your policies to generate returns above your cost of capital and increase your stock price, or get delisted.” Scorched earth tactics, but it has worked wonders.

2. The Results

Today many Japanese companies have successfully implemented these reforms, and those that didn’t bother have been delisted or moved to lower market tiers. The percentage of Prime Market companies trading below book value has decreased to 27% (down from 50%) and the percentage of companies with ROEs below 8% has also declined, to 43% (down from 47%).

The majority of unwound cross-shareholdings have been deployed into record dividends and buybacks. In just a few years, you have made the Japanese equity markets significantly more attractive.

Standing here today in April 2026: equity trading volumes are up significantly. Activists and other foreign investors have poured capital into Japan at the highest pace in 22 years — even household equity ownership is increasing. Trading profits are up, and thanks to a rise in interest rates, yields on clearing balances are boosting profits further.

The Nikkei index finally broke through its 1990 highs in early 2024, after a staggering 34 years, and it has since rallied a further 50%. M&A volumes are skyrocketing. In 2024 corporate stock buybacks doubled over 2023 and they remained strong in 2025.

These impressive results have led to total shareholder returns running at a cool 17% annually from the Japan Stock Exchange Group since the implementation of the April 2022 reforms, beating many other global exchange operators over that timeframe.

Despite the impressive progress that has been made, the work is far from over. More cross-shareholdings need to be unwound. Many companies still hold 15-25% of their assets in cash and equivalents. Interest rates likely have further to rise. In a June 2025 interview with Nikkei Asia, you acknowledge that despite the strong pace of progress, the overall reforms are still only 20% of the way there.

“Our reform has just started, and we are not satisfied with the current situation.” — Hiromi Yajami, JPX Group CEO

The Japan re-rate trade isn’t over just yet. So how can we still play it?

In this report we are covering the exchange itself, 2 small-cap brokers, and the TOPIX banks, all direct beneficiaries of higher trading volumes, higher interest rates, and higher JGB yields.

Let’s kick things off by discussing Japan’s monopoly exchange itself.

3. Japan Exchange Group ($8697.T)

Japan Exchange Group is different to American exchanges in that it has a monopoly over equities and derivatives trading and clearing in the country, whereas in the U.S., the big four exchanges (ICE, NDAQ, CME, CBOE) are locked into an oligopoly, and the clearing of equities and options is handled by regulated infrastructure corporations owned by the exchanges themselves as well as other financial institutions.

However in Japan, the JPX Group controls everything. All cash equities trading, functionally all listed derivatives trading, and their subsidiary the Japan Securities Clearing Corporation is Japan’s sole central counterparty through which every single JPX listed financial asset in the entire country must be routed. The JPX Group even controls the dominant regional index, TOPIX.

This gives the JPX Group a much stronger position than non-monopoly exchanges that fight tooth and nail for trading volumes. The JPX Group is the bedrock infrastructure layer of Japan’s entire public capital markets stack. It owns all the economics between trading, clearing, listings, and market data and other services. The JPX Group operates the Tokyo Stock Exchange, the Tokyo Commodities Exchange, and the Osaka Securities Exchange, in addition to the Japan Securities Clearing Corporation.

Financial Profile

As mentioned above, thanks to reforms driven largely by the exchange itself, trading volumes and transactional revenues are up significantly over the past few years, and clearing income has been boosted by rising interest rates.

Trading revenue growth has been driven entirely by cash equities trading (14.8% CAGR since Q1 2021), while listed derivatives revenues have been flat over the same period.

Within listed derivatives, 87% of trading revenues come from financial derivatives (TOPIX and Nikkei futures and options, JGB futures) and the remaining 13% comes from commodity derivatives (energy, precious metals, and agriculture). Broadly, over 75% of revenue comes from the typical exchange transactional, clearing, and data fees, with a smaller share coming from listings, systems, and access fees.

Given the impressive strength in trading volumes, the JPX Group has posted a revenue CAGR of 11.58% with steady margins. In Q3 2025, revenue increased 14.8% Y/Y with operating income up 17.1% due to record high margins.

Given the high incremental margins of the exchange business, as well as an increase in high-margin clearing interest income due to increases in interest rates, profitability has remained strong, with 2025 YTD pretax margins through Q3 reaching a strong 58.5% keeping pace with the three large U.S. exchanges with large market shares in equities and options, ICE, NDAQ, and CBOE. In Q3 2025, pretax margins reached a record 60%.

JPX Group generates significant cash and returns the majority of cash to shareholders through dividends (3.2% yield, 60% stated target payout ratio) and buybacks. Capital investment requirements are relatively minimal, with capex running at 9% of revenues in 2025.

The Japan Exchange Group trades today at 22x forward earnings, a premium multiple. Strong, diversified exchanges typically trade at premium multiples because they will be operating and producing cash flows long after we are around to collect them (The Osaka Exchange predates the founding of America by about 80 years), their cash flows usually scale at or beyond the pace of long term economic growth due to increasing financialization, and they are realistically impossible to displace, in this case due to liquidity network effects and regulatory lock-in.

Assets like this have earned a bit of premium, or at least, the reasonable expectation that premium exit multiples can be assumed in valuation.

Our Final Take on JPX Group:

While it may not be the most exciting Japanese Financials investment in this environment given the premium already in the price, we see JPX Group as a solid way to earn market or potentially above-market returns, given strong revenue growth as trading volumes continue increasing long-term, the prospect of slight margin expansion, and a 3%+ dividend yield.

4. Ichiyoshi Securities ($8624.T) — Idea #1

The first pick we discuss is Ichiyoshi securities, a Tokyo-based retail broker with a $259M market cap trading at 11x trailing earnings. As the company has been transitioning toward a “stock-type” business model in recent years, the Japanese equivalent of a wealth management business in the U.S. or Canada, their recurring AUM fees have grown strongly in recent years to the point that they now cover 80.2% of total operating costs (up from 60% in 2023), approaching the structural 100% breakeven where incremental fee revenue flows through at near-pure margin.

Customer AUM has grown from ¥2.26Tn in 2023 to ¥2.6Tn in Q3 2025, driven by growth across all asset classes, including investment trusts at ¥860Bn, stocks at ¥1.27Tn, and the newest fund wrap at ¥420Bn in assets.

With its portfolio of custom offered fund wraps including the popular “Dream Collection”, Ichiyoshi is specifically cashing in on demographic wealth transfer in Japan as older retirees pass wealth to younger family members. Specifically, their ‘“Dre-Colle Pass” product which offers succession of funds to the next generation without realizing taxes.

“With regard to “Dream Collection,” a fund wrap account vehicle and a core of “Stock-Type Business Model” with its ten-year anniversary behind, it enjoys an increasing popularity among customers as a medium- to long-term investment vehicle for customers’ conservative assets. Its outstanding balance as of December 31, 2025, amounted to 421 billion yen, up 33.8%.

The Company started new services from 2024: namely, “Dre-Colle NISA” (which can be used as a growth investment frame for NISA investments) and “Dre-Colle Mini” (which is an automatic monthly subscription type).

By combining “Dre-Colle Pass” (which makes the succession of the fund to next generations possible without cashing in the fund) with the new two services, the Company can support its clients’ asset-formation for a medium- to long-term across generations.” — Q3 2025 Earnings Report

High net worth accounts have grown 12.5% since Q4 2024 while total accounts have decreased a very small amount, similar to other Japanese retail brokers.

Due to strong growth in revenues and 72% of costs through Q3 2025 being fixed, Ichiyoshi has demonstrated strong margin expansion as revenue has grown, a trend that is highly likely to continue as recurring AUM-based revenue continues to increase. Operating expenses increased just 9% through Q3 2025 primarily due to higher compensation.

As of the FY 2025 earnings pre-release, Ichiyoshi grew revenue 30.7% in 2025, and as you can see in the chart, operating income grew an astonishing 170% Y/Y driven by massive leverage around the fixed cost base.

Considering the recent earnings pre-release Ichiyoshi trades at 11x trailing earnings and as of Q3 earnings, 1.7x book value per share, earning a very strong TTM ROE of ~14.5% with negligible non-operating earnings from interest income and sales of investment securities — an excellent ROE that shows Ichiyoshi is deserving of a premium book value multiple.

Over the past year the company has significantly increased their biannual dividend as earnings have grown, from 17¥ per share in 2024, up to 30¥ in November 2025, and finally to 58¥ in March 2026, from a 48¥ regular dividend and an extra 10¥ each period to commemorate the company’s 75th anniversary. Given a targeted 50% payout ratio, if earnings sustain, the 48¥ biannual dividend would equal a 6.4% forward yield which we find highly attractive.

In a similar vein to other Japanese brokers, we think the trend of Japanese household participation in the equity and investment trust markets will only increase, and Ichiyoshi is well positioned to capture their share of that volume.

Given that 67% of TTM revenues are high-quality, relatively stable and recurring wealth management fees, and given a very strong ROE, we think Ichiyoshi deserves to trade for a good bit more than 11x trailing earnings. Assuming modest earnings growth and the 6%+ dividend, even a 14-15x multiple re-rate could generate fantastic shareholder returns from here.

5. Nomura TOPIX Banks ETF ($1615.T) — Idea #2

While other companies we have covered benefit primarily from higher benchmark interest rates and higher trading volumes, TOPIX banks benefit from higher Japanese Government Bond (JGB) yields, because they may reinvest maturing loan balances at higher yields to earn significantly wider spreads than they have historically earned.

Pictured below is the yield on 10-year JGBs, driven higher by increases in inflation and benchmark interest rates in Japan as well as the formal ending of Yield Curve Control (YCC) policy.

Combined with increasing capital return trends among Japan’s financial institutions driving increasing ROEs, warranting higher BVPS multiples, the TOPIX Banks have performed incredibly well over the past year and we think they are likely to continue to do so. We see the Nomura TOPIX Banks ETF ($1615.T) as an elegant way to express the trade, given relatively diversified exposure across 70+ banks. The fund’s 3.2% dividend yield covers the 0.22% expense ratio with plenty of extra yield.

Next we are covering a small cap Japanese retail broker trading at 8.4x TTM earnings and just 1.24x book value despite recently pre-releasing a 25% increase in revenue and a 50% increase in operating income. This broker sports a 14.4% (and improving) core ROE, with ambitious and capable management who have taken reforms very seriously, committing to a 6% dividend yield.

We dive deep into why we think this broker is simply far too cheap given the company’s strong growth, execution and quality of earnings.

Our Favorite Japanese Stock Added to the Portfolio

We are adding this stock to the Aurelion Index today.

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That brings us to today’s subject: the situation in Iran and its direct implications for the chemical and fertilizer markets.

Let’s start with chemical prices. They have jumped since the Strait of Hormuz was blocked in March and are still climbing as we head into April.

We do not expect this trend to slow down soon. Since key production sites are now being targeted, the squeeze on global supply will only get tighter.

Table of Contents

1. Hormuz Reopening: Timing the Ceasefire

   1.1 Physical Oil & Market Narrative

   1.2 The Strategic Value of the Strait of Hormuz

2. What Industry Leaders Are Saying

   2.1 Dow CEO Jim Fitterling: The 275-Day Unwind

   2.2 Chevron CEO Mike Wirth: Supply on the Ground

   2.3 Growmark on Fertilizer & Food Security

3. Chemical Market and the Iran War Impact

   3.1 Our View on the Petrochemical Market

4. Fertilizer Market and the Iran War Impact

   4.1 Our View on the Phosphate Market

5. Tracking Iran’s Discounted Supply

6. 2 New Favorite Chemical & Fertilizer Stocks Added to the Aurelion Index

   6.1 The Global Leader in Industrial Chemicals

   6.2 A Vertically Integrated Phosphate Pure Play

7. Our Final Take on the Opportunity

1. Hormuz Reopening: Timing the Ceasefire

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We originally set out to write a broader defense primer, but drones kept swallowing every section we wrote. At some point it became obvious they deserved their own report, so that is what we built.

Between the Israel-Iran escalation and the ongoing war in Ukraine, NATO and the U.S. are buying these systems at an unprecedented rate. They constantly need to replenish their stocks and upgrade their fleets to keep up with the pace of technology. These systems are now treated as consumables instead of long-term assets, and that changes the demand profile entirely.

The real task now is finding the best companies to own to benefit from this cycle. That is exactly what we are doing today. But before getting into specific names, let us look at the broader thematic setup, which, quite frankly, looks fantastic.

Beyond the investment case, drones represent the first mass deployment of physical AI, and understanding how this technology is evolving tells you a great deal about where autonomous systems are headed across every industry.

As you can see in the chart above, the global drone market has roughly doubled over a remarkably short period. Total industry revenue surged from $22.5bn in 2020 to $42.0bn in 2025, and it is firmly projected to reach $46.5bn by the end of 2026. Safe to say, this looks like an exceptionally good place to be positioned for the future.

Table of Contents

1. Why Drones, Why Now?

   1.1 The Drone Industry Is Growing Fast

   1.2 The Shift Toward Autonomous Defense

2. Drones: A $400B Market Opportunity

3. Understanding the Industry

   3.1 Types of Drones Available Today

4. Our Top Takeaways

5. Market Overview & Technology Dynamics

   5.1 Market Overview

   5.2 Global Market Outlook

   5.3 Public Defense Spending & Contract Trends

   5.4 Private Capital & Funding Momentum

6. Our Top Picks

7. Favourable Regulatory Frameworks

8. Our Final Take

1. Why Drones, Why Now?

The backdrop speaks for itself. The world has more active conflicts today than it did five years ago, and drones are at the center of most of them. The war between Ukraine and Russia is the most closely watched, a conflict that has dragged on for years with no real end in sight and has become the largest real-world test of drone warfare we have ever seen. But demand goes well beyond that. Israel, Iran, and NATO members are all rushing to build up their inventories. Demand is strong and coming from everywhere.

The question we always ask ourselves when a theme starts getting attention is whether it actually has legs, or whether it is just momentum that fades once the headlines move on. For drones, we think the answer is pretty clear.

The fundamental appeal is simple: a drone does not come with a body bag. When one gets shot down, nobody dies. That changes everything about how willing governments are to use them, how often, at what scale, and how the population perceives attacks on other nations.

And on top of that, they keep getting cheaper and better every year. Countries are fundamentally rethinking how they defend themselves and project power, and drones are becoming a core part of that answer.

We think we are still early in that story.

1.1 The Drone Industry Is Growing Fast

The drone industry is expanding fast, driven by AI capabilities and geopolitical necessity. Modern autonomous drones eliminate the need for onboard pilots, removing casualty risk and keeping personnel off the front line. They operate as networked, intelligent systems that require minimal human input to execute missions.

No matter the source, the drone market is expected to grow rapidly. Over the next decade, Oppenheimer expects total drone hardware, software, and services to grow tenfold, from $45B to $400B globally. Spending splits roughly evenly between multi-rotor systems (hover and manoeuvre) and fixed-wing craft (long distance coverage). Both categories are expanding.

Defense accounts for around 75% of total spending. Global military expenditures currently sit around $3.1T, up 50% over the last five years and on track to double within the next decade. Governments are actively shifting budget away from legacy hardware toward autonomous systems. If that pace holds, the drone market could reach $400B faster than consensus expects.

This growth is driven by three factors:

1. Evolving regulatory environment: Standardized frameworks for beyond-visual-line-of-sight (BVLOS) operations expand drone accessibility and enable remote operations across jurisdictions.

2. Commercial & industrial momentum: New applications including logistics, infrastructure inspection, and agriculture, combined with AI enabled automation, are accelerating adoption in private sectors.

3. Defense priorities: Global rearmament trends and heightened focus on sovereign defense capabilities are driving significant investment in drone technologies.

1.2 The Shift Toward Autonomous Defense

We are currently witnessing a massive shift toward autonomous defense, which is exactly why Oppenheimer expects military spending on these systems to eventually hit 10% of total defense budgets. That is huge for drones. They have become the fastest growing part of physical AI because they are so effective for scouting plus strike missions. Controlling the airspace is now essential for controlling the battlefield.

We see this clearly in Ukraine. Beyond the front lines, governments are rushing to support this tech because owning the drone supply chain has become a matter of national survival. This shift is part of a larger geopolitical race involving satellites, energy, plus AI. We believe this combination will disrupt the traditional defense industry. Future conflicts will likely move toward machine to machine warfare.

2. Drones: A $400B Market Opportunity

The model from Oppenheimer shows we are at a major turning point.

The real story here is the lower skies segment, which alone is expected to grow from $22B in 2026 to nearly $300B by 2035. That means this single category will make up about 75% of the entire industry plus represents nearly 20x growth on its own. Governments are reallocating budgets away from traditional hardware toward autonomous systems. If this pace continues, the drone market could reach those $400B targets far sooner than most expect.

Drone TAM Model ($bn)

The move toward drones marks a fundamental change in how the world works. It is the first time we are seeing physical AI, which are systems that can sense plus act in the real world, deployed on a massive scale. This is a foundational shift on par with the arrival of the internet or electricity.

As autonomy moves into the physical domain, it kicks off a decades long investment cycle focused on real world automation. In the short term, whoever perfects these systems first will likely hold the advantage in Ukraine. Once that technology is proven on the battlefield, we think it will quickly move into self driving transport plus other commercial industries.

Drones Are Expanding Into Industrial & Commercial Applications

Nations are now racing to build their own drone industries by bringing manufacturing back home plus sourcing materials from allies.

They are also moving away from slow engineering plus adopting a faster, tech focused approach. As costs drop plus rules change, drones will become practical for many commercial jobs. Over the long term, these systems will likely form a permanent infrastructure layer in our skies. This creates a massive sensing network that changes how we collect plus use data.

3. Understanding the Industry

Drones have a longer history than most people realize.

The concept traces back to 1849 when Austrian forces deployed explosive laden balloons in warfare. World War I saw early radio controlled aircraft emerge as precursors to modern UAVs. By World War II, drones were used extensively for reconnaissance and target practice. The Cold War accelerated technological development. The term "drone" itself became popular in the 1930s, inspired by the British DH.82B Queen Bee.

In recent decades, drones transitioned from purely military tools to commercial and recreational devices, expanding into photography, delivery, agriculture, and emergency response. We believe this diversification of use cases has grown the total addressable market significantly, and the expansion is far from complete. As regulatory frameworks mature and AI capabilities advance, new applications will continue to emerge, further expanding TAM across both commercial and defense segments.

Today’s drones serve multiple purposes. Military reconnaissance and targeted strikes remain core applications, but civilian uses now dominate volume: filmmaking, infrastructure inspection, environmental monitoring.

As you’d expect, AI and GPS integration have made drones smarter and more autonomous. Future trends point toward urban air mobility and autonomous delivery systems. The technology is only getting sharper. The industry has matured rapidly from experimental military technology into a multi-billion-dollar commercial sector. Regulatory frameworks and AI integration continue to shape the next frontier in urban mobility and autonomous operations.

3.1 Types of Drones Available Today

Drones are classified by design, function, size, weight, purpose, operational characteristics, autonomy level, and regulatory standards.

Multi rotor drones (quadcopters, hexacopters) dominate consumer and tactical applications. They offer high stability, ease of control, and excel at short range tasks like aerial photography and inspection. Their compact design enables vertical take-off and landing without runway requirements.

Fixed wing drones resemble aeroplanes. Built for long range missions like mapping and surveillance, they offer longer flight times but require runways for take-off and landing, limiting flexibility in constrained environments.

Single rotor drones operate like helicopters. More efficient for heavy payloads and longer endurance, but harder to fly and more expensive to operate and maintain. Hybrid VTOL drones combine vertical take-off capability with fixed wing efficiency. Advanced applications like search and rescue, agriculture, and military operations benefit from this hybrid approach. The trade-off is higher cost and system complexity.

Drones also classify by weight: nano (under 250g), micro (250g to 2kg), small (2kg to 25kg), medium (25kg to 150kg), and large (over 150kg).

These classifications determine regulatory requirements, operational limits, and licensing needs for both recreational and commercial use. Operational characteristics such as range, altitude, and power source (battery, fuel, hybrid, solar) influence mission type, flight duration, and regulatory scope.

The micro-drone segment has become strategically important where defense procurement, regulatory compliance, and software capabilities converge.

We believe this concentration of competitive intensity and margin opportunity reflects government spending priorities, established procurement cycles, and NATO compliance barriers that create competitive moats. Suppliers who clear those hurdles lock in customers and pricing power. This dynamic will only intensify as defense budgets expand and Western governments formalize their sovereign supply chain strategies.

4. Our Top Takeaways

4.1 The battlefield has rendered its verdict

Mass-produced, low-cost drones now deliver what billion-dollar weapons systems once handled exclusively. Military force structures are being rebuilt around that reality, and budgets are following.

4.2 Software is where value concentrates

Computer vision, edge AI, and autonomous navigation have turned drones into decision-making platforms capable of detecting, classifying, and acting with minimal human input in contested environments. Hardware has become almost secondary.

4.3 Supply chains are now a security imperative

Roughly 80% of drones are currently manufactured in China, with estimates suggesting nearly 30% of US military equipment relies on Chinese components. Governments have moved to make this unacceptable, and the push to reshore manufacturing is accelerating. For domestic producers, this represents significant tailwind.

4.4 Drone fleets are becoming critical data infrastructure

Combined with satellite observation, they generate real-world, continuous data that feeds next-generation AI models. The strategic value extends well beyond individual missions.

4.5 Demand will outpace supply for years

The primary bottleneck is onshore manufacturing capacity and the time required to build it. The gap between what governments need and what industry can currently deliver is where the investment opportunity exists.

5. Market Overview & Technology Dynamics

5.1 Market Overview

The drone market divides into four distinct categories optimized for different missions. Fixed wing platforms excel in long range surveillance and mapping by prioritizing endurance and distance over maneuverability.

Single rotor platforms function like traditional helicopters, providing longer flight times and heavier payload capacities suitable for cargo and agricultural operations. Hybrid vertical takeoff systems combine these capabilities for large scale operations, though they require significant capital and complexity.

For defense applications, multi rotor micro drones stand out as the definitive choice. These highly agile, easily deployable systems dominate tactical operations, detailed inspections, and search and rescue missions.

As the fastest growing segment globally, they align with NATO procurement cycles and support deep software integration, acting as unified platforms that seamlessly connect artificial intelligence, edge computing, and cybersecurity.

Drone as a Platform

5.2 Global Market Outlook

The unmanned aerial systems market is expanding rapidly worldwide, shaped by distinct regional growth drivers and regulatory environments. North America currently leads the sector, holding ~39% of the global market in 2024. Supported by strong commercial and defense investments, the region is projected to grow at a 13% annual rate through 2030 as aviation authorities expand approvals for flights operating beyond the visual line of sight.

The Asia Pacific region remains the fastest growing market globally, expanding at over 14% annually. Led by manufacturing powerhouses China and Japan, this volume driven market sees broad adoption across agriculture, logistics, and urban air mobility. Europe follows with a steady 10-12% annual growth rate, operating under a harmonized and strict aviation framework.

European investments are heavily concentrated on defense and photogrammetry, prioritizing secure and artificial intelligence driven platforms. Meanwhile, government backed infrastructure and surveillance projects in the Middle East and Africa are driving the highest projected growth rates in the world, whereas Latin America anticipates steady 8-10% growth, primarily in crop management, though fragmented regulations continue to slow broader deployment.

5.3 Public Defense Spending & Contract Trends

To understand genuine market demand across the ecosystem, researchers track official government contract obligations through public ledgers instead of immediate corporate revenue. These obligations reflect concrete funding commitments tied to multi year programs and task orders, serving as a highly reliable indicator of future deployments.

Current data reveals a massive influx of capital into unmanned defense programs. Recent allocations include $5.1B designated for shipbuilding initiatives such as unmanned surface and underwater vessels.

Another $2.4B is directed toward integrated air and missile defense, encompassing attack drones and counter drone programs, alongside an additional $1.6B for scaling the production of low cost surveillance drones.

When looking at the historical trajectory, overall contract obligations for unmanned equipment manufacturers reached a record $2.6B in 2025, climbing sharply from just $281.8M a decade prior.

Total Contract Obligations Across Unmanned OEM Basket

While these figures do not capture classified research and development spending or awards routed through major prime integrators, they clearly demonstrate a broader industry truth. High level policy shifts and budget announcements are now successfully converting into funded, executable contracts across the entire defense ecosystem.

5.4 Private Capital & Funding Momentum

A significant portion of the innovation driving this unmanned supercycle stems from privately held companies. In early 2026 alone, private funding surged as capital concentrated around next generation defense technology.

Notable recent capital raises include Zipline securing $600M for its autonomous delivery network, Skyryse raising $300M for flight automation systems, and VulcanForms bringing in $220M for advanced defense manufacturing. Emerging players are also successfully raising millions to build mission adaptive software and advanced power systems.

The broader private ecosystem remains heavily capitalized. Leading defense technology firms have accumulated massive financial resources, with Anduril Industries raising over $6.1B historically, followed by European defense artificial intelligence firm Helsing with $1.5B, and autonomous systems developer Shield AI raising over $1.0B.

Furthermore, industry reports from early 2026 suggest Anduril and Shield AI are currently negotiating to raise billions more, underscoring the massive and sustained investor appetite for sovereign defense technologies.

The most important section of the report below.

We believe the rapid expansion of the defense technology sector is creating a rare, highly lucrative window for investors. The key is knowing exactly where the capital is flowing before the broader market catches on.

In the following section, we discuss our highest conviction ideas.

6. Our Top Picks

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Let’s get into it. The fascinating universe of fertilizers. So, what are they and why are they so important? Well, first, the war in the Middle East has created major disruptions to global supplies of nitrogen-based crop nutrients.

The focus since the conflict began has been on urea, a key nitrogen fertilizer used on corn. Prices for the nutrient have surged as the war blocks shipments through the Strait of Hormuz, sending farmers scrambling to secure supplies.

But we think the risk to phosphate fertilizers has been largely overlooked. They are essential for crops like soybeans and a big part of global food production. The region may not dominate phosphate trade directly, but it still plays a critical role upstream.

A large share of global sulphur supply, a key input used to process phosphate rock, comes from countries exposed to the same disruptions. That is where the risk builds. As inventories get worked down, pressure moves through the supply chain and tightens availability broadly. And since phosphate is used across a wide range of crops, the impact goes well beyond a single market.

The Persian Gulf concentration makes this tangible. Nearly 45% of global urea trade is sourced from producers on the Gulf coast and shipped via the Strait of Hormuz. In total, 49% of global seaborne urea exports are Hormuz-exposed, with Saudi Arabia (20%), Qatar (11%), Iran (11%), Oman (4%) and other Gulf producers (3%) accounting for roughly half of global supply.

US sanctions announced on 2 March 2026 risk disrupting this entire corridor, with potential to impact both the nitrogen and phosphate fertilizer segments.

The disruption is already visible in prices and physical flows.

US Gulf granular urea has surged past $800/t, a level last seen during the 2022 spike. According to Argus, urea prices jumped nearly 50% from late February to mid-March, with ammonia up around 24% over the same period.

Table of Contents

0. Introduction

1. What are Fertilizers?

2. Fertilizer Industry Overview

   2.1 Potash Outlook

   2.2 Nitrogen Outlook

   2.3 Phosphate Outlook

3. Who Are the Big Players?

   3.1 Nutrien

   3.2 Mosaic Company

   3.3 Yara

4. Our Favorite Ideas

5. Fertilizer Demand Drivers

6. Fertilizer Supply Drivers

7. Urea Outlook

8. What About China?

9. What About Russia?

10. The Threat to Global Farming

11. Our Final Take on the Fertilizer Market

0. Introduction

The risks extend well beyond shipping. As discussed by HSBC’s Sriharsha Pappu, upstream shut-ins of energy production, given limited storage and lack of export alternatives, have already been observed in Iraq and Kuwait.

These disruptions have the potential to force shutdowns of downstream chemical and fertilizer capacity due to feedstock shortages, as already seen in Qatar. Restarting idled capacity could take months, and given the relatively inelastic demand profile of fertilizers, even a temporary supply shock carries the risk of keeping prices elevated for an extended period.

The knock-on effects are cascading globally. India has directed that domestic natural gas supply to the fertilizer sector be capped at ~70-75% of typical needs, resulting in an estimated production loss of ~800,000 tonnes per month of urea. China, which normally fills supply gaps during its off-season, is unlikely to export nitrogen or phosphate fertilizers in the near term, as it grapples with its own sulphur and energy supply constraints.

Around half of China’s 9.6M tonnes of sulphur imports in 2025 came from Middle East. The downstream consequences are significant for major agricultural importers. Australia sourced over 60% of its urea from the Middle East in 2025, with domestic stocks expected to last only until April.

Brazil, entering its 2026-27 soybean purchasing campaign, typically covers 25-30% of its phosphate fertilizer needs from China and roughly half of its urea from the Middle East. Both sources are now constrained. In the US, Trump administration has announced a Jones Act waiver to facilitate domestic deliveries of fertilizer between ports, and is allowing imports from Venezuela.

Why Fertilizer Prices Drive Food Costs?

The chart below shows how closely corn and urea futures have tracked each other over the past six years. The logic is straightforward: nitrogen fertilizer is the single largest input cost for corn, so when urea moves, corn tends to follow. The 2021-22 period is the best example. Gas prices surged in Europe, Russia’s invasion of Ukraine disrupted trade flows, and urea tripled.

Corn followed, moving above 1,000 cents/bu in 2022-23. The two traded together for nearly two years before coming back down through 2024-25.

Now looking at the right side of the chart. Urea is spiking again on the back of the Persian Gulf disruption, already at $662/t. Corn, at 467 cents/bu, has started to move up but has not followed with the same force. The gap between the two is widening, and the question is whether it closes.

Two paths from here. If the Hormuz disruption fades and alternative supply from southeast Asia or Venezuela fills the gap, the urea spike unwinds and corn stays in its range. But if the conflict drags on and Chinese exports stay offline, the 2022 pattern is the better guide. Farmers facing higher input costs will either absorb them or plant fewer acres.

We see both outcomes pointing to higher grain prices.

1. What are Fertilizers?

Fertilizers supply the three essential nutrients that crops need to grow:

1. Potassium (K) = Potash

2. Nitrogen (N) = Nitrogen

3. Phosphorus (P) = Phosphate

Each plays a distinct biological role, is produced through a different process, and has its own supply chain dynamics.

1. Potash (K)

Potash keeps plants healthy. It strengthens roots, helps retain water and makes crops more resistant to heat and disease. The product is potassium chloride (KCl), which is mined from deep underground deposits or extracted from salt lakes. About 80% of global supply comes from conventional underground mines. It is sold as either granular (preferred in the US and Brazil for blending) or standard grade (more common in Asia).

2. Nitrogen (N)

Nitrogen makes plants grow. It is the single most important nutrient for crop yield and is used in the largest volumes globally. Production begins with ammonia, made from natural gas (or coal), steam and air. Ammonia is then converted into urea, the most widely traded nitrogen fertilizer. Urea also has industrial uses in plastics, resins and emissions control. Liquid blends such as UAN are also common in agriculture.

3. Phosphate (P)

Phosphate powers the plant from the inside. It drives photosynthesis, root development and maturation. Phosphate rock is mined, then processed into phosphoric acid, the base ingredient for most fertilizer and feed products. The main end products are MAP and DAP (solid fertilizers) and liquid fertilizer. Beyond agriculture, phosphate is gaining importance as a key input for LFP batteries used in electric vehicles.

Global Fertilizer Market by Product

Nitrogen is by far the largest segment at 109M tonnes of annual consumption, and urea alone accounts for half of it. This is why the Persian Gulf disruption matters so much: the single biggest product in the single biggest nutrient segment is the one most exposed to Strait of Hormuz risk.

Phosphate comes in at 44M tonnes, dominated by DAP/MAP and NPK blends. This is the segment most affected by Chinese export restrictions and the sulphur squeeze. Potash is the smallest at 35M tonnes and less directly exposed to the current Middle East disruption.

The hidden link across all three segments. NPK blends show up in every nutrient category, accounting for 36% of potash, 17% of nitrogen and 26% of phosphate consumption. They require inputs from all three nutrients to produce, meaning supply constraints in nitrogen and phosphate will ripple into potash-containing products as well. No segment is truly insulated.

2. Fertilizer Industry Overview

The long term growth narrative for nutrient consumption is driven by two distinct engines. On the agricultural side, baseline population growth is amplified by shifting diets in developing economies, specifically the transition toward protein rich foods and higher fruit and vegetable consumption.

As illustrated in the global consumption data, caloric intake per capita has maintained a steady upward trajectory for over three decades, creating a persistent floor for fertilizer demand.

These macro food security drivers are reinforced by a secondary industrial growth vector. This demand is tied directly to broader economic expansion and tightening environmental regulations, most notably the increasing global mandates for nitrogen oxide emissions (NOx) reductions.

We believe this dual exposure insulates overall consumption from isolated sector shocks and reinforces the case for sustained global capacity utilization.

The supply side of the industry is characterized by high concentration, with a small group of Tier 1 producers controlling the majority of global nameplate capacity. Nutrien and Mosaic dominate the potash and phosphate landscapes, while firms like CF Industries and Yara lead in ammonia production.

Despite these strong demand fundamentals, equity valuations across the sector are currently trading at a significant discount to historical averages.

As shown in the peer comparison analysis, forward EV to EBITDA multiples for majors like Yara and Mosaic have compressed well below their ten year means. We believe this valuation disconnect suggests the market is pricing in a cyclical downturn that ignores the persistent supply deficits emerging across all three primary nutrient markets.

2.1 Potash Outlook

The 2022 price spike is over, but potash has settled into a higher range. After a decade of trading between $200 and $400 per tonne, prices surged above $1,100 per tonne in 2022 when sanctions on Russia and Belarus removed roughly 40% of global export capacity.

That initial shock has passed, and prices are back in the $350-400 range. But they have not returned to the $200 floor seen in 2019 and 2020, and they are unlikely to do so. The cost to produce potash has simply gone up across the industry, and the cheapest mines are already running at full speed.

There is enough capacity on paper, but the cushion is thinner than it looks. Global potash capacity has grown from roughly 80M tonnes in 2017 to an estimated 100M tonnes by 2028E. That sounds comfortable.

But utilization tells a more interesting story: after peaking near 88% in 2018, it fell to 75% in 2022 as sanctions and buyer pushback collided. The recovery has been slow, settling in the low 80s, and forecasts keep it there through 2028. In a commodity with concentrated supply and long lead times for new projects, an 80% utilization rate leaves less room than it suggests.

A single major producer pulling back could move the market.

Potash Demand: Two Main Buyers and a Fast Growing Third

Global potash demand has shown consistent growth, doubling since 2000. Current projections suggest the market will reach the 80-85M tonne mark by 2030. This upward trend reflects the essential role of potash in maintaining soil health and crop yields as global food requirements expand.

Two regions run the demand story, and a third is emerging fast.

China and Brazil each consume close to 20M tonnes annually and together account for the bulk of global trade. North America and Other Asia have been relatively flat. India is the one to watch. The country has nearly doubled its potash imports since 2021, driven by agricultural intensification, potassium-depleted soils and government policy pushing for higher crop yields.

Brazil’s cost curve is the best guide to where prices are heading. Brazil imports almost all of its potash and buys more than any other single country.

Because of this, the price it costs to deliver potash to Brazil is the best indicator for global pricing. Short term costs have risen from $215 per tonne in 2020 to $270 per tonne in 2025, and are expected to reach $315 per tonne by 2030. Long term costs, which represent the price needed to justify building a brand new mine, have climbed from $395 to $480 per tonne over the same period, heading toward $545 by 2030.

Current spot prices sit above short term costs, so existing producers are earning healthy profits. But prices sit below the long term cost of new supply, which means companies have no financial reason to build new mines.

That gap can last for a while. Eventually, growing demand will force the issue: either prices must go up to encourage new mines to be built, or the market will just keep getting tighter.

The Bottom Line on Potash

This segment has the least direct risk from shipping issues in the Middle East, given that production is concentrated in Canada, Russia, Belarus, and China. But the longer term picture is attractive: demand is growing at ~2% a year, utilization sits in the low 80s with very few new mines being approved, and the cost to produce keeps rising.

The biggest risk remains Russian & Belarusian supply. Those two countries caused the 2022 price shock, and their continued access to global markets is uncertain. Any new disruptions would tighten the market quickly. And this time around, there would be less backup capacity available to absorb the hit.

2.2 Nitrogen Outlook

Nitrogen is the most important nutrient in agriculture, and the most exposed to the current crisis. At 58% of global nutrient consumption, nitrogen dwarfs phosphate (24%) and potash (18%). It is applied annually, demand is relatively stable, and farmers cannot skip it without immediate yield consequences. That combination of scale and inelasticity is precisely why the Persian Gulf disruption has hit nitrogen prices the hardest.

Prices are spiking again, and the pattern looks familiar. Urea prices across all major benchmarks (fob Egypt, fob China, cfr Brazil) traded in a $150-300/t range from 2015 through 2020, before surging above $800/t during the 2022 energy crisis. Prices corrected through 2023-25, but never returned to pre-Covid levels. Now, with the Strait of Hormuz disrupted, urea is moving sharply higher again. The chart title says it well: Yara, the world’s largest nitrogen seller, is a net seller into this environment.

Understanding nitrogen economics is simple: it starts and ends with gas. The value chain runs from natural gas to ammonia to finished products (urea, nitrates, UAN). Gas is both the feedstock and the energy source, typically representing 70-80% of the cash cost of ammonia production.

This means nitrogen fertilizer prices are fundamentally a function of regional gas prices, and producers with access to cheap gas (Middle East, US, Russia) enjoy a large and persistent cost advantage over those relying on more expensive supply (Europe, India). On the revenue side, urea is the benchmark price that pulls all other nitrogen products along. Crop prices and grain inventories drive demand, while capacity additions and closures drive supply.

Global consumption is growing slowly but steadily, led by Asia. IFA forecasts total nitrogen consumption rising from around 105M tonnes in 2021 to over 110M tonnes by 2028. Asia accounts for roughly 60% of that total and is the primary growth engine. Europe and North America are essentially flat.

Africa & Latin America are growing, but from a small base. The overall growth rate is modest at around 1-1.5% per year, but in a market this large, even small percentage gains translate into millions of additional tonnes of demand.

The three import markets to watch are India, Brazil and, surprisingly, China. India imported 9.3M tonnes of urea in 2025, up from 6M tonnes in 2022, and forecasts for 2026 sit in the 8-10M tonne range. But with domestic production now curtailed by gas rationing, the actual import requirement could be higher. Brazil took in 7.7M tonnes in 2025 and is expected to need 7-8M tonnes in 2026, virtually all of which has to come from overseas.

The interesting story is China: after nearly zeroing out urea exports in 2022-23 to protect domestic supply, China ramped back up to 4.9M tonnes in 2025 and was expected to export 4-6M tonnes in 2026. That return to market was supposed to ease the global balance. The sulphur and energy squeeze from the Middle East conflict has put that assumption in serious doubt.

The supply side is where the real tension builds. Outside of China, new urea capacity additions are running well below demand growth. After 4.5M tonnes of new capacity came online in 2023, additions dropped to just 0.7M tonnes in 2024 and 0.3M tonnes in 2025. The pipeline picks up to 2.2M tonnes in 2026 and 3.4M tonnes in 2027, but falls back to 1.0-1.3M tonnes in 2029-30.

Average consumption growth runs at ~2.3M tonnes per year. In 2024, 2025, 2029 and 2030, new capacity falls short of that growth rate, meaning the market needs to draw on spare capacity or Chinese exports to stay balanced. With Chinese exports now uncertain and Persian Gulf supply disrupted, those two sources of flexibility are both compromised at the same time.

The volatility in the capacity addition schedule is worth understanding. Urea plants are large, capital intensive projects that take 3-5 years to build.

They tend to come in waves: a period of high prices triggers investment decisions, which then deliver new capacity several years later, often arriving just as the market has already cooled. That is what the chart shows.

The 4.5M tonnes that came online in 2023 were largely projects sanctioned during the 2021-22 price boom. The near-zero additions in 2024-25 reflect the period before that, when prices were low and nobody was building.

The bump in 2026-28 is the next wave of post-crisis investment, and the drop-off in 2029-30 tells us that the current tightness has not yet triggered enough new project approvals to fill the gap later in the decade. By the time the market realizes it needs more capacity, it will be years before it arrives.

Bottom line on nitrogen. This is the largest, most traded, and most geopolitically exposed fertilizer segment. Prices have already moved sharply higher. The supply picture ex-China is tight, with new capacity additions below demand growth in most years through 2030.

India & Brazil remain heavily import-dependent. And the two swing factors that the market has relied on to stay balanced, Chinese exports and Persian Gulf supply, are both constrained simultaneously. If this persists beyond the next few months, nitrogen prices have room to run well above current levels.

2.3 Phosphate Outlook

Phosphate has the worst supply setup of the three nutrients right now. Four countries control the DAP export market: China, Morocco, Saudi Arabia and Russia. Three of them are constrained. China keeps pulling back exports to protect domestic supply. Saudi shipments are caught up in the Strait of Hormuz disruption. Russia has been operating under sanctions pressure since 2022. That leaves Morocco as the only major exporter running freely, and even Morocco depends on imported sulphur and ammonia to keep its plants going. When your market relies on four suppliers and three of them have problems, prices stay elevated.

The export data makes this very visible. After a decade of gradually rising global DAP trade, volumes have fallen off sharply in 2025. China is the main story. Chinese exports were above 5M tonnes in 2021, dropped to nearly zero in 2023 as the government restricted outflows, recovered partially in 2024-25, and are now at risk again as the sulphur squeeze intensifies.

Every time the market expects China to come back, something pulls it away. That pattern is becoming the defining feature of this market.

DAP prices have come down from the mid-2025 highs, but the floor keeps moving up. At $661/t, DAP is off its recent peak near $800/t, but still well above where it traded through most of 2023-24. Look at the price chart over the past four years: every spike is followed by a pullback, but each pullback settles higher than the one before. The $400/t floor of 2023 became $550 in 2024, and now $650 looks like the new base. This is a market where the tight supply-demand balance is real and is gradually being reflected in prices.

The US is a good example of what happens when supply tightens. American phosphate imports peaked above 3M tonnes in 2018 and have been falling steadily since, reaching roughly 2M tonnes in 2025. Tariffs, a tough farm economy and shrinking global availability have all played a role. This leaves US farmers with less imported supply heading into each planting season.

The March letter from 64 agricultural groups urging Mosaic & JR Simplot, two of the largest US phosphate fertilizer producers, to drop support for duties on Moroccan phosphate imports tells you where the pressure is being felt: buyers are running out of options and want every available trade route open.

Demand keeps growing, and the supply side cannot keep up.

Global phosphate consumption has risen steadily from around 62M tonnes in 2010 to an estimated 76-79M tonnes in 2025, tracking the long-term trend line closely. But the gap between where demand is heading and what the supply chain can deliver is starting to widen. Phosphate rock deposits are concentrated in a handful of countries, new mines take years to permit and build, and the entire processing chain from rock to finished fertilizer requires sulphur and ammonia at every step. When those inputs are disrupted, as they are now, the whole chain slows down. And unlike nitrogen, where at least some new capacity is being built, the phosphate pipeline has been quiet.

Bottom line on phosphate. This is the tightest of the three nutrient markets. The major exporters are all dealing with some form of restriction or disruption. Prices have pulled back from peak levels but the floor keeps rising. US imports are declining when farmers need them most. And global demand continues to grow with very little new capacity coming online.

The single biggest variable is China. If Chinese exports come back at scale later in 2026, the market gets some relief. If they do not, the tightness we see today could easily last into 2027 and beyond.

3. Who Are the Big Players?

A Look at the Global Fertilizer Leaders

• 3.1 Nutrien

• 3.2 Mosaic Company

• 3.3 Yara

3.1 Nutrien

Read more

Table of Contents:

1. The Backbone of the Energy System

2. The Rising Demand for Electricity

3. The Aging Grid Infrastructure

4. The Need for Massive Investments

5. Governments Are Stepping In

6. A Grid of Actionable Ideas

7. Our Final Take on the Grid

For this thematic report, we collaborated with Daniel's Deep Dive, a sharp analyst running a Substack focused on fundamental equity research. Daniel provided the electricity infrastructure expertise.

1. The Backbone of the Energy System

To start today’s thematic, a basic understanding of how the electricity grid is structured and how it works is essential. At its core, the grid is the infrastructure that connects electricity generation to end users.

Power plants generate electricity, which is then transported through high-voltage transmission networks. Closer to the point of use, that power moves through lower-voltage distribution networks, which deliver electricity to homes, factories, data centers, and the rest of the economy.

Although the core principle sounds simple, the system in practice is vast and highly complex. Electricity networks stretch across millions of km of power lines and rely on substations, transformers, digital control systems, and increasingly energy storage to keep power flowing smoothly across the grid.

All of these components have to work together in real time to ensure electricity is delivered the moment it is needed and that the broader system remains reliable and stable.

The Basic Architecture of the Power Grid

The exact structure of power grids varies widely across countries, shaped by geography, energy resources, and economic development. Even so, most power systems follow a broadly similar logic and face many of the same challenges. Those challenges are emerging on both sides of the system.

On one side, changes in how electricity is generated are reshaping power flows across the grid. On the other, shifting patterns of consumption are creating new demands on grid infrastructure. To understand where the most actionable ideas could emerge, we believe it is important to understand the challenges grids are likely to face in the years ahead.

1.1 Challenges for Power Grids

Power grids are entering a more demanding phase as the broader electricity system changes. Supply is becoming more dispersed, while consumption is rising and becoming more intensive. Much of the network in place today was built for a setup that was easier to manage, with steadier demand and more predictable flows.

That backdrop is changing quickly. New generation is being added across a wider set of locations, often beyond the parts of the network originally built to handle it at scale. At the same time, rising electricity use is creating heavier requirements in areas that need more capacity and flexibility. The result is a grid that is coming under increasing pressure.

A useful way to approach this is to separate the challenge into two parts.

One comes from changes on the generation side. The other comes from changes on the demand side. Together, they explain why grids are becoming harder to operate and why the need for investment is rising so quickly.

2. The Rising Demand for Electricity

One of the clearest pressures on the grid comes from a simple reality: electricity demand keeps rising.

The chart below is a good place to start. Global power use is already enormous, and the demand base is broad. Industry remains the largest end market, buildings still account for a large share, and transport is becoming a more important source of load as electrification moves forward.

Part of that growth reflects the expansion of the global economy. As populations increase, incomes rise, and more countries continue to industrialize, electricity demand moves higher alongside them. Higher living standards bring more appliances, greater cooling needs, and a larger digital footprint, each of which adds to power use.

Industry is a major part of that picture. It already accounts for a large share of global electricity consumption and remains one of the most energy-intensive parts of the economy. As more industrial processes shift toward electrification to improve efficiency and reduce emissions, demand from this segment should continue to rise.

A similar shift is underway in buildings. Heating, cooling, cooking, and water heating are gradually moving toward electricity. That lifts underlying consumption and also changes when electricity is needed, especially during peak periods and seasonal swings.

Transport adds another source of growth. Electric vehicles still represent a small share of the global fleet, but adoption is advancing quickly enough to create a meaningful new source of load for the power system.

That shift feeds directly into charging demand, which is expected to rise sharply over the rest of the decade. Pressure on local networks becomes more visible as that demand builds, especially in areas where charging demand rises faster than the grid was designed to handle.

Data centers are another fast-growing source of electricity demand. Their footprint is already meaningful, and expansion tied to cloud infrastructure and artificial intelligence is pushing it higher. These facilities can add very large, concentrated loads in specific locations, which makes the strain on the grid harder to manage.

That is why rising demand is such an important issue for power networks. Total electricity use is increasing, while demand patterns are shifting at the same time. Peaks are becoming sharper, and more of the new load is landing on distribution networks with greater local intensity. Existing infrastructure was built for a system with lower demand growth and a very different load profile. As electricity use rises across more parts of the economy, spare capacity begins to shrink. More parts of the network move closer to their limits, and the need for grid expansion becomes far more urgent.

3. The Aging Grid Infrastructure

While electricity demand keeps rising, large parts of the existing grid are already approaching the end of their operational lives.

This is especially visible in developed markets such as the United States.

According to industry data, around 31% of U.S. transmission lines and 46% of distribution lines have already exceeded their intended lifetimes or will do so within the next five years. That means a large share of current investment is going toward replacing aging infrastructure, not just adding new capacity.

This modernization goes well beyond replacing aging cables and transformers. It also includes upgrades to digital control systems, better monitoring capabilities, and new grid management tools that give operators more flexibility in balancing shifts in supply and demand.

3.1 The Growing Distance

Now that we have covered the challenges on the demand side, it is time to shift focus to the generation side. Over the past few decades, renewable energy has taken a much larger share of global electricity generation. Renewables accounted for roughly 30% of global power generation in 2023, and that share is expected to keep rising in the years ahead.

Historically, electricity systems were built around large, centralized power plants located close to major centers of consumption such as industrial regions and large cities. As renewable energy takes a larger share of the mix, that pattern is changing. Wind parks and large solar farms are usually built where natural conditions are strongest, often far from the areas where electricity demand is concentrated. Solar projects are commonly located in high-irradiation regions, while wind capacity is frequently added in remote rural areas, along coastlines, or offshore.

That shift increases the distance between where electricity is generated and where it is consumed. As a result, transmission networks become more important because they must carry power across longer distances.

At the same time, generation is becoming more decentralized. Instead of relying on a limited number of large power plants, modern systems increasingly draw on many smaller generation sources spread across the grid. Some renewable capacity is also connected directly to local distribution networks, which adds another layer of complexity for those systems.

The implication is clear: electricity networks need to expand in order to connect generation that is increasingly located farther away from the areas where demand is concentrated.

3.2 The Timing Mismatch

Location is only one part of the challenge. Renewable energy also changes the timing of electricity generation. Traditional power plants can be ramped up or down to follow demand. Wind and solar depend on weather conditions, so output comes when the resource is available and not always when demand is highest. That creates a growing mismatch between electricity generation and consumption.

Energy storage can smooth part of that volatility, though it is unlikely to solve the issue fully, especially over longer periods. In practice, electricity often needs to be transported from regions with excess generation to regions where demand is stronger.

Grid management is evolving as well. In the past, system operators focused mainly on adjusting supply to meet demand. Today, they are also shifting electricity use toward periods when power is more available. That helps reduce congestion and improves the use of existing network capacity.

That shift is increasing the need for smart grids. These systems use digital tools to manage electricity flows more efficiently across the network. In turn, they improve flexibility, support system stability, and help the grid operate more effectively as generation and consumption become harder to balance.

4. The Need for Massive Investments

The grid is moving into a far heavier investment phase. The network in place today was built for a power system that was simpler, more centralized, and far less demanding than the one now taking shape.

Electricity demand is rising, generation is becoming more decentralized, and power flows are growing more complex. Existing infrastructure can no longer absorb that shift without significant expansion.

The spending outlook already reflects that shift. Global grid investment is estimated to have reached ~$490Bn in 2025, up from ~$390Bn in 2024, and BloombergNEF’s outlook points to spending approaching $600Bn by 2030. That goes well beyond routine upgrades. It points to a broader wave of capital deployment that is likely to extend through the rest of the decade.

The mix of that spending is changing as well. Distribution still accounts for the larger share today, though transmission is gaining ground as utilities need more long-distance capacity to connect new sources of power and move electricity across wider areas. The data shows transmission rising from ~42% of total grid investment in 2024 to ~50% by 2028, before easing modestly to ~46% in 2030. Even so, the direction still points to a system that will require more backbone capacity alongside reinforcement at the local level.

The scale of what lies ahead is just as significant. According to Rystad Energy, global power networks may need to expand by ~18M km by 2030 to keep pace with rising demand and the growing role of renewable energy.

That would represent an increase of about 20% from current levels. Looking further out, total global grid length could approach 140M km by 2050, which suggests the build-out still has a long runway ahead.

5. Governments Are Stepping In

Policy is playing a larger role in the grid build-out. Across many regions, governments are moving beyond broad decarbonization goals and taking a more active role in supporting the next phase of grid development.

We think that shift is important because grid expansion depends on more than capital. It also requires a policy framework that allows projects to move forward and earn acceptable returns.

The table below shows how different regions are responding.

As the table shows, the policy tools vary by country, but the broader direction is consistent. Grid modernization is receiving more support, resilience is becoming a bigger priority, and network investment is increasingly being treated as a central part of the energy transition.

6. A Grid of Actionable Ideas

The grid build-out is a large and long-duration theme, though the investable universe is more concentrated than it may first appear.

The charts below show that listed exposure sits mainly in a limited number of regions and is weighted heavily toward utilities and industrials. That already helps frame the opportunity set. Exposure differs meaningfully across the market, and so does the quality of that exposure.

That is why stock selection carries so much weight here.

We believe the best ideas are the companies with the clearest link to grid investment, the strongest positioning, and the best ability to turn this cycle into durable growth and earnings upside. With that in mind, we now turn to the names we believe stand out most.

6.1 Bowman Consulting (BWMN):

A Cheap Small-Cap Name in the Grid Theme

Bowman deserves a place in this thematic because it offers something the larger grid names no longer do: meaningful exposure to the U.S. power infrastructure build-out at a valuation that still leaves room to move.

The company participates through engineering, design, and project support for power and utility infrastructure. Equipment manufacturers and large-scale contractors carry more balance sheet intensity and execution risk. Bowman’s model is lighter and sits further upstream, giving it a different return profile from the better-known names in the group.

That difference is part of the appeal. The stock carries rising exposure to transmission line design, substation engineering, utility undergrounding, and data center power infrastructure while trading at a clear discount to most E&C peers. Thematic relevance combined with valuation dislocation is what makes it worth including here alongside larger, better-followed names.

Bowman’s revenue base is expanding, and the power, utilities, and energy segment is taking a larger share of that growth. That shift changes how the market should value the business. A year ago, Bowman looked more like a broader engineering platform with some relevance to power. Today, the company has a stronger claim on the grid theme as utility undergrounding projects, gas pipeline work, renewables interconnection, and data center power supply contracts become a more meaningful part of the mix.

This exhibit shows that the business mix is improving. Total revenue rises from $346M in 2023 to $490M in 2025, with 2026 expected to reach about $564M. More important than the top line alone is the contribution from power, utilities, and energy, which grows from $64M in 2022 to an estimated $150M in 2026 and is on track to account for more than 25% of total revenue.

That shift gives Bowman more exposure to the parts of the market benefiting from grid hardening, utility capex, and rising power demand tied to AI infrastructure and electrification.

Utilities need engineering and design work before transmission lines are permitted, substations are built, or underground cable is installed. That puts Bowman earlier in the project cycle and gives the company exposure to the same capex wave driving the broader build-out.

For a smaller-cap name, that is an attractive place to be. Bowman can participate in what is shaping up to be a decade-long reinvestment cycle in U.S. power infrastructure, while carrying a lighter balance sheet and lower fixed costs than many peers.

Margin expansion should follow naturally from that mix shift. As higher-value power and utility work becomes a larger share of revenue, the earnings profile should improve with it. BWMN has guided to 17.0% to 17.5% adjusted EBITDA margin for 2026, and Craig-Hallum views that range as conservative. That trend is already visible in the numbers.

BWMN Adjusted EBITDA has grown from $34M in 2022 to $73M in 2025, with 2026 estimates pointing to $86M. Margin has expanded steadily alongside that, from 13.0% in 2022 to 14.9% in 2025, with further improvement expected in 2026. That progression shows revenue growth is feeding into a stronger earnings profile as the mix shifts toward segments with better unit economics. Revenue growth draws attention first.

Margin expansion, as power and utility work takes a larger share, is what can push the stock higher once the market gives that shift more credit.

Backlog adds another layer. When a smaller company is tied to a large secular theme, the market needs proof that demand is already translating into booked work and not simply coming from a favorable macro backdrop. Bowman has that proof.

Backlog rose from $204M in 1Q23 to $479M by 4Q25, including 20% YoY growth at the latest quarter-end. Book-to-bill of 1.2x shows the pipeline is still growing. Power, utilities, and energy was one of the main drivers of order activity. For a company of Bowman’s size, a record backlog of nearly half a billion dollars gives strong support to near-term revenue visibility and shows demand remains solid.

Valuation is where Bowman becomes especially compelling. The stock trades at a discount to the E&C peer group despite stronger growth, a record backlog, and a business mix that is becoming more relevant to the grid investment cycle with each passing quarter.

Bowman trades at ~8.3x FY26E EV/EBITDA against a peer average of ~11.5x, well below Quanta at over 20x and MasTec at 13x. That gap looks too wide given the company’s momentum and the direction of its end-market exposure. Bowman does not need to fully close it to generate a strong return.

Even partial convergence toward the peer group average would support meaningful upside from current levels, and the direction of the business argues for narrowing rather than a sustained discount.

The multiples behind those targets, 9.2x at J.P. Morgan and 11.0x at Craig-Hallum, look reasonable. They imply a valuation more in line with a growing engineering business that has strong backlog and clear exposure to the U.S. power grid build-out. Given the company’s recent momentum, that does not look demanding at all to us.

The story depends on execution. Bowman needs to keep converting backlog into revenue, integrating acquisitions including the December 2025 RPT Alliance deal which deepens its utility-scale power generation capability, and continuing to grow the power and utilities contribution. Progress on each front simultaneously supports earnings growth and multiple expansion.

We are bullish on Bowman. Power and utility revenue is growing, backlog has reached a record $479M, margins are improving, and the stock trades at roughly 8x forward EBITDA while peers trade closer to 11x to 21x.

6.2 Quanta Services (PWR):

A High-Quality Way to Play the Grid Build-Out

Quanta Services is one of the clearest ways to gain exposure to the grid build-out underway across NA. It sits close to the center of the spending wave moving through transmission, distribution, gas-fired generation, and data center-related power infrastructure. That opportunity is growing as the work becomes larger, more technical, and more difficult to execute.

That is where Quanta separates itself. Utilities and large customers increasingly need a contractor that can handle complexity across the full life of a project, from engineering and planning through installation and ongoing maintenance. Scale helps here. So does execution. Quanta has both. Its labor base, delivery record, and breadth of capabilities give it access to projects that many peers are less equipped to pursue.

The backdrop is favorable. Power demand is rising, the grid is aging, and the system needs a broad wave of investment to support higher load, new generation, and greater reliability. Data centers add to that need, but they are only part of the story. Grid hardening, interconnection work, and gas generation are also pushing spending higher. Quanta is positioned across each of those areas, which gives the growth case both depth and duration.

We are bullish on Quanta from here. Expectations into the March 31 Analyst Day still look reasonable relative to the scale of the opportunity ahead. The key issue now is less about whether demand is there and more about how far the current platform can carry the next leg of growth.

If management shows that the business can drive that growth without leaning too heavily on acquisitions, that should reinforce confidence in both the earnings path and the multiple.

The guidance belongs here because it grounds the growth case in current numbers. The core utility business still provides visibility, while faster growth tied to technology and load center demand adds another leg of upside. That mix is attractive. It gives it a solid base of recurring infrastructure spend, with faster-growing categories adding incremental momentum on top.

Profitability is another part of the case. Quanta already generates better margins than most closer E&C peers, and that gap says something important about the business. It points to a stronger mix, tighter execution, and a platform that has been able to convert favorable end markets into earnings more effectively than much of the group. A premium valuation still needs to be earned, but Quanta has given investors a solid reason to grant it one.

This exhibit fits best here because it supports the premium argument directly. Quanta is producing a higher margin profile than most peers, and that gives investors a concrete reason to treat the company differently from the rest of the group. The operating model adds to that edge.

Quanta self-performs more than 85% of its work, which gives it tighter control over project timing, quality, and execution. That also makes labor a competitive advantage. Skilled workers remain difficult to find across much of the market, and Quanta has more resources than most peers to recruit, train, and retain them. In a tighter labor environment, that edge can widen.

There are also shorter-cycle ways the story can improve. Many projects move through long development timelines, which means reported numbers can shift with permitting, procurement, right-of-way work, and customer readiness. That can create volatility from quarter to quarter, though it also creates room for upside when projects move faster and backlog converts earlier than expected. For PWR, pace of conversion is a major variable. Investors often focus on the size of the opportunity. The speed at which that opportunity turns into revenue and earnings is just as important.

That upside is visible in scenario work as well. We are aligned with Jefferies’ $765 upside case, which implies roughly 33% upside from a share price of $577. That framework assumes stronger revenue growth across both major business lines as Quanta attaches more deeply to data center-related demand and continues to win large power projects, with stronger margins creating upside to current numbers. It is an ambitious outcome, but still a reasonable one if execution stays strong and demand keeps building.

The balance sheet adds another layer to the thesis. PWR has already shown that it can allocate capital productively across acquisitions and repurchases, and that flexibility should stay valuable over the next several years.

In a market growing quickly, financial capacity gives management more ways to extend capabilities, widen its lead, and support earnings growth.

Valuation still deserves discipline. At ~31x 2028 earnings, Quanta is not cheap, even after accounting for the quality of the business and the strength of the end markets. The premium holds only if it keeps converting backlog, executing well on large projects, and protecting margins as it scales. That is a high bar. Quanta has cleared similar bars before, which is why the stock continues to command a premium inside a group that has already re-rated.

There are still risks worth keeping in mind. Warranty exposure is one. Large project work often carries long-dated obligations, and acquired portfolios can bring legacy exposure. Timing is another. Work under master service agreements is not always awarded evenly, and customer approvals, safety rules, and regulatory processes can all influence when revenue begins and how efficiently projects move. But even with those risks, we believe Quanta stands out as one of the strongest ideas in the space. The stock already reflects part of that quality, so the path higher will continue to depend on delivery. Still, with power infrastructure spending set to remain strong for years, Quanta looks well positioned to keep compounding.

6.3 GE Vernova (GEV):

A Great Way to Play the Grid Build-Out

GE Vernova stands out as one of the clearest public-market ways to gain exposure to the grid investment cycle. The company sits at the center of global power equipment and electrification, with a footprint that spans generation, grid hardware, software, and services. That breadth gives it exposure to several of the forces shaping the next phase of the electricity system, while its installed base creates a durable stream of higher-quality service revenue over time.

What makes the story especially compelling in the context of this report is the Electrification segment. This business includes grid solutions, power conversion and storage, and software used to support the network.

Grid solutions account for the largest share of that segment, which gives GE Vernova direct exposure to the upgrade cycle in transmission and distribution. As spending on substations, transformers, switchgear, HVDC links, and automation moves higher, GE Vernova is positioned to capture a meaningful share of that capital deployment.

The broader setup also looks attractive. After a difficult period earlier in the decade, growth has inflected sharply. As the chart below shows, organic sales growth has moved ahead of the U.S. multi-industry average and is expected to stay there through 2028. That acceleration reflects improving demand across power and electrification, better execution, and a healthier order backdrop. It also supports the view that GEV is entering a period where stronger revenue growth can feed into much better earnings and cash generation.

A key part of the thesis sits in mix. The Power segment carries a large installed base, and service revenue attached to that fleet is far more attractive than equipment revenue. The margin chart makes that point clear.

Services are already highly profitable and continue to expand, while equipment margins recover from a lower base. As the revenue mix keeps shifting toward services and execution improves across the portfolio, group profitability has room to move materially higher over the next several years.

That operating improvement should show up very clearly in free cash flow. After moving through a lower-margin and more volatile phase, GEV is now reaching the point where higher earnings, better mix, and cleaner execution can translate into a much stronger cash profile. The FCF chart points to a business that could move into a low-teens margin range by 2028, which would represent a major step-up from recent history and place the company in a much stronger position from a capital allocation standpoint.

That cash generation opens another part of the upside. By 2028, the company could have a very large amount of cash available for deployment.

Management would then have meaningful room to balance shareholder returns, internal reinvestment, and external growth opportunities. In a market where grid and power assets remain strategically valuable, that flexibility could become an important advantage.

Valuation still looks reasonable when viewed against that runway. Even after the move in the stock, the multiple can be justified by the quality of the end markets, the scarcity value of the asset, and the earnings profile that can emerge as margins normalize and backlog converts.

The valuation bridge shown below points to implied upside toward the mid-$900s per share, broadly in line with the upper-end analyst framework referenced in your notes. For a company with GE Vernova’s positioning, that still leaves room for appreciation if execution remains strong and electrification demand continues to build.