In the stories the author is able to pick out the a key design choice the scrappy company makes, which the sleepy incumbent under appreciates. This feature or design choice plays out over time and the scrappy upstart eventually disrupts the whole industry. By the time the incumbent sees the problem it’s always too late.

Netflix was like that. The key feature in the beginning was to be able to watch what you wanted, when you wanted in contrast to scheduled cable TV. Netflix also piggy backed for free on the high speed fibre cable companies were spending billions on to connect their triple play bundles to the home. And over time Netflix became a ‘smart’ media company able to learn in real time what its customers liked watching and build algorithms to keep them binge watching.

I’ve read that in the beginning the cable executives studied whether Netflix was a threat, but saw it as additive to cable viewing, and only 3% of their subscribers also subscribed to Netflix so it wasn’t a big deal. Back in 2004 Netflix had 2.6 million subscribers and only made $22mn in net income so you can see why it was easy to dismiss.

But Netflix had developed a disruptive product and like a sharp knife they relentlessly pried cable customers away from their dumb bundle of channels. In the end it disrupted the entire cable industry and changed how customers consume media.

And the stock price performance was amazing.

The story of Apple and the iPhone was similar. AT&T thought the iPhone would be additive to the network and grow data consumption. It did, but there was a key feature AT&T didn’t appreciate, the App Store. AT&T thought they had considered every angle. They owned the spectrum, and they had the customer relationship with direct billing to the customer, so there was no way to get disintermediated. But Apple created a digital market place inside their operating system that bypassed AT&T all together. And they created the AppleID so all the apps and data related back to an Apple ID and not a phone number. In hindsight AT&T was too far behind technologically to ever have imagined what was going to happen. Their business was managing infrastructure they had no way to connect dots and see what Apple was building.

Again, we look back at these features and design choices and see how they steadily play out over 20 years creating life changing value for the disrupter and misery for the incumbents.

But there are two problems with these ‘stories’.

First. These trades are always way harder than they look with later with benefit of 20 years of hindsight. As an investor when you are in the trade it’s hard. It’s never clear how big the trend is going to become. Then there are periodic counterattacks by the incumbents where they create their own version of the product. Or, new start-ups with a seemingly better tweak on the product. Then there are the years where the growth rate slows and everyone says it is over. How many 40% drawdowns did Netflix shareholders have to sit through along the way?

And the disrupter’s stock is always ‘expensive’, so even if you ‘get it’ is it really worth that much? And what if you are wrong? With such a high valuation if anything goes wrong the downside will be painful.

The Second problem with these business case studies.

Stories are fun to read but they don’t make us money.

Fine, Netflix and Apple were big successes, but show us the next one?

Show me the next Netflix that everyone under appreciates today and which I can buy now and make 10x.

Sadly, the business case study analysers are always quiet on this. Great at analysing things in hindsight, but no use at making us money.

Which is why we come to YWR.

We always want the trade. How do we make money?

So would you be interested in a Netflix style disrupter, except bigger?

I mean potentially massively bigger.

And would you be interested if this disrupter has market cap of just $15 billion and is trading on the lows?

If so come with me.

Read more

But also reminds us of a challenge we are going to have to navigate in the near future.

We will discuss that at the end.

The chart pack is 54 slides covering:

• S&P 500 Earnings Estimates

• BofA Survey

• University of Michigan Consumer Survey

• 10 year bond yields

A link to the full deck is at the bottom of the post.

I want to especially highlight the charts I included from the University of Michigan consumer survey because I found them shocking. Maybe consumers are just better at complaining these days, but the results are at historic lows despite full employment and a booming stock market. I found it surprising how extreme all the charts are right now.

It could be a big deal.

So get yourself a coffee and go over all the slides, but here are 8 highlights then slide 9 and my final takeaway.

#1 We hit $400/share for the S&P 500 2027 EPS Estimate.

This is a key milestone for our S&P $10,000 target (S&P $10,000 Update). Estimates revisions remain positive.

#2 The market is no longer a Mag7 story. The ‘Other 493’ are growing earnings 25%.

#3 S&P 500 EPS estimates for 2027 are 17% growth with the energy sector negative.

Expectations around energy look too bearish to me.

#4 Investors are piling into Tech and out of Energy.

Record inflows into tech funds and record outflows from energy as we go into a global energy crisis. Kind of amazing.

#5 Fund managers are sanguine about inflation and rate hikes.

CPI hits 4.2% and everyone is convinced it’s a 1-off and the Fed doesn’t need to do anything. According to the BofA fund manager survey 83% of fund managers expect no rate hikes before the midterm elections.

#6 Consumers have never felt worse.

The market is making new highs, the economy is booming and unemployment is low, but the University of Michigan consumer survey readings are off the charts negative. Like lowest ever.

Within the readings there is an unprecedented polarisation in sentiment by political party.

#7 Consumers are in pain over rising prices.

Inflation is only 4% but consumers are in extreme pain.

#8 Consumers are miserable and expect things to get worse.

The future expectations reading is making an all time record low, even lower than the financial crisis. Consumers are more negative about their future than they have ever been. This is profound.

There is a rising concern about future unemployment.

So what story do I see playing out here?

What is the challenge we need to face?

Here is the other most important chart from the University of Michigan Survey. Chart 9.

Read more

Having a hard time investing in new stock ideas?

Is it always one thing or the other?

Let me guess.

Software looks cheap but it might be a value trap and could all get disrupted.

Semiconductor related industries are growing, but getting expensive and it could be a bubble.

Energy stocks are doing well, but it could just be a cyclical boost from the Iran war and structurally oil is in decline.

Refineries are minting, but it’s all from the Iran War and how much of a valuation do you put on something which has a binary outcome and could end at anytime?

Real estate has gone nowhere, but then who really needs all these office buildings anymore?

Consumer stocks are on the lows, but maybe consumers are getting structurally disrupted by AI and robots.

It goes on and on.

Either the company is expensive and in some narrow growth area, or it is cheap and getting disrupted.

The problem you are facing is that we are in a time of widespread disruption and these are all Western style H-Corps.

‘Hierarchical’ Companies.

The Western corporate model is ‘focus’. Focus on an industry, business line or process and just do that. If the company expands into a new unrelated industry it is spun off to create ‘shareholder value’.

So you get very focused companies, with managers and employees highly specialised in one industry which is either doing well, or it is not. And for the companies not doing well, it is hard for them to know what to do. It’s not in their DNA, or expertise, to expand into unrelated industries.

Because then they would start to be a conglomerate.

And conglomerates get discounts.

Except maybe a conglomerate is what you need right now.

Maybe in a world of rapidly changing technologies and geopolitical stress the Japanese style conglomerate, the J-Corp, is what you need.

At least that’s a view I’m coming around to.

J-Corps are different from H-Corps.

H-Corps exist to create shareholder value.

J-Corps are built to survive. That’s why the history of many large Japanese companies can go back as far as the Meji Era (1860-1920).

J-Corps are permanent capital companies, which employ people directly out of college for life. Employees are paid on seniority and bonuses based on the performance of the overall company, not personal performance. Usually, the shareholding is tightly controlled by related companies and the bank financing is also from related companies (keiretsu structure).

Most J-Corps are built around manufacturing, but what they manufacture can be very diverse. TOTO manufactures toilets, but also ceramic chucks for semiconductors. Sony is the same. It makes optical sensors, video games smart phones and speakers, plus makes movies and runs a bank.

It seems weird to do so many different things until you put yourself in the shoes of a Japanese company.

“Hey guys, we all have jobs here for life, but as you know our traditional business lines are in trouble and we aren’t growing anymore. So let’s all huddle together, come up with some good ideas and figure out how to adapt and keep the company going.”

So everyone figures out how to take the manufacturing and process skills from their existing products and apply them to something else. Which is why over time we have arrived at this state where Japanese companies do so many different things.

Everyone is on the same team and has to make it work. Nobody can jump ship to a competitor because it’s hard to get hired except directly out of university. And the company is committed to you and not going to layoff everyone so you actually have loyalty to the company and want to make it work.

This is very different from what happens at an H-Corp under stress.

We’ve always know Japanese companies do too many things, but not why they do so many different things.

This J-Corp model is built for survival and adaptation, and I think that’s why my gut keeps coming back to Kawasaki Heavy Industries (7012.JP), when it goes against all of my stock market training. And it’s why as I kept thinking about Kawasaki and questioning why I liked it when it looks like a mess and is hard to model, I eventually found great article “Why Japanese Companies do so many different things”, which is really a deeper analysis of industrial organisation.

But studies of “industrial organisation” are for another day.

We are here to make money.

And I think Kawasaki Heavy Industries looks interesting.

This isn’t a 5x idea.

This isn’t an inflection point idea.

It’s probably a 1x idea.

It’s something that just works over time. An investment which survives. And in this day and age that might be how we should look at things.

But if I wanted to hype it a bit I’d say Kawasaki Heavy is 5 (actually more) Silicon Valley start-up mega themes wrapped into a Japanese industrial conglomerate.

Yes, it’s a conglomerate. But because it’s a conglomerate it has the existing manufacturing facilities, technical expertise, financing, distribution, brand and customers to execute on long-term themes which will play out over years with lots of disruption and chaos along the way.

And like a Silicon Valley start-up they just did a $600mn capital raise to accelerate investment into these mega-themes. Except, unlike a Silicon Valley start-up the market of course punished them for this and the stock has sold off.

This 5 in 1 Silicon Valley mega-theme start-up trades at 20x March 2027 expected earnings (I’ve included my earnings estimate model at the bottom of the post).

Kawasaki Heavy: 5 Silicon Valley Start-ups for the price of 1.

Read more

The most important question for pension funds is changing.

For decades, the question was: Where should we allocate capital?

The answer was usually expressed through a strategic asset allocation: public equities, fixed income, real estate, private equity, infrastructure, credit, hedge funds, cash. Define the buckets. Set the weights. Hire managers. Monitor performance. Rebalance. Repeat.

That model created discipline. It gave boards a governance framework. It helped large institutions avoid emotional decision-making. It created a common language for risk, return, liquidity, and long-term liabilities.

But it was designed for a simpler market structure.

The world pension funds invest in today is no longer neatly organized into asset classes. Artificial intelligence infrastructure is not just a technology theme. It is public equity, venture capital, private equity, private credit, infrastructure, real estate, power, semiconductors, data centers, water, regulation, and geopolitics at the same time. Private credit is not just credit. It is bank disintermediation, sponsor finance, asset-based lending, insurance capital, liquidity transformation, and shadow monetary policy. Sports and media rights are not just alternatives. They are intellectual property, streaming, data, consumer behaviour, gaming regulation, and recurring cash flows.

The old model classified assets.

The new model must understand systems.

That does not mean Strategic Asset Allocation is dead. It means SAA should be the constitution, not the operating system. It should define long-term risk appetite, liability awareness, governance discipline, and institutional guardrails. But it should not become a substitute for judgment. It should not trap judgment inside categories that markets themselves are already outgrowing.

The real work is no longer only setting the policy portfolio. It is building the institutional engine that can learn, adapt, and allocate intelligently between policy decisions.

From allocator to platform

The traditional pension fund model is built around selection.

Select asset classes. Select managers. Select benchmarks. Select commitments. Select risk budgets.

The future model will be built around orchestration.

A pension fund’s greatest underused asset may not be any single manager, mandate, or portfolio company. It may be the network itself: the web of external managers, internal teams, co-investors, consultants, banks, portfolio companies, data providers, operating partners, and market relationships that surround a large pool of long-term capital.

Today, much of that network is still managed as a collection of relationships. In the future, it should be managed as a platform.

This is where pension funds can learn from the architecture of multi-manager platforms - firms such as Citadel,Millennium, and BAM - without copying their mandate, economics, or risk profile.

The lesson is not that pension funds should become hedge funds. The lesson is that the most powerful investment organisations increasingly behave like operating systems for capital, talent, data, risk, and accountability.

Multi-manager platforms understand specialization. They understand risk budgets. They understand telemetry. They understand that capital should move toward talent, opportunity, and discipline. They understand that a portfolio is not just a list of positions. It is an architecture.

Pension funds have a different purpose. They exist to pay beneficiaries, not to maximize short-term trading profits. They operate under fiduciary duty, public scrutiny, governance constraints, and long-term liabilities. They cannot and should not copy the economics, leverage, turnover, or culture of hedge fund platforms.

But pension funds may have something more powerful: permanent capital, cross-asset visibility, access to the world’s best external managers, and the ability to be a strategic partner rather than a transient source of assets under management.

The issue is not that pension funds lack these advantages. It is that the industry has usually expressed them through allocation programs rather than platform architecture.

That is the opportunity.

Every allocation should make the platform smarter

The old question was simple:

Did the manager outperform?

That question still matters. It will always matter. Pension funds cannot pay benefits with interesting ideas or elegant data architecture. They need returns.

But the next question is more powerful:

Did the manager strengthen the platform?

A manager’s value should not be measured only by excess return. It should also be measured by the data, access, transparency, co-investment flow, underwriting insight, sector intelligence, risk visibility, and institutional learning the relationship contributes.

Every allocation should make the platform smarter.

A venture manager may help the pension fund understand how AI is changing software margins before public markets fully price it. An infrastructure manager may reveal the bottlenecks in power, land, cooling, and grid connections. A private credit manager may identify stress in a sector before rating agencies or public credit markets respond. A public equity manager may see how a private market theme is being repriced in real time. A real estate manager may surface what is happening in logistics, housing, offices, data centers, or consumer behaviour. A hedge fund manager may understand positioning, liquidity, and cross-asset contagion.

Individually, these are manager updates.

Collectively, they are a distributed intelligence system.

A networked pension fund does not ask each manager only for performance. It asks: what are you seeing, what are we learning, where are risks building, where is capital scarce, where is consensus wrong, where is the next opportunity forming, and how does this change the total portfolio?

This is the move from manager selection to manager orchestration.

Platform value is the new alpha

Pension funds have historically paid managers for alpha. The next generation of strategic partnerships should also help build the platform.

That does not mean asking managers to give away proprietary secrets. The best managers will rightly protect their edge. But pension funds should be much more deliberate about what they receive in exchange for long-term capital, strategic credibility, and scale.

The negotiation should not only be: What fee am I paying?

It should be: How much stronger does this relationship make my platform?

That requires a broader definition of value creation.

The first layer is portfolio value: returns, alpha, diversification, downside protection, liquidity management, cost efficiency, and risk-adjusted performance.

The second layer is platform value: better data, better access, better co-investment rights, better underwriting, better look-through, better risk visibility, and better institutional memory.

The third layer is option value: the ability to understand and underwrite new markets faster when they become investable.

That third layer matters because the future will not arrive as a clean new asset-class label. It will arrive as a messy cluster of contracts, cash flows, technology, regulation, infrastructure, and behaviour.

The future pension fund does not need to chase every new market. It needs the institutional architecture to recognise when a new market becomes real.

Total Portfolio Approach as an operating system

This is why the Total Portfolio Approach matters.

TPA should not be seen as a fashionable governance phrase. It is a practical response to a world where opportunities cut across asset-class boundaries. Instead of asking whether an opportunity fits neatly into private equity, infrastructure, real estate, credit, or public markets, TPA asks a better question:

Where does this dollar contribute most to the total portfolio, considering risk, liquidity, opportunity cost, manager quality, data access, and platform value?

This shift is already visible among sophisticated asset owners. CPP Investments has recently described disciplined flexibility as central to making a Total Portfolio Approach work in practice, while CalPERS announced in November 2025 that its board adopted a new Total Portfolio Approach intended to increase flexibility and focus on total-fund outcomes.[1][2]

The word disciplined is essential. Flexibility without discipline is just discretion. TPA does not mean weakening governance. It means replacing rigid bucket management with stronger total-portfolio judgment, clearer risk ownership, and better information.

A networked pension fund needs SAA as its constitution. But its operating system should be total-portfolio thinking.

Data rights are the new fee rights

If the pension fund is becoming a platform, then data rights become strategic.

Manager reporting today is still too often built around quarterly PDFs, backward-looking attribution, inconsistent templates, and fragmented systems. That is increasingly inadequate for any institution trying to understand risk, liquidity, and opportunity across the total portfolio.

The next generation of manager negotiations should include structured data rights, APIs, look-through reporting, exposure transparency, co-investment notification rights, data-quality standards, digital audit trails, and clear escalation rights when transparency obligations are not met.

Again, this is not about micromanaging managers. It is about matching discretion with accountability.

The manager keeps discretion. The platform gets telemetry.

This is not surveillance; it is alignment.

A great manager needs freedom to act. The pension fund does not need to approve every trade, every loan, every acquisition, or every position. But it does need to know whether the manager is operating within the agreed boundaries. It needs visibility into risk, liquidity, concentration, leverage, style drift, and mandate alignment.

Give the manager flexibility on the field, but wire the agreed scoreboard into the platform.

The future IMA is a control system

The traditional investment management agreement or side letter is mostly legal prose. It defines the mandate, fees, restrictions, reporting obligations, termination rights, and other legal terms.

In the future, that will not be enough.

The future strategic mandate will likely have three layers.

The first is the legal contract: fiduciary responsibility, mandate scope, confidentiality, fees, liability, termination, regulatory obligations, and dispute resolution.

The second is the data contract: what data must be shared, in what format, how frequently, through what systems, under what privacy constraints, and with what standards for quality and completeness.

The third is the economic and risk contract: risk budgets, exposure limits, liquidity rules, drawdown triggers, breach notifications, key-person events, transparency obligations, co-investment rights, capacity rights, fee mechanics, and capital-scaling rules.

This is where smart-contract thinking becomes useful - not as a blockchain slogan, but as a way to make obligations more structured, monitored, and eventually machine-readable.

The point is not crypto. The point is programmability.

The Bank for International Settlements has described tokenisation as part of a broader shift toward programmable financial platforms, while also emphasizing that trust in money and sound governance remain central regardless of technological change.[3] That distinction matters. Programmability should not be confused with speculation. It is about making ownership, obligations, data, settlement, and accountability more machine-readable.

A future mandate should not simply describe a relationship. It should encode how the relationship operates.

The first AI revolution is institutional memory

AI-native should not mean replacing investment judgment with machines.

It should mean building an organization where knowledge compounds.

In most investment institutions, too much knowledge disappears into inboxes, PDFs, meeting notes, quarterly reports, consultant decks, and individual memories. A manager says something insightful in a meeting. A portfolio company reveals a signal. A co-investment memo captures a sector thesis. A risk report flags a pattern.

A credit manager notices stress. A venture manager sees a new behavior. A public markets manager identifies a valuation disconnect.

Then the institution forgets.

Or, it remembers only through the people who happened to be in the room.

An AI-native pension fund changes that. It captures meetings, memos, manager updates, transcripts, risk reports, portfolio data, investment decisions, and post-mortems. It structures them. It challenges them. It compares them. It reuses them.

The first revolution is not autonomous trading.

The first revolution is autonomous institutional memory.

A pension fund that can remember better can underwrite better. A pension fund that can compare better can allocate better. A pension fund which can connect weak signals across asset classes can see systems earlier.

This is where the networked pension fund becomes powerful. Not because it has more data than everyone else, but because it has better context. It can see how a theme appears in venture, then private equity, then credit, then infrastructure, then public markets. It can see the battlefield.

From human managers to bounded agents

Only after building this foundation should pension funds think about autonomous agents.

The agent economy is not the core thesis. It is a frontier implication.

Still, it matters.

This is not an argument for delegating fiduciary capital to autonomous software today.

Pension funds already allocate capital to agents. We call them managers. An IMA is a boundary-setting device: here is the capital, here is the universe, here are the limits, here is how you report, here is how you get paid, and here is when we can terminate you.

Autonomous AI does not change that principle. It makes it more explicit.

If capital is ever delegated to software agents, the same architecture will be required: mandate, limits, telemetry, economics, auditability, escalation rights, capital scaling, legal wrapper, and human accountability.

Recent work from the IMF on agentic AI in payments highlights exactly this tension: AI systems may act probabilistically, but payment, authorisation, settlement, compliance, and operational resilience require deterministic controls. NIST has also launched an AI Agent Standards Initiative focused on agents that can function securely on behalf of users and interoperate across digital ecosystems.[4][5]

That is the institutional lesson.

Let the agent reason probabilistically. But make authorisation, risk control, settlement, and accountability deterministic.

The future is not AI replacing the fiduciary. It is fiduciaries designing more programmable forms of delegation.

The human should not approve every action. That would destroy the value of autonomy. The human should define the mission, design the mandate, set the risk appetite, approve exceptions, control capital scaling, and own accountability.

The agent gets autonomy inside the boundary.

Humans own the boundary.

The future investable universe

The investable universe is expanding beyond traditional labels.

Some future opportunities may look like tokenized private assets. Others may look like music or media royalties, sports rights, compute contracts, power capacity, data marketplaces, API marketplaces, carbon and biodiversity markets, litigation finance, cyber insurance, digital identity infrastructure, agent-security systems, or prediction-market-like information infrastructure.

This is not an argument for speculative investing. It is an argument for better architecture.

A pension fund that remains organized only around yesterday’s asset-class labels will struggle to evaluate tomorrow’s systems. It will ask, ‘Which bucket does this belong in?’ when the better questions are:

What cash flow is being created?

Who controls the data?

Who owns the rails?

What is the liquidity?

What is the contract?

What is the risk transfer?

What is the regulatory perimeter?

Where does durable value accrue?

How does this affect the total portfolio?

Assets are becoming more executable. Contracts are becoming more data-rich. Markets are becoming more programmable. Economic activity is becoming more machine-readable.

The pension fund does not need to chase the frontier. But it does need to understand it.

The cultural shift

None of this works with a bureaucratic mindset.

The pension fund of the future cannot operate like a passive reporting organization. It needs an elite, entrepreneurial, cross-asset team that can challenge managers, synthesise patterns, negotiate data rights, understand technology, respect fiduciary duty, and think commercially.

The culture must shift from reporting to underwriting.

From manager selection to manager orchestration.

From allocated capital to intelligent capital.

From asset-class ownership to system understanding.

That does not mean abandoning governance. It means upgrading governance. The more dynamic the platform, the stronger the controls must be. The more data the fund receives, the more serious cybersecurity and privacy become. The more programmable the mandates, the more carefully humans must define the boundaries. The more autonomy is delegated, the more explicit accountability must become.

This is not a call for looseness. It is a call for a higher standard.

The legitimate objections

A skeptical CIO or board member will raise fair objections.

This sounds complex. It is.

Managers may resist data sharing. Some will.

Tokenization does not magically create liquidity. Correct.

AI can produce false confidence. Absolutely.

Autonomous agents should not be allowed to manage fiduciary capital without strong controls. Agreed.

Total Portfolio Approach can become dangerous if it gives discretion without accountability. True.

These are not reasons to preserve the old model untouched. They are reasons to build the new model properly.

The answer to complexity is not pretending the world is simple. It is better architecture.

The answer to technology risk is not technological avoidance. It is governance, telemetry, auditability, and human-owned accountability.

The answer to manager resistance is not to accept opacity as the permanent price of access. It is defining which relationships are truly strategic, what data is necessary, what information is proprietary, and what level of telemetry is appropriate for the mandate.

The answer to a changing investment universe is not to chase every new market. It is to build an institution capable of understanding when a new market becomes investable.

The permanent-capital intelligence platform

The pension fund of the future is not a fund-of-funds.

It is not a hedge fund.

It is not a crypto vehicle.

It is not an AI science project.

It is a permanent-capital intelligence platform.

Its edge will not come from pretending to be faster than every trading firm or more technical than every venture fund. Its edge will come from combining long-term capital, fiduciary purpose, cross-asset visibility, elite external managers, internal judgment, data rights, programmable mandates, and total-portfolio discipline.

The old pension fund allocated capital.

The networked pension fund compounds intelligence.

And in a world where markets are becoming systems, contracts are becoming data, and economic activity is becoming programmable, that may become the most powerful investment model of all.

Sources

[1] CPP Investments Insights Institute, Investing in Uncertain Times: Achieving Disciplined Flexibility in the Total Portfolio Approach, Apr. 7, 2026. Source

[2] CalPERS Newsroom, CalPERS Board Adopts Streamlined Investment Approach to Seize Market Opportunities, Nov. 17, 2025. Source

[3] Bank for International Settlements, Annual Economic Report 2025, Chapter III: The next-generation monetary and financial system, Jun.2025. Source

[4] International Monetary Fund, How Agentic AI Will Reshape Payments, IMF Notes, Apr. 23, 2026. Source

[5] National Institute of Standards and Technology, Announcing the AI Agent Standards Initiative for Interoperable and Secure Innovation, Feb.17, 2026. Source

The views expressed are the author’s own and do not refer to any specific institution, portfolio, manager relationship, or internal strategy.

There is a saying in San Francisco real estate to always follow the artists. The artists establish the new cool neighbourhoods, then the yuppie tech bros come in afterwards and drive up the prices. So get in early with the artists.

This might surprise you, but I think China is the new cool neighbourhood. And that might be the most important stock market indicator for this hated market.

The background is that noticing my family’s infatuation with South Korean culture is what got me into our mega memory trade. I’d love to say I predicted the whole memory bottleneck, but what actually started me looking at South Korea is that my daughters were obsessed with South Korean music and TV. So I started looking into the stocks which had coincidentally sold off over a temporary presidential coup. This seemed like a great short-term opportunity so we bought the ETF in December 2024 (Who am I ETF?).

Now the YWR daughters are into China and asked if our summer trip could be to HK, Shanghai and Beijing. They’d heard so much about all these cities and wanted to see them.

And my big takeaway from the trip so far is not self-driving cars or robots. It’s that China is cooler than I thought. It is reinforcing my suspicion that this market can take-off.

Hong Kong

Strangely, the girls were not in love with HK. They’d heard so much about it from their friends and came in with high expectations. The HK girls at their universities’ carry on about ‘HKIS’ (HK International School) and HK incessantly. I think the pre-hype somehow had the opposite effect. My girls said the city was ‘OK’. but the girls in HK were super cliquey, and it was a turnoff. They liked Shanghai more.

To me HK is a unique city. I love that it has that San Francisco style combination of a financial centre with open space and mountain biking 15 minutes away. One morning we popped over to Shek-O and did the scenic Dragonback hike along the mountain tops down to Big Wave beach. Then 30 minutes back to Wan Chai. Where else can you do that?

With HK you also get those unique British colonial touches like a horse racing track right in the middle of the city. You can imagine the colonial governors back in the day planning out how they would like the city to make it the most fun for them. To help get over missing England. Of course they would have said HK should have a horse racing track right in the centre. And a golf course next to the beach. Why not? You can design it however you want. Harare is the same way. Golf course all over town. These stylistic touches will never happen ever again so cities that have them are unique. We went for the Wednesday night racing at Happy Valley. Admission is free and it’s tons of fun. Also a total scene for the youth.

While in HK I met with a real estate investor and fellow YWR reader who is surprised at the strength of high end HK residential real estate. 1,400 square foot penthouses in Kowloon in new developments are going for $8,000/square foot. He gets the listings every day from Knight Frank is amazed at the transactions. He thinks it must be mainland Chinese buyers. Commercial real estate is not picking up in the same way yet, but it’s a good sign that residential is heating up.

After HK the plan was to cross the border into the Mainland China and take a high speed train to Shanghai.

Before entering the mainland we downloaded all our Chinese apps and VPN’s. Doing this it hits you how weird it is that China is in its own internet bubble where nothing from the rest of the world works.

BTW, over the last 2 years China has granted visa free entry to all of Europe and the UK so it is much easier to visit and Western tourism is picking up.

The surprising coolness of Jingdezeh (Pottery Town)

Shanghai is an 8 hour train ride from HK so we decided to do something adventurous and stop overnight in a no-name town called Jingzedeh which is famous for pottery. While planning the trip back in London we had a hard time picking which town to stop in because they all seemed like they would be boring Chinese mega-cities. Nobody has heard of this town, but I’m into Japanese pottery, so I thought Jingdezeh had a 10% chance of being interesting. I kept everyone’s expectations super low and told them Jingdezeh would be a boring stopover with the idea that something interesting and unexpected might happen. I like to have these wildcards in my trip planning.

Jingdezeh ended up being a massive hit.

And this is where I started to get a new view of China.

I’ll start by saying the countryside is prettier than I expected. Super green and hilly.

On the taxi ride from the train station to the hotel we drove by lots of those narrow high rise apartments which are all over China. The ones you see in the housing bubble documentaries. I gave the girls a 5 minute lesson about how they built these all over China, people bought 4-5 at a time, but now they are poorly maintained and losing value. And that China is in a massive property crash. No-name Tier 2 cities like Jingdezeh were especially hard hit.

“Look kids. A Chinese housing bubble apartment complex.”

But then we got to our hotel in the Taoxichuan Ceramic Cultural Creative Park and I was blown away. I don’t really know how it happened, but the city took a run down 22 acre pottery factory and renovated it into a high end retail, cultural real estate development. It was like the fancy open space malls in Phoenix, but better. The hotel was brand new, super high-end and sleek too, but only cost $90/night.

After checking in we went for a stroll down the pedestrianised lanes with beautiful pottery studios, art galleries and museums. As part of the real estate development they kept the old factory kilns and smoke stacks. It reminded us of the coal drop yards in Kings Cross (London).

After wandering around the studios we had a big dinner for the whole family for $60. Then afterwards we walked around some more and gathered with the rest of the people to listen to the outdoor musicians. It was a fun night.

What struck me though was that the Taoxichuan pottery development was high end, super sophisticated and played off the town’s cultural roots in a modern way by renovating the old buildings. It was so well done it shocked me. I’m used to the typical EM tourist traps. Tons of trinkets and souvenirs for sale, overly commercial and gaudy where you just roll your eyes. But this was completely different. If you are from Milan, New York, San Francisco, Miami, Paris, whatever, you would think it is cool. I’ve never seen anything like it. Again, it’s like the coal drop yards in Kings Cross, but with a total focus on the artists, which makes it cooler. The pottery was really good. Like Japan style good.

And the whole place was clean and tidy with no riff riff, no pick pockets, and no gypsies. I was surprised there would be a market for this type of high-end tourism in China, but there was. It’s a sign of a new type of Chinese consumer. Way more upscale and sophisticated. I think the whole Europe trip trend might be fading, and people might start checking out China.

So our night in Jingdezeh was a highlight and a complete eye opener.

Shanghai

Shanghai has also been a hit.

Like I said in Shanghai Crash Fund, I had previously only been to Shanghai for investment conferences in Pudong (the Canary Wharf of Shanghai). So it was different hanging out with university age daughters and doing the things they want to do.

Instead of business dinners and investor meetings we’ve been going to roof top bars, restaurants featured in Instagram and art districts.

I still prefer the open spaces and MTB trails of HK, but Shanghai has hooked me more than I expected.

Maybe I’m just in the nice parts, but again like Jingdezeh, it’s clean and tidy, with no riff riff. It’s a good mix of new buildings, restored older buildings and tons of cool, edgy retail concepts. I know what you are going to say. No. It’s not sterile, clean like Disneyland. It’s cool. Where else can you take a picture with Bumblebee and try an Apple-Cinammon Latte next to the water? It’s also not crowded and great value.

Later that afternoon we were wandering around looking for something else, and ran into a small outdoor craft beer bar where you pull up a bar stool and drink craft beers next to the sidewalk. There were only 10 stools, so we stayed for a while and ended up chatting with everyone else there. It was tons of fun. Later on down the road at another establishment my daughter and I lost to two Shanghaiese girls at foosball. That was fun too.

Another night we went to dinner at Warehouse 3 which is a trendy new restaurant concept. The food presentation was super creative, like serving my Coke in a glass handbag. A Chinese friend I was talking to said the Shanghai restaurants have to always come up with new ideas for food and presentation because it is so competitive. Meanwhile, the restaurants in London kind of pride themselves on always doing the same thing. They would never make it in Shanghai.

After dinner we went to a great rooftop techno party next to the river (top picture) with kids partying their brains out to JayZ’s ‘New York, New York’ under the CCP flag. It made me think there is a cultural revolution underway, just not the one Mao expected.

And can I say, the office lights on the Bund were also impressive. Yes, it’s just a light show, but all the buildings put work into their displays and it’s really pretty. Again, cool in a way you don’t see anywhere else.

Afterwards, while we were waiting for a taxi I got to chatting with an Italian who is the China CEO for a well known Italian shoe brand. We were talking about China and he said the people he works with are amazing. He said ‘just you wait’ about China. His employees are committed to the company in a way you don’t see in the West (who are more checked out). The Chinese employees are energised and fast charging. He said he has a hard time translating their ideas and how fast they want to move to the HQ back in Milan. It’s two different worlds. He also said the Chinese tastes have switched somewhat to being more interested in local brands so as an Italian company they have to evolve a bit and find new concepts that are a mix of Europe and Chinese tastes. He said they need to find a ‘bridge’.

Another night we found a five story shopping mall which has been converted into a massive techno club complex. INS Land. I had read about it online, but was still surprised at the concept. You pay £35 at the front door then get access to all the different clubs inside. Again, it was super fun and cool. And it was normal kids attending. Not an over the top DJ scene like in Miami or Ibiza. I sipped a £2 cocktail and watched a crazy dubstep DJ crank out her own tracks while young Shanghaiese bopped around me in crazy outfits.

The IDGAF Stage

This might upset some people so I apologise in advance.

I’ve been going to Asia for a long time, starting with Japan when I was in high school.

And I see a change. I see a change in the Japanese. And it looks like it is happening in China too. Maybe it’s happening in South Korea as well, but I see it more in China and Japan.

The Japanese have always had some edge to them, but if you went to Tokyo in the 1990’s or 2000’s it was still 90% robots. Everyone dressed the same, everyone acting the same. Everyone on the same path; to get a salaryman job at a big company. Very little originality. Even the edginess back then seemed kind of forced and dorky. Often the rebelliousness was just a copy of Western trends.

Again, I apologise for my stereotypes and insensitivities.

But something is changing.

I think the youth in Japan and China are to some degree starting to say IDGAF. The corporate robot path of the past doesn’t work anymore. Or isn’t working like it used to. And that realisation, while painful, is opening up some space.

The youth are experimenting with new culture and new ways. And you can see something cool, and original emerging.

On this trip I am having experiences where I’m like ‘Wow.. this is super cool.., fun.. and safe” and I can’t think of a better version of it back in the US. No knife attacks. No street takeovers.

In the past Asia has always looked to the West for cultural leadership. California was always the epicentre of cool. Hollywood movies, Western music, etc. But I see a shift. I see China, Japan and Korea coming up with their own cool trends which are even catching on back in London (with my daughters).

The cultural epicentre is slightly shifting and we should take note.

I want to be clear that are there are still tons of things that are annoying about China, and it’s not for everyone. Still, I came into this trip thinking it would be a hot, sweaty schlep through a bunch of Chinese mega-cities in the middle of summer. I thought it wouldn’t be that pleasant, but at least my kids would enjoy it. Instead, I am enjoying myself more than I expected.

How do we make money?

Month after month the YWR Global Factor model data has been flagging the estimate momentum in China, Japan, Taiwan and Korea. The factor model is telling us to take note of Asia.

This trip reinforces the data for me in another way. There is something going on here.

And maybe Shui On Land is a way to play beaten down Shanghai real estate (Shanghai Crash Fund).

Or take an investment trip and explore China with the family.

And get in before everyone else figures out it’s cool.

Erik

Do you remember the CLSA China Conferences back in the day?

I mean 2005-2007.

They were the best parties.

Every fund manager had to be there.

Because China was the centre of the world back then. And we all craved perspective on what was happening in China.

Which was why I was there too. Our CIO thought it was important and good for me to go in 2007. Also it was already several years into a massive bull market. Perfect time to go to a conference.

I remember my taxi pulling into Pudong and being amazed at the forest of sleek 100 story office towers all less than 10 years old. I stayed at the Shangri-la hotel in Pudong and stared out at the city lights at night. Shanghai felt futuristic.

And Shanghai was pumping. You could feel it. There was an excitement about China’s future and all the things it would become. Plus the property market was hitting new highs. So everyone had money.

During the day we would buzz around the hotel from one room to another taking in the exciting investment pitches. Banks, consumer companies, insurance, telecoms, education companies, tech starts ups, and property. Plus the CLSA analysts would be there with their shiny 90 page reports to tell you how they had analysed everything and the future for all these companies looked great.

Then at the night we would go out for fancy dinners. My favourite place was an old warehouse district which had been renovated into an outdoor mall. Xintiandi. While everything else in China was desperately trying to be modern and new, Xintiandi had its own cool style. Because I was curious I learned that Xintiandi was an early project by Chinese property developer, Shui On Land led by Chairman Vincent Lo. Xintiandi was such a success Shui On Land had turned it into a brand and used the name for further projects; primarily in Shanghai.

It’s funny. 19 years later I don’t remember anything the CLSA analysts told me. But I do remember Xintiandi.

So I have a question.

If you like something at $100, and would have bought it then, and then it sells off 90%, shouldn’t you like it more at $10?

That’s my question about Shui On Land (272 HK).

Read more

I always say YWR readers are some of the smartest investors in the world. I see it from the comments at the end of the posts, the chat dialogue, and coffee meet-ups.

Now we have some data to prove it.

It’s time to review our 1H 2026 performance.

Do you remember the ETF portfolio you picked at the end of 2025?

It’s +21.1% ytd! Great job!

Dirty Div’s is +15.9%.

Cash Dragons is sucking (-20%).

And my overall ‘buy everything’ portfolio which includes Dirty Dividend, Cash Dragons, NASDAQ, S&P 500, Gold, AI and a few other stocks is +5.6% ytd.

Let’s go over each of them.

YWR ETF Portfolio

Energy (XLE) was +19%. Gold Miners (GDX) -12%. China (FXI) -17%. Brazil (EWZ) +9%.

And South Korea (EWY) +108% ytd!!

Bam!! Korea roll’n up on all the memory haters!

So what do we do for 2H 2026?

Do we switch out FXI for KSTR?

I know everyone wants to fade hardware, but it feels super consensus. I’m kind of leaning the other way. I’m not sure. Is the market surprise that ‘Cybertron’ goes on for years, kind or how online vs offline was a 25 year theme?

Or, do we keep everything the same?

Just to be clear, while the other portfolios are real money, the YWR ETF Portfolio is a hypothetical portfolio constructed from the reader survey we conducted in December 2025.

Maybe it should be a real portfolio.

Below is the current allocation.

Let me know what you think.

Dirty Dividends

+15.9% ytd. A nice recovery from -2.6% at the end of March. We kept our cool during the Iran war panic. Just reinvested a few year-end dividends and added a new position in Frontline.

European banks are the biggest trade nobody talks about. They just carry on growing, buying back shares, and paying out dividends while nobody talks about them. That’s how we like it. 2 million Substack posts/week about AI and none about Unicredit, Santander or Barclays. Let’s keep it that way. If anyone asks about European banks send them another AI podcast to listen to.

The performance of European banks means they are now 59% of the portfolio.

If I had to say what looks the interesting right now in Dirty Div’s it’s TotalEnergies at 7x earnings. You get a mix of everything; upstream oil and gas, global LNG trading business, LNG terminal investments, a growing electricity generation portfolio and refining all for 7x earnings plus dividends. In the latest Global Factor Model data everything to do with energy screened well. The market is pricing energy, shipping and refining as if the Iran disruptions are over. So the bet would be that they are not. That there a few more chapters to the story.

Cash Dragons

-20% YTD! Crikey.

Earnings at Alibaba have been terrible. Baidu is starting to inflect, but it got dragged down with the rest of the Hong Kong sell-off. Tencent Q1 earnings were better than expected given all the warnings they made about how much they were going to spend on AI, but it didn’t matter, it was sold down too.

Basically, Hong Kong has turned into a ‘software’ trade, while the Shanghai Star market is Cybertron (‘hardware’). Nobody wants food delivery, online retail, paid search and video games…. Those are ‘human’ trades. ‘Human trades’ are dead money. Everyone wants robot trades; GPU’s, DRAM, contract manufacturing, optical connectors, LIDAR and batteries.

So what do we do?

I’m reducing Alibaba and Baidu. Mostly Alibaba, but it’s also for personal reasons. See the personal announcement below. I’ve seen Tencent manage well through problems before (new video game license freezes, changes to fees on payments). ‘AI’ will probably be the same. So I’ll stick with Pony Ma and his team. Earnings at HK Exchange, Ping An, LVS and SGX have been fine so nothing done there.

Overall Buy Everything Portfolio

My asset allocation can best be described as the ‘buy everything portfolio’. Buy NASDAQ, buy AI, buy gold, buy China, buy banks, buy energy. It’s Project Zimbabwe. We want to be long a diversified portfolio of risk assets.

Mostly we just want to be long everything. It’s the 18 wheeler theory. Even if 1 tire blows, we keep on trucking.

The Cash Dragons slice dragged down 1H performance so the overall performance was only +5.6% ytd.

Public Service Announcement.

I want to disclose something because it’s important to know where people have skin in the game and where they are just talking. That’s why we do this review of our actual performance.

At the end of the quarter I had to sell some stocks to buy a property. It meant going over all of my accounts and doing an upside/downside analysis of how to raise money while minimising capital gains taxes.

I sold completely out of Mercedes Benz, Tesla, Amgen, Vinci and Alibaba. I reduced Glencore and Baidu substantially, and sold 15% of SK Hynix. The sales to Alibaba and Baidu reduced a lot the size of the Cash Dragons portfolio.

Regards,

Erik

• $7,000 gold by December 2026.

• The metal which cannot be bought. $500,000/ton Tungsten.

• Jeremy’s worst day.

• The strong demand for Pure Tungsten. Click here for more information.

• Jeremy’s first IPO (Gold Road). 2.8x in 14 months.

• Will Pilar be the greatest gold comeback ever? Click here for more information.

Pure Tungsten Information:

Pilar Gold Information:

Have a good weekend!

Erik

June’s Killer Charts is a recap of our main research themes, plus a new one (Cybertron).

The full 74 slide deck is at the bottom of the post.

But here’s a quick table of contents and the main ideas.

#1 Project Zimbabwe Theme

• The persistent theme driving everything.

• An era of higher inflation.

• Stock markets will surprise everyone to the upside.

• Trading speculation will be high, but this is natural when money is losing value. It’s a sign of the times.

• Bond yields rise over time, but remain low relative to inflation and supportive of equity returns.

• ‘Bad is Good’ - Society feels like it is falling apart, but markets go higher.

  

#2 Cybertron Theme

• We are still in the early days of building the AI/Robot economy.

• Winning theme of the last 25 years: Online vs offline.

• Winning theme of next 25 years: Robots vs Humans

• Tailwind behind robot and AI themes. Human industries derate.

• Cybertron Markets (Korea + Japan + Taiwan + China + US) outperform Rest of World?

  

#3 Elysium Theme

• Divergence not convergence

• Divergence of wealth - Extreme wealth of the 1%

• Divergence of Economies - Emerging markets economies don’t converge with the developed world.

• Intense immigration pressure from 3rd world countries to find opportunity in Elysium (developed markets/US).

#4 World Economic Boom

• Nominal GDP is growing strongly

• US + Europe + Japan all booming

#5 Return to Loan Growth

• Banks in Europe + US + Japan have never been healthier.

• Record high Tier 1 capital, record profits, and strong asset quality.

• Change in top down direction from government and regulators.

• Pendulum swings from Post-GFC ‘Never Again’ to ‘Risk On’

• Banks start to lend again.

• A new driver of economic growth.

• Hard to have a widespread ‘credit bubble’ when banks haven’t been lending.

#6 The Final Bottleneck

• Contrarian call on US Natural Gas

• The AI datacenter play no one wants to own

• Unprecedented confluence of demand drivers

• Datacenter demand, LNG export demand, Industrial demand.

#7 Hang Seng on the Launchpad

• Contrarian (but so far not working very well) call for a bull market in Hong Kong stocks.

• Record low valuation

• Earnings inflection.

• Record low Chinese interest rates.

• Negative: HK Tech is food delivery, online retail and video games, while exciting Cybertron tech is listed in Shanghai and Shenzhen.

#8 Software

• AI disruption fears might be overdone.

• Estimate revisions are positive.

• Big difference between vibe coding software and running an enterprise software business (debugging, maintenance, security)

• But is it a value trap because longer-term fears around changes in the business model are warranted?

• Is software a ‘human’ industry?

#9 Gold

• Hard to call gold prices. No press releases or ‘catalysts’

• Bull market drivers intact.

• ETF Flows minimal and Futures positioning neutral.

• After a 10 year winter, gold is entitled to a multi-year bull market.

#10 S&P $10,000

• Counterpoint to prevailing institutional negativity.

• Earnings estimates are rising.

• Earnings are curving upward (earnings growth accelerating)

• Consistent double digit EPS growth with 4.5% 10 year yield justifies P/E > 25x.

• Ask why bond yields are so low, not why market is expensive.

• $400/share sometime by early 2028.

• $400/share @ 25x = S&P $10,000

A link to the full presentation is below.

Read more

Investors lack imagination.

Investors underestimate the strength and duration of trends.

Words of wisdom from John Burbank.

Below are the 30 best ranked stocks in the world.

We have some hard calls to make, but let’s start with the data.

As a reminder we are ranking stocks based on the % change to FY1 and FY2 earnings estimates for over 10,000 global stocks to create our estimate score. We then value companies relative to their sector (banks vs banks, tech vs tech) to create our Value score. Finally, we rank the % move in the share price creates our Price Score.

The best ranked stocks have high % changes to forward earnings estimates, have positive price momentum and relatively attractive valuations.

A link to the YWR Data Apps and the full rankings sheet is at the bottom of the post.

YWR Global Top 30

The global top 30 is full of memory, semiconductor and computer peripheral stocks from Taiwan, Japan and South Korea. The estimate data for the semiconductor and memory supply chain is off the charts. I’ve never seen a vertical move like this. Most trends evolve over years. This went vertical in the last 8 months.

What to do with memory and electronic component stocks?

First off, the ranking system is not a recommendation to buy stocks. It’s our global perspective tool so we know where estimates are changing in the world. So we know the big debates.

Now let me talk out of both sides of my mouth.

Buy case: Yes, the Taiwanese electronic component stocks have gone up a lot, but for all the euphoria they are still trading on <9x earnings. Where’s the bubble? This isn’t CSCO on 50x or JDSU on 100x. But then you say they should trade on 7x because there are no moats and these are commodity component suppliers… Are they though? Are they commodity suppliers, or are these component companies part of a multi-billion datacenter supply chain carefully curated over two decades by Nvidia where it takes years to delivery reliably and get into the club. And these established players are not about to be suddenly overrun by a new Chinese DRAM start-up, especially when AI supply chains are a matter of national defence.

And are we vastly underestimating the multi-year demand from AI and soon robots? Is Earth turning into Cybertron and the demand for memory, semiconductors and electronic components will go on for years? Basically, AI and robots are a new alien species, which are just getting started, and the build out of the Transformer economy will change the world?

Another way of reframing how early we might be in AI. It’s the biggest technology ever and it’s only 0.4% of GDP. Like with Cybertron maybe instead of constantly calling it a bubble we are underestimating the scale of this.

BTW, I remember in 2004 when we kept calling China a bubble when it would grow 8% every year. We thought there was no way that could keep happening and kept expecting iron ore stocks to crash. And there were lots of super smart bear cases on China back then (still are).

But imagine if we could have gone back in time to our 2004 selves on the trading desk and said “Hi. sorry to interrupt your bubble conversation…. but I’m from the future…. and China is going to do this every year for the next 20 years..”

Imagine the perspective of knowing that even if everyone would have said you were crazy.

And another thing. Even if the 2nd derivative on datacenter spend goes to 0 (no growth) or slightly negative (a temporary pull back in new datacenter spend) do the stocks still go up because the valuations are effectively saying investors don’t believe the earnings estimates anyways, and when the actual profits come in the stocks start rerate to 10-14x earnings?

This is was a lesson from the European banks. The second derivative of earnings upgrades from the interest rate moves ended in 2024, but we held on because they were still too cheap. Since then the stocks have steadily rerated higher as the reality of the higher profitability played out, even though the estimates were barely changing.

Maybe in 2027 Samsung rerates to 11x earnings, or KRW 600,000/share, which isn’t extraordinary, but still another +70%. And Korean retail is right to get on board and buy it.

The bear case: Below is the forward consensus for SK Hynix in May 2024 when it first started showing up in the global factor model.

Go back in time and revisit the set-up. SK Hynix was announcing that 2025 would be great. That they were sold out of HBM chips.

Earnings estimate for 2025 were rising and despite SK Hynix saying HBM supply was sold out and going to grow 60%/year analysts still hated memory stocks, so they said it was a bubble. Their EPS estimate for 2025 was KRW 30,000 but the estimate for 2027 was below 20,000; ie profitability all comes falling down again after a 2 year burst.

That was the perfect set up.

Rising profitability, but analysts fading it.

Contrast that with the SK Hynix estimates today in the YWR Factor Model Data App (link at the bottom). KRW 180,000 for 2026, KRW 359,000 for 2027 and KRW 630,000 for 2028. The analysts are now onboard the bull market and predicting a 250% growth over the next 2 years.

Yes, SK Hynix is still cheap, if the numbers are right, but it’s a lot harder trade now. It’s a $1 trillion stock, the analysts are all bullish now, Korean retail is levered long and the company is selling $29bn in stock.

Yes, it will probably still work (and I still own most of my position) but it’s not fresh meat.

Instead, what’s a set-up now that looks like SK Hynix in 2024? Something where the company is making lots of money, the trend has changed and yet the analysts are fading it? Saying it’s a ‘1-off’.

Hmm… let me use the YWR Factor Model Data app to find one…

How about this?

Here’s a stock making record profits trading on 5x because the analyst say the earnings are unsustainable. The 2026 estimate is $7/share (and rising) but the 2027 EPS is back to $3.60 and then even lower in 2028.

Which stock is it?

Frontline. Tankers.

Massive disruptions from the Iran War which are stretching out tanker supply and forcing up rates. But the market thinks it is a one off.

All of energy is like this. Look at the earnings estimates for TotalEnergies and Shell. Strong 2026 but then 2027 is lower. Same thing for chemical stocks like Dow or Lyondell. Everything benefitting from the Iran War disruption has this pattern. Great profits in 2026, then it all goes lower in 2027.

US refiners are also benefitting.

But the market and the analysts are fading it.

So you want a SK Hynix 2024 set-up?

It’s in the energy space. The trade is that the Iran War disruptions are the start of a multi-year problem and it is going to take the world years, maybe even decades to re-architect global energy supply away from the Middle East (3 Trillion non-AI trends). And we’ve only seen Ch.1 of the energy price shock.

BTW, my favourite outcome would be that Iran becomes a new Dubai and the Middle East booms (economically) with the whole region synched up and growing. And I thought maybe with a combination of carrots and sticks that was possible. But, I’m slowly slipping into the view that Iran is a world changing intractable problem that is not priced in.

Back to the data.

Top Ranked Sectors

The top 5 ranked sectors are semiconductors (#1) and electronic components (#5) which is the Cybertron theme. Computer peripherals is another top ranked Cybertron sector, but didn’t make the top 5.

But then Intregated Oil (#2), Shipping (#3) and Chemicals (#4) are the ‘US as the new Middle East’ theme.

In the monthly progression chart below you can see (strangely) how all five themes started firing together at the beginning of this year. A previous multi-year theme which has completely dropped out is Major Banks.

Top Ranked Countries

It’s strange to see China ranked so highly, when the FXI is -17% ytd (and driving me crazy), but when you look into the individual stock rankings in the YWR Rankings Sheet (link at the bottom) you see China has many stocks in electronic components, computer peripherals, semiconductors, shipping and chemicals; all the top industries. Unfortunately, a lot of them are A-shares (which is performing better).

The US is always in the top 5.

Then the last 3 countries are almost always there too. Japan, Taiwan and Korea. Like China they are exposed to all the top industrial themes.

Below are links to the rankings sheet with rankings for over 10,000 stocks as well as the Data App I use to show the estimate revision charts, which is highly useful.

I also include the global inflection ranking sheets to show where earnings have recently inflected. A lot of it is energy related. Contract drilling, oil and gas, oilfield services, coal.

Trucking companies and staffing companies are also inflecting upwards for some reason.

Be original, be imaginative, dig into the data, find the new themes and let me know anything interesting.

Erik

Read more

Investors lack imagination.

Investors underestimate the strength and duration of trends.

Words of wisdom from John Burbank.

Below are the 30 best ranked stocks in the world.

We have some hard calls to make, but let’s start with the data.

As a reminder we are ranking stocks based on the % change to FY1 and FY2 earnings estimates for over 10,000 global stocks to create our estimate score. We then value companies relative to their sector (banks vs banks, tech vs tech) to create our Value score. Finally, we rank the % move in the share price creates our Price Score.

The best ranked stocks have high % changes to forward earnings estimates, have positive price momentum and relatively attractive valuations.

A link to the YWR Data Apps and the full rankings sheet is at the bottom of the post.

YWR Global Top 30

The global top 30 is full of memory, semiconductor and computer peripheral stocks from Taiwan, Japan and South Korea. The estimate data for the semiconductor and memory supply chain is off the charts. I’ve never seen a vertical move like this. Most trends evolve over years. This went vertical in the last 8 months.

What to do with memory and electronic component stocks?

First off, the ranking system is not a recommendation to buy stocks. It’s our global perspective tool so we know where estimates are changing in the world. So we know the big debates.

Now let me talk out of both sides of my mouth.

Buy case: Yes, the Taiwanese electronic component stocks have gone up a lot, but for all the euphoria they are still trading on <9x earnings. Where’s the bubble? This isn’t CSCO on 50x or JDSU on 100x. But then you say they should trade on 7x because there are no moats and these are commodity component suppliers… Are they though? Are they commodity suppliers, or are these component companies part of a multi-billion datacenter supply chain carefully curated over two decades by Nvidia where it takes years to delivery reliably and get into the club. And these established players are not about to be suddenly overrun by a new Chinese DRAM start-up, especially when AI supply chains are a matter of national defence.

And are we vastly underestimating where the multi-year demand from AI and soon robots? Is Earth turning into Cybertron and the demand for memory, semiconductors and electronic components will go on for years? Basically, AI and robots are a new alien species, which are just getting started, and the build out of the Transformer economy will change the world?

Another way of reframing how early we might be in AI. It’s the biggest technology ever and it’s only 0.4% of GDP. Like with Cybertron maybe instead of constantly calling it a bubble we are underestimating the scale of this.

BTW, I remember in 2004 when we kept calling China a bubble when it would grow 8% every year. We thought there was no way that could keep happening and kept expecting iron ore stocks to crash. And there were lots of super smart bear cases on China back then (still are).

But imagine if we could have gone back in time to our 2004 selves on the trading desk and said “Hi. sorry to interrupt your bubble conversation…. but I’m from the future…. and China is going to do this every year for the next 20 years..”

Imagine the perspective of knowing that even if everyone would have said you were crazy.

And another thing. Even if the 2nd derivative on datacenter spend goes to 0 (no growth) or slightly negative (a temporary pull back in new datacenter spend) do the stocks still go up because the valuations are effectively saying investors don’t believe the earnings estimates anyways, and when the actual profits come in the stocks start rerate to 10-14x earnings?

This is was a lesson from the European banks. The second derivative of earnings upgrades from the interest rate moves ended in 2024, but we held on because they were still too cheap. Since then the stocks have steadily rerated higher as the reality of the higher profitability played out, even though the estimates were barely changing.

Maybe in 2027 Samsung rerates to 11x earnings, or KRW 600,000/share, which isn’t extraordinary, but still another +70%. And Korean retail is right to get on board and buy it.

The bear case: Below is the forward consensus for SK Hynix in May 2024 when it first started showing up in the global factor model.

Go back in time and revisit the set-up. SK Hynix was announcing that 2025 would be great. That they were sold out of HBM chips.

Earnings estimate for 2025 were rising and despite SK Hynix saying HBM supply was sold out and going to grow 60%/year analysts still hated memory stocks, so they said it was a bubble. Their EPS estimate for 2025 was KRW 30,000 but the estimate for 2027 was below 20,000; ie profitability all comes falling down again after a 2 year burst.

That was the perfect set up.

Rising profitability, but analysts fading it.

Contrast that with the SK Hynix estimates today in the YWR Factor Model Data App (link at the bottom). KRW 180,000 for 2026, KRW 359,000 for 2027 and KRW 630,000 for 2028. The analysts are now onboard the bull market and predicting a 250% growth over the next 2 years.

Yes, SK Hynix is still cheap, if the numbers are right, but it’s a lot harder trade now. It’s a $1 trillion stock, the analysts are all bullish now, Korean retail is levered long and the company is selling $29bn in stock.

Yes, it will probably still work (and I still own most of my position) but it’s not fresh meat.

Instead, what’s a set-up now that looks like SK Hynix in 2024? Something where the company is making lots of money, the trend has changed and yet the analysts are fading it? Saying it’s a ‘1-off’.

Hmm… let me use the YWR Factor Model Data app to find one…

How about this?

Here’s a stock making record profits trading on 5x because the analyst say the earnings are unsustainable. The 2026 estimate is $7/share (and rising) but the 2027 EPS is back to $3.60 and then even lower in 2028.

Which stock is it?

Frontline. Tankers.

Massive disruptions from the Iran War which are stretching out tanker supply and forcing up rates. But the market thinks it is a one off.

All of energy is like this. Look at the earnings estimates for TotalEnergies and Shell. Strong 2026 but then 2027 is lower. Same thing for chemical stocks like Dow or Lyondell. Everything benefitting from the Iran War disruption has this pattern. Great profits in 2026, then it all goes lower in 2027.

US refiners are also benefitting.

But the market and the analysts are fading it.

So you want a SK Hynix 2024 set-up?

It’s in the energy space. The trade is that the Iran War disruptions are the start of a multi-year problem and it is going to take the world years, maybe even decades to re-architect global energy supply away from the Middle East (3 Trillion non-AI trends). And we’ve only seen Ch.1 of the energy price shock.

BTW, my favourite outcome would be that Iran becomes a new Dubai and the Middle East booms (economically) with the whole region synched up and growing. And I thought maybe with a combination of carrots and sticks that was possible. But, I’m slowly slipping into the view that Iran is a world changing intractable problem that is not priced in.

Back to the data.

Top Ranked Sectors

The top 5 ranked sectors are semiconductors (#1) and electronic components (#5) which is the Cybertron theme. Computer peripherals is another top ranked Cybertron sector, but didn’t make the top 5.

But then Intregated Oil (#2), Shipping (#3) and Chemicals (#4) are the ‘US as the new Middle East’ theme.

In the monthly progression chart below you can see (strangely) how all five themes started firing together at the beginning of this year. A previous multi-year theme which has completely dropped out is Major Banks.

Top Ranked Countries

It’s strange to see China ranked so highly, when the FXI is -17% ytd (and driving me crazy), but when you look into the individual stock rankings in the YWR Rankings Sheet (link at the bottom) you see China has many stocks in electronic components, computer peripherals, semiconductors, shipping and chemicals; all the top industries. Unfortunately, a lot of them are A-shares (which is performing better).

The US is always in the top 5.

Then the last 3 countries are almost always there too. Japan, Taiwan and Korea. Like China they are exposed to all the top industrial themes.

Below are links to the rankings sheet with rankings for over 10,000 stocks as well as the Data App I use to show the estimate revision charts, which is highly useful.

I also include the global inflection ranking sheets to show where earnings have recently inflected. A lot of it is energy related. Contract drilling, oil and gas, oilfield services, coal.

Trucking companies and staffing companies are also inflecting upwards for some reason.

Be original, be imaginative, dig into the data, find the new themes and let me know anything interesting.

Erik

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I hope the market gods don’t kill me for this……

…but in the future will International Markets matter anymore?

Or matter much.

I mean long-term.

This chart from 3 Non-AI Trillion $ Trends is stuck in my head.

In 2014 it used to be the US was a big stock market (38%), but there were lots of other important markets too. Now the US is 49% of global market cap and all the other markets are a lot smaller.

The UK for example, has gone from a respectable 5.8% to just 3.5%.

And that was 2024. With semis going vertical and the IPO of Spacex the US in 2026 must be closer to 55% of global market capitalisation. After OpenAI and Anthropic IPO will it be 60%?

Capital markets have network effects. Liquidity begets liquidity. And network effect businesses are usually winner takes all.

In the years ahead will international markets become irrelevant to global allocators?

Or, will investing ‘internationally’ mean buying an ADR on a US exchange?

The US Capital Markets Ecosystem

The US supports its capital markets in a way you don’t see anywhere else. Markets are a religion. This relentless attention to the health of the US markets is why they keep growing, innovating and taking market share. It’s a US soft power.

There is also a whole ecosystem to support US capital markets.

Take the lifecycle of a start-up.

The US has the biggest PE/VC industry. These PE/VC firms back the start-ups which later go on to IPO or issue debt. If you are an aspirational start-up founder it’s best to be a Delaware corporation located in the US to get funded.

NY City by itself has almost $2 trillion in private assets under management (PE/VC Q3 2025 Deal Tracker). NYC, SF, Boston, and LA are big cities for the PE industry. 6 of the top 10 cities in the world are in the US.

US Start-up → US Venture Capital → US IPO

The US also has the world’s biggest army of retail investors. 58% of US households invest in stocks with an average holding of $52,000 (and that was on the market lows in 2022).

The US investing pool is the world’s biggest with $94 trillion in equity AUM between individual investors and investment funds.

The other advantage to the US market is that it’s one currency, one reporting standard, one ticker format, with low trading costs. There is also the best offering of derivatives products if you want to lever things up, change the payoff structure or isolate different parts of the trade. This is why US securities work well for complex quantitative trading strategies. When you take these quant strategies to other markets there are lots of edge cases and exceptions to troubleshoot.

In the end it’s easiest to just trade the US.

Liquidity begets liquidity.

The Americanisation of TotalEnergies

TotalEnergies is a great case study. I’ve been a long-time shareholder and have followed their multi-year pivot to become more of an American company. Total has always had a lot of US shareholders of their NYSE listed ADR, and it annoyed CEO Patrick Pouyanne that despite similar growth metrics Total still traded at discount to Exxon and Chevron because it was European.

So Total started making small changes like doing their annual capital markets days in English in New York. They also increased their US operations in Texas to make the business more American.

Here’s Pouyanne deciding Texas would be their new second home.

“I love Texas. Texas is a country. We want to invest in the U.S. But the U.S. is so big. It’s so huge that, in fact, we are completely lost, you know? And in fact, you know, for us, you know, we invest in the U.S. in LNG and in electricity. And in fact, the perfect land is Texas, where we are building a new plant, Rio Grande LNG, where we are developing gas plants and renewables. And there is a lot of space. So, yes, it’s a big country. It’s a growing demand of electricity. So it’s a nice place.”

“You know, we were heavily involved in Russia. And I decided to take actions. And we choose American, as I would say. I said, OK, look, my colleagues, forget Russia, because this war is just has some—many implication. We need to continue. We are one of the top three energy player. If we want to continue to be among the top three, it will not come—it will not come from Russia. Let’s go to the U.S.” Source: CFR

There’s the killer line.

If we want to be top 3 we need to be in the US.

Then in 2025 Total converted their ADR share to a full US listing to be the same as Exxon and Chevron.

Total feels the pull of the US. They feel the need to operate in the US, have offices in Houston, be listed on the NYSE, and have access to US capital..

European banks are the same. They all want to have access to US retail funding. It’s why Barclays keeps building its US consumer bank and why Santander just sold a bank in Poland to buy Webster Bank for $12 billion. And any European investment banking operation has to be in the US (50% of the global fee pool). And you see it with the Japanese banks all highlighting how they are getting more active in US capital markets and trying to be like JP Morgan or Goldman Sachs.

It’s the same for global tech companies. How can you not be in Silicon Valley? And what kind of a tech company are you if you aren’t listed on the NASDAQ?

And the same with Biotech. You have to be in Boston, SF or San Diego.

Across industries international companies see the trend. If you are listed in the US, operating in the US, and known to US investors you have structurally better access to capital.

It’s reflexive. Traders want to be able to trade any security in US$’s on a US exchange. This exerts gravitational pull on the top international companies to also be listed and operating in the US. This further reinforces the two-sided attractiveness of US capital markets. It has both the investors and the issuers. And as an international company if you aren’t there you’re missing out.

Which is why you see the markets like the LSE consistently losing issuers who move to the US.

The Death of the LSE

If our theory is correct it will be hard for the LSE to stage a comeback. The risk is UK public companies remain a hunting ground for US PE firms to acquire quality businesses on the cheap. Getting taken out is a nice one time benefit for shareholders, but the other public UK companies don’t feel like being in a death spiral where their future is to be taken out by private equity. They feel pressured to move to the US before it is too late.

Bright new start-ups out of Cambridge or Oxford might operate in London, but end up listing in the US.

Everything trades in the US.

In 2040 will US listed stocks be 75% of global market cap?

And what are the market structure implications of this?

It’s not so hard to imagine. In the MSCI World index it’s already 72%.

If US markets are >70% of listed market cap does a US investor really care about the 3.5% of stocks in the UK or 2.4% in France?

And will the top UK and French companies just relist on US markets to remain competitive? Like Total?

There is also the subtle effect of the portfolio manager saying “Do I really need to do a research trip to the Netherlands? I’ll just see ASML at the Goldman semiconductor conference in NYC.” So he never makes the trip and never sees the 3 smaller Dutch companies that would have filled out his day in Amsterdam.

In December last year I met a large US pension fund which doesn’t even look at international markets. I thought it was a bit limiting at the time, but I’m starting to wonder if maybe they are right and this could be a trend.

Norges has come to the same conclusion. Here’s Paul Marcussen based in New York saying how Norges wants to be structurally overweight the US forever.

“We don’t give official market outlooks. But if I want to bet on the US versus Europe over the next 20 years, my money would be in the US. It has the innovation, it has the creativity, it has the willingness to let people fail and pick themselves up and try again, which we don’t have in Europe.” Source: top1000funds

It doesn’t mean international markets can’t work for a few years, but it says guys running hundreds of billions of dollars have made a top down decision they are allocating most of their billions to US markets. And if you aren’t in that bucket, it’s hard to attract their money.

What is the long-term effect of this?

Structural US Premium

This could mean a steady gravitational pull of fund flows towards the US and away from international and EM markets. The US becomes the platform where everything gets traded. US and International.

It means international markets would still have good years, but the bull markets would become shorter and fewer.

You would also expect to see a widening valuation spread between US and international markets. A persistent premium for US securities reflecting the better liquidity and market structure.

Isn’t this what we are seeing already?

Look at the global valuation chart below from JP Morgan. I used to look at this chart and think it showed how international market valuations are attractive. What a deal?

But that view might miss the structural changes underway. The surprise for investors might be that the valuation difference is not mean reverting.

Through the lens of our ‘USA all the Time’ not being listed in the US is like not being on Facebook. It makes perfect sense that US valuations are near the top of their 20 year range. And it makes sense that international stocks are near the bottom of their 20 year ranges even though we are in a global bull market. The valuation difference might even get wider in the years ahead. Extrapolating things into the future; in 2040 does the US trade at 27x while Europe trades at 12x?

How do we make money?

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CME, ICE and CBOE are down 25% from their highs.

There are two issues.

First, is concern the CFTC’s approval of Kalshi’s perpetual future’s contracts might be a competitive threat to these established futures exchanges.

The second concern is that with the signing (?) of the Iran peace deal the Q1 surge in Iran War volatility was a one-off.

Forward P/E’s are back to trough levels for these businesses, which is sub-20x. Traditionally, this is a good entry point.

We probably don’t need to go over why these are great stocks to own. They grow in line with capital markets activity, have virtual monopolies in their products, high operating margins and minimal capex.

Perpetual Futures Threat

The fear with Kalshi’s new Crypto perpetual futures is whether these monopolies are under threat. It’s crypto today, but tomorrow it could be commodities and the S&P 500.

First let’s understand the real moats around these derivatives exchanges, because they aren’t really monopolies, they just naturally evolve this way.

#1 Liquidity network effects. This is the most obvious. Liquidity begets liqudity. It would be hard for a new exchange to compete with the CME’s flagship S&P 500 contract, ICE’s Brent contract or CBOE’s S&P options contract. Although you can see how CME also offers options and competes with CBOE, and why ICE has a competing WTI contract. But it’s really hard for a new entrant to get started.

#2 Collateral efficiency. A diversified derivatives exchange can reduce a client’s margin requirements by considering offsetting contract positions (long June - short September) as well as highly correlated contracts (long Brent - short WTI) when calculating collateral. This is a strategic benefit for a one-stop shop like CME (interest rates, equities, commodities, FX). This is also why traders might want to trade WTI on ICE for the margin benefits even if CME is more liquid.

#3 Back office clearing and settlement relationships. CME, ICE and CBOE own their own clearing houses and this is the key market structure. It’s hard to set up back office settlement relationships with all the major banks, commercial traders, futures clearing merchants, and market makers. Everyone is already ’set up’ with ICE, CME and CBOE. There would be huge inertia to setting up a new derivatives exchange and getting all the market participants connected.

This is different from cash equities settlement which is why cash equities isn’t very profitable for exchanges. US cash equities settlement is through the DTCC, a public settlement system everyone is connected to. Effectively, anyone can create a cash equities exchange. The settlement is a public good through the DTCC. Which is why exchanges make ‘billions’ trading futures and ‘hundreds of millions’ trading cash equities.

Rule of thumb: He who owns the clearing house makes the money. It’s why SGX and HKEX can make a lot of money in cash equities.

Perpetuals vs Futures

A traditional futures contract is tied to the underlying spot market through periodic delivery. Usually, quarterly. The requirement for future delivery means spot and futures market are highly connected through arbitrage.

Perpetuals are a crypto market invention where the contract is never delivered and has no connection to the underlying spot market. Instead there is a ‘funding rate’ which is meant to keep the perpetual tied to spot. If the price of BTC on a perpetual has pushed up to $70,000 because everyone is super bullish BTC and wants to be long with 20x leverage, while the spot is $60,000, there would be a 16% funding cost which gets paid to holders of the short BTC contracts. Effectively, compensating them for the contract deviating away from spot.

The perpetual structure kind of works as a way to trade things on a website without having settlement. But it’s like Automated Market Making, another crypto invention. It works (kind of), but it’s shaky and it’s not the same as being connected to the actual liquid underlying market.

Pushback on Perpetuals

#1 Retail product: It’s hard to see perpetuals as something institutions are going to use. American Airlines, Vitol, and Morgan Stanley want to trade energy contracts with deliverability of the underlying commodity. Real commercial traders who touch both the spot and futures market are the core to a contract’s liquidity. The pure play speculators are layered on top and chase after real world liquidity. I’m trying to keep an open mind of how the market might develop, but perpetuals are probably going to remain a fringe retail product for traders who want extreme leverage (>5x).

#2 Regulatory Review: CME is pushing back heavily on this CFTC’s decision to allow onshore regulated trading of perpetuals. On June 18th they sued the CFTC that perpetuals do not meet the Commodities Trading Act definition of a future contract, which clearly states the contract has to have a delivery date. If perpetuals have no delivery then they are ‘swaps’, which are regulated differently. The CFTC has responded that they will open up the matter to a wider industry consultation, which is what the CME wanted. CME Executive Chairman Terry Duffy gave a great 25 min fireside chat on this topic (as well as his positive outlook on CME’s growth). I recommend giving it a listen.

My guess is the futures industry is going to drag Kalshi through the regulatory mud and make it really hard to offer a regulated perpetual futures contract. And in the end if they do get it approved, the existing exchanges CME and ICE are well positioned to counter with products of their own if they want to.

Interestingly, Duffy thinks perpetuals futures are insane and the current retail speculative trading fever is the equivalent of subprime mortgages in 2007.

Why derivative exchanges are good Project Zimbabwe plays

The fear over perpetuals contracts provides us an entry point to businesses which are aligned with our Project Zimbabwe outlook. Earnings have been surging for the exchanges recently, and here is why it is likely to continue.

#1 Rise of retail speculation. The lesson from all inflationary periods is that trading and speculation increase as nominal assets rise and everyone flees cash. Duffy worries this is a short term cyclical trend. Project Zimbabwe says this is going to go a lot further.

Project Zimbabwe is why hyper volatile short dated options grew gone from 22% of CBOE volume in 2022 to 60% in 2025.

CME is also seeing a surge in retail trading.

#2 Rise in interest rate volatility.

The biggest complex at CME is interest rates and it’s becoming a big product for ICE too. Interest rate contract volumes are growing rapidly which seems to be tied to our new environment where rates are higher and no-one knows if interest rates are going higher or lower from here. For the exchanges this uncertainty is great.

#3 Growth of US Energy Exports

The US is becoming the trusted, reliable supplier of world energy, especially for gas and LNG. Counterparties around the world will need to hedge their US supply with US energy futures contracts.

#4 Geopolitical uncertainty.

Covid, Ukraine War, Tariffs, Iran War.. .what next?

The world is increasingly uncertain and volatile. Which is great for hedging volumes in interest rates, metals, energy and equities.

Risks and Timing

I could be wrong, and this isn’t the best entry point for the derivatives exchanges, but I think with a long enough time frame these are good businesses to own. The other challenge is that it is hard to predict quarterly volumes. They can surge and then flatline, and it’s frustrating to wait around when things are quiet not knowing when the next volatility surge will hit.

You just have to know you own great businesses and also track all the initiatives they have to launch new products and data sets.

Below are my earnings models for CME and ICE.

Have a good weekend!

I’m going to go watch the HSBC Championship Cup tennis.

Erik

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Most investors lack imagination.

I do too, but I know it’s a weakness and I try to work on it.

Which is why in June last year I came up with a radical idea.

With the S&P at $6,000 and everyone worried about tariffs, ‘multi-polar’ worlds, inflation and the bond market, I proposed the opposite.

I proposed we were going to have the biggest bubble ever. A bubble which would out-do ‘1999’. A radical new technology would create a new bubble which would set the world record for bubbles (S&P $10,000).

And rather than be like everyone else on Substack, who was going to spend the whole move naysaying it and missing it, we would stay long and strong and make money.

And in the midst of the Iran War wobble, when everyone was counting down the days to when we were going to run out of jet fuel, fertilisers, helium, etc, we stuck to the mega-bubble view (Ten Reasons we go higher).

But it’s a been a year since we started this view.

Let’s do a health check.

Have we already peaked?

Does the market keep going higher?

Are we still on track, or have the warning signs come early?

Here are the 5 reasons I think we go higher.

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“Should I shift my exposure more to inference?”

“Am I underestimating the demand for Neoclouds?”

“Is it too late to buy optical connectors?”

And on and on….

AI, AI, AI. It’s all anyone talks about.

It’s fine. It’s warranted. AI is a massive trillion $ trend.

But it might be time to consider some other trends.

The AI 2nd Derivative

Think back to May 2024. May ‘24 was when Nvidia blew everyone’s minds with guidance that Q2 revenues were going to grow +52% quarter on quarter ($7.2bn → $11bn).

It was our first big signal that datacenter capex was going to skyrocket.

Unimaginably.

The rest was history.

Hyperscaler Capex grew from $240bn to $416bn in 2025. Then earlier this year, when we thought we had a handle on things and 2026 capex would be $600bn, everyone came out in April and upped the numbers again. Now we are forecasting almost $1 trillion in Capex by 2028.

The problem is it’s hard to see how AI Capex surprises again from here. Or to the same magnitude. Or, to a magnitude which isn’t already priced in.

The big tech companies are already spending all of their operating profits on capex and beyond. Google did an equity raise, to fund AI, which is kind of unimaginable. Google needing to raise money? And the rumour is Meta might raise money too. And Michael Burry is pointing out all off balance sheet SPV’s and lease agreements also being used to fund datacenters.

I’m not saying this is all going to crash. I’m saying many of the financing levers have been pulled (operating cash flows, off balance sheet financing, capital raises) and the big tech companies are hitting spending constraints.

There are also practical constraints. Even if companies wanted to spend $1.5 trillion on datacenters it’s increasingly hard to find communities to host these data centres or utilities able to power them. It’s going to be hard to spend the money.

We are hitting the near term financial and physical limits on AI spend.

Maybe I’m wrong, but it feels like a lot of the big AI capex surprise has happened.

So why not find on some new trillion $ trends?

Trillion $ trends nobody is positioned for.

Non-AI Trillion $ trend #1: Re-architecting global energy supply

What if Iran is unfixable? I know there is a deal in the works, but will any deal really last? It reminds me of that old Montana saying.

You can’t straighten a crooked stick.

What if we have an angry troll controlling the Straight of Hormuz who can’t be dislodged? Removing the IRGC requires a full scale occupation of Iran, which nobody wants to attempt. Unless, maybe the IRGC collapses of its own accord. Or, maybe like North Korea it just goes on for decades.

It increasingly looks like the future is a prolonged state of conflict and insecurity in the Persian Gulf.

Maybe traffic through the SOH improves, but never returns to 15 million bpd of oil or 112 bpm of natural gas (20% of global LNG). But it’s not just oil and natural gas. 30% of global urea, 20% of ammonia, and 8% of aluminium flow through the SOM. The Middle East built up a massive petrochemical and refining complex to get more value out of their raw commodities.

It’s hard to imagine a world without the Middle East at the heart of energy supply, but maybe we need to start.

Start with pipelines to Turkey and Israel. Does Saipem get billions of dollars of orders to build alternative routes? Does Turkey become a new refining and energy hub?

And Dangote Refinery in Nigeria. Does Nigeria become an important petrochemical hub. Safely tucked away in the Gulf of Guinea.

The problem with Isreal, Turkey and Nigeria though is they are not on the road to India and Asia. How do you fuel Asia if not from the Middle East? The only answer I can think of is more Russia. Does this force some kind of a peace deal with Russia?

An obvious beneficiary is everything in the Gulf of America. The Gulf of America is the world’s new gas station. In Qatar Changes Everything we highlighted the LNG Terminal plays (LNG, VG, NEXT). But the refiners and chemical plants also benefit.

In our YWR estimate monitoring tools these are all the sectors with the highest momentum in the world. Refining, oil and gas, chemicals, coal, aluminium. Everything that comes out of the Middle East.

And what about floating LNG plays like Golar. If we are trying to replace Qatar is the cheaper, faster option to set up floating LNG in Africa? And what are the beneficiaries of floating LNG construction? Do all your semiconductor bottleneck analysis on the shipbuilding industry.

Oil and gas, and chemicals are the obvious plays.

But there will be many creative 2nd derivatives. What happens with airlines? Do the Middle East carriers benefit because they can access stranded jet fuel at low prices, or do traveler’s not want to route through the Middle East? Does Turkish Airways benefit?

Turkey is one to consider because it comes up a lot when you start thinking how energy and trade flows might change and who will benefit.

Do renewable stocks benefit? Do Chinese solar stocks start to work?

I don’t have all the answers. I just want to get us thinking about the size of this trend. Because it’s world changing and the big the big funds haven’t even begun to play it.

Non-AI Trillion $ trend #2: Developed Market Banks

Following on from Non-AI trillion $ trend #1 we are eventually going to have high energy prices.

Inflation and interest rates have been notoriously hard to predict, but all the signs are there that the combination of high levels of government spending, AI capex, industrial reshoring, tariffs and now an energy supply shock is going to lead to higher inflation. We already had a 4% CPI print.

It seems likely that with 4%+ inflation US 10 years could be at 6% soon, and the Fed will be raising rates at least 75bps. The ECB just raise rates and the Bank of Japan is preparing to raise rates too.

And who benefits from higher interest rates?

The banks. Yes, the are pluses and minuses, and the timing of how it all plays out depends on how each bank is positioned, but broad brush, higher interest rates are good for banks. It’s a lot easier to make a 2% spread with 10 years at 6% than it is when they are 4%. And possibly we are going to yet again underestimate the change in interest rates and how much banks will make. Like we did post-COVID.

Banks are another sector the big funds don’t want to own, and yet DM Banks have been one of the best performing trends in the world. The best performing trend nobody talks about.

Banks are making more money from higher interest rates, but the second effect is their risk appetite has improved. Banks are lending again. We see it in the Federal Reserve H.8 statements and it is coming through in the results.

Take Mitsubishi UFG. Do you want to know who is quietly sucking up datacenter debt? It’s the big monster banks in Tokyo. In The Godzilla Trade we wanted to know where the Japanese banks would point their liquidity firehose. Turns out data centers are one of the sectors.

Morgan Stanley originates the debt and MUFG either owns it or sells it on to Japanese insurers.

MUFG’s slide deck highlighted something else interesting.

MUFG were trying to show how they can rerate to be more like Goldman Sachs and JP Morgan (also shows you they intend to take on a lot more risk to be a global player), but what it highlighted instead was European banks. Barclays and BNP are earning the same ROE as MUFG but trading 40% cheaper.

If you want to bring together global data centre capex funding, plus replacing the Middle East infrastructure funding, plus higher interest rates in a sector that is cheap and nobody owns it’s global banks.

Banks are your second Trillion $ Non-AI trend.

Non-AI Trillion $ trend #3: China

What’s the second biggest market in the world, which nobody owns, which is also the cheapest and is at an earnings inflection point?

The JPM chart below confirms the same inflection point we discovered in Hang Seng on the Launchpad. Chinese earnings are about to inflect upward and start growing again after the multi-year property crash.

I will admit I thought this EPS uptrend was supposed to start sooner, and it kind of did, but what I did not expect was the implosion in Chinese online retail earnings at big earners like Alibaba. Bank sector earnings are already recovering.

As a side note take in the significance of the chart below. What is the only equity market which has been able to grow its market share over the last 10 years in the face of the US equity juggernaut?

US equities are 49% of global market cap, but China is the second biggest market in the world for both equities and fixed income (almost) and growing. And nobody owns it.

And question. Does China benefit from the rearchitecting of the world energy supply? They are already leaders in renewables. Do their construction companies benefit too?

Does HK originate a lot of this new infrastructure finance in Turkey, Nigeria and the Middle East?

Yes. Chinese equities have been frustrating this year, but I can’t unsee what looks like a big set-up.

Spread your wings.

So there you go.

Three trillion $ non-AI opportunities that your peers are not focused on.

Please share your thoughts.

I feel these three trends are going to intertwine a lot.

Have a good weekend.

Erik

Let’s analyse the publicly disclosed equity positions at 445 funds with over $3.9 trillion in assets.

We loop through the Top 20 positions at every fund managing > $1 billion and count of which stocks keep showing up. This creates our list of the Top 21 Most consensus stocks. It’s 21 because I wanted 20 different companies, but the hedge funds always own both share classes of Alphabet.

Note: The full dataset with every fund’s Top 20 positions is available at the bottom of the post.

So what do we see when we compare June 8 with January 31?

Amazon is still the most consensus holding.

Nvidia keeps moving up the ranks. It’s up from #3rd most popular holding to second. I’m sure it will beat Amazon soon to be the #1. It used to be that Nvidia was a considered to be a ‘bubble’. Now funds are increasingly comfortable that the earnings are ‘sustainable’.

Meta went from #2 to 5. Investors are nervous about Meta spending similar amounts as AWS or Azure on datacenters, but without a cloud business.

Apple, the steady eddy, no data centre builder is unchanged at #8.

Look how many semiconductor/hardware/memory names are in the Top 21. 11. Up from 7.

It’s incredible that 11 out of the most popular hedge fund stocks are the same theme.

In fact I would argue 17 of the 21 stocks are the same thing. Only Visa, Tesla, Warner Brothers, and Eli Lilly are not a Semi/AI/Datacenter play.

That’s actually quite incredible when you think about it.

No energy stocks, no banks, no GE Vernova, no Netflix, Spotify, ThermoFisher or Salesforce. All the software stocks gone. All the finance gone, except Visa. Mastercard is gone.

It’s a wipeout. Everything is AI.

Which is interesting because in our Global Factor Model analysis the best sectors in the world for earnings momentum are refining, and oil and gas. But the hedge funds are missing it.

The only fund I see catching the refining wave is at Praetorian Capital.

Most Consensus Funds

I also run a count of which funds have the biggest overlap between their Top 20 positions and the Top 21 most consensus stocks. These are the most consensus funds.

The names of the funds move around a little, but what I notice is the distribution of this chart has shifted to the right since January.

The extreme outlier used to be two funds each owning 13 of the 21 most consensus stocks. But now there is DE Shaw with 15, which is a record. And 3 stocks with 14 consensus positions. Interesting that Marshall Wace and SquarePoint, both big users of alpha capture systems, are at the top of the consensusness list.

Tons of alpha there.

Also the 30th most consensus fund used to own 9 consensus stocks, but that has shifted right to 10.

While it looks like the big funds are becoming more and more consensus (owning the same stocks as each other), the overall distribution hasn’t changed for the 445 funds. There are more just outliers in the right tail.

The box plot analysis shows the median is still 1 consensus stock holding for a fund, with 75% of funds having fewer than 5 consensus names.

The bunching into the same stocks is mostly with the bigger funds. The scatter plot below shows equity assets (y axis) and consensusness (x-axis).

To summarise, we see the bigger funds concentrating more into the same names, and those names themselves are all the same thing.

Most consensus, non-consensus stocks.

We also loop through the top holdings of hedge funds which don’t own any of the Top 21 most consensus stocks, to see if there is anything they agree on.

The most consensus stock among non-consensus funds is Talen Energy, the utility which runs the Susquehanna nuclear power plant. Constellation Energy is also a nuclear power utility.

Nu Holdings is the digital challenger bank operating in Brazil and Mexico.

Fund of the Month

Farallon is our interesting fund of the month.

What do we see in their top 20? Let’s strip out all the usual AI derivatives and see what other plays they are making.

There is a lot of healthcare here. Revolution Medicines (Redwood City based cancer biotech). UnitedHealth Group (great trade). Bridgebio, Exelixis, Natera, Protagonist Therapeutics, Lantheus (radiology isotopes), Liquidia (inhaled therapies), Thermo Fisher(lab equipment), and Boston Scientific (medical devices).

Does Farallon’s positioning tell us biotech is a backdoor AI beneficiary where AI accelerates drug development? And if drug development is going to accelerate, is the other way to play it the contract manufacturers like Wuxi AppTec (2359 HK)? The Foxconn of drug development.

Below is a link to the full dataset so you can explore the Top 20 equity positions for over 1,700 funds.

Read more

Erik exited Jomo Kenyatta’s Terminal 2 into the bright blue sky. It was nice to be back. His driver was waiting and waved.

“Good to see you back sir! May I take your bag?

No. It’s fine. I got it. It’s just a roller. Can we swing by my apartment so I can take a shower? Then we need to go to the Horizon offices.”

It had been an overnight flight in the back of the bus on BA. Which was fine, but he needed a shower to refresh, and change clothes before his meeting.

He got in the back of the Landcruiser with its nice leather seats. He really liked the Landcruiser perk. He was going to miss it. Erik thought ahead to the next 2-3 days. Trying to think if he was missing anything. It was impossible to predict how it would all play out exactly, but this felt right.

Later that afternoon after a long meeting with John Kinyua Erik exited the Horizon offices. The meeting with John had gone well. Of course it had. John probably still couldn’t believe what Erik had just presented him.

Next he called Lloyd, his CFO.

“Lloyd. Hi. It’s Erik.”

“Erik. Hi there! How is the London weather? Not too depressing I hope.”

“Actually, I’m back in Nairobi already.”

“What? Why? I thought you were staying there until the deal was signed?”

“Change of plans. Can you please contact Daniel Wanaina’s office at the Central Bank and say we want to meet with him tomorrow morning? And say it’s important.”

“You want us to meet with Daniel tomorrow morning? Please tell me what’s up.”

“I’d rather not and the less you know the better for you. Just ask Daniel for the meeting and please email me when it’s confirmed. My guess is you won’t have any trouble getting the meeting.”

Erik assumed John Kinyua was up in his office right now talking on the phone to Daniel working out the details. Hence Daniel would know exactly why Erik wanted to meet when Lloyd contacted him.

The Nairobi Solution was underway.

The next morning at 9:00am Erik and Lloyd, dressed in their suits, presented themselves to the Office of Bank Supervision. The receptionist directed them to the same large board room where they had met for their last supervisory meeting. The one where they had celebrated with beer and chicken wings afterwards.

They waited by themselves in the boardroom in silence for 5 minutes before Daniel and two other members of his regulatory team entered carrying notebooks and looking stern. They sat down across from Erik and Lloyd.

“Erik, Lloyd emailed me requesting that you wanted to meet about something important.” Daniel said gravely.

“Yes, we do. Thank you for being so accommodating with your schedule. Something has come up and in the spirit of our improved relations with the Office of Bank Supervision we wanted to disclose it as soon as possible.”

“And what is it you feel you need to disclose.” Daniel said slowly.

“You are of course well aware of Turkana Trust’s large single name exposure to the East Africa Rail SPV. It’s an important loan to the bank and because of this we have been working to assist the CEO, Ms Claire Delacroix, with the project. Obviously, it is in the best interests for both our companies for the rail project to be successful. And for Kenya” Erik added.

“Yes. Go on.”

“Recently, we assisted East Africa Rail in finding a new supplier of rolling stock for the project after their original supplier, China Eastern Rail Systems, changed the price of the contract. It was a substantial change in price and would have created an entire review of the project’s feasibility by the IFC. So to try and help solve the problem, and through contacts at Belway Capital we were able to find an alternative manufacturer in Zimbabwe, called EcoRail. EcoRail agreed to take on the rolling stock order at the same original price in the budget so East Africa Rail and EcoRail signed a new agreement.”

“OK. Go on.”

“As part of this agreement two regulatory matters have come up which we feel we need to disclose.”

Daniel said nothing.

Erik continued.

“First, EcoRail had the capability to take on the East Africa Rail project, but had had minimal activity in the prior years and so first needed a loan to revitalise their business as well as to refinance a previous loan they had with Standard Bank. In order to keep the East Africa Rail project on track, and to provide some working capital, I authorised Turkana Trust to disburse a $12 million loan to EcoRail’s subsidiary in Mauritius. This was in July, after our June review and in contradiction of the Central Bank’s guidance to not make new disbursements.”

Daniel breathed heavily.

“And the second regulatory matter?” asked icily.

Daniel was playing this well Erik thought. If Nairobi worked how he thought it did.

“The second issue is that there are currently FX market disruptions in Zimbabwe and EcoRail is having difficulty sourcing steel and parts for the order. This is likely to cause temporary delays to the East Africa Rail project. We feel we need to notify you because these unexpected delays occurring so quickly after the new supplier agreement may, in our opinion, trigger a project review by the IFC which could be lengthy. There is a risk that during this review the IFC may pause all project payments including loan payments to Turkana Trust. None of this has happened yet, but like we said, we value our strong regulatory relationship with the Central Bank of Kenya and want to be transparent and forthright about any banking risks.”

“Did Ms Delacroix know about these EcoRail delays? Because in your latest regulatory filings, which included in the addendum the East Africa Rail Board pack there was no mention of this delay.”

“No, Ms Delacroix doesn’t know about the delays yet. I only found out about it through my connection with the owner of EcoRail. And as soon as a I found out about the delay I immediately came to you and asked for this meeting. I thought it was best to inform you first because this might be market sensitive information.”

Daniel looked across the table at Erik. Erik imagined Daniel must be struggling to not roll his eyes at the kabuki theater they were both playing. After a pause Daniel responded.

“Well. You were right to come to us with these two regulatory matters. The first, the loan disbursement, is a clear regulatory breach. And a serious one. The second matter implies there is a risk the East Africa Rail loan will need to be reclassified as Stage 2. This means a thorough regulatory review and calculation of the potential loss. Turkana Trust is still a fragile institution. A potential credit loss of this size will be material.”

“We are aware of that sir.”

“OK. We will have to convene and likely bring in the Central Bank Governor as well. Thank you for coming in and thank you for your forthrightness. Please go back to your offices and be available throughout the day. We will contact you with our next steps. Good day.”

Later that day at 6pm, after the rest of the Turkana Trust workers had gone home and the local Kenyan stock market was closed, Erik, Lloyd and a small team, opened the front door of their offices to the teams from the Office of Bank Supervision and Horizon Bank. Erik and Lloyd took them up to the 8^th floor where all the files were prepared. Erik and Lloyd answered questions and offered coffees as both teams worked through the night.

The next morning the news hit the streets of Nairobi.

Turkana Trust had been taken into administration by the regulators and sold to Horizon Bank for KES 200 million (less than $2 million). According to the regulatory statement issued by the Bank of Supervision Turkana Trust had asset quality problems and needed an immediate capital injection which Horizon Bank would provide. Importantly, the depositors of Turkana Trust did not need to worry. They were now clients of the Horizon Bank and their money was safe.

The first incoming call was from Claire.

“Qu’est-ce que c’est!!! Turkana is being taken over by the regulator?? What is the meaning of this? Erik! I need a full explanation. Does this have anything to do with the rail project?”

“Claire. Hi. Yes. The bank is being taken over, but it’s OK. The project is fine. It doesn’t affect anything. The only change is you will be dealing with John Kinyua now from Horizon. John and I have already discussed everything. He backs you and will get your railway done. Don’t worry. Anything else we should discuss later. Someday we’ll have a nice coffee in Paris and I’ll tell you everything. For now, you know nothing and stick exactly to what you wrote in your board of director reports. You will be fine. Now it’s best for both of us if I hang up.”

And hour late came the biggie. Dwight.

“WHAT….. THE…. FUCK???? What the fuck am I reading?” Dwight exclaimed down the phone.

“You are supposed to be in London signing our deal with Dipak and instead I’m reading news on Bloomberg that my entire bank has been taken over for $1.5 million. I don’t know how this happened, and I don’t know what game you think you are playing, but you better have a really good lawyer because I am coming after you for this. You are going to be the one responsible for this loss.”

“I was going to need a lawyer anyways.” Erik said calmly. Letting that register with Dwight.

“I don’t know what that is supposed to mean.”

“I think you do. Do what you need to do. Speak to your lawyers. I’ll be back in London next week.”

Finally, a call from Nicole.

“Hey babe. Are you OK? I read the news link you sent. I didn’t understand everything. It doesn’t sound good. Is this why you went back to Nairobi? You can tell me more about what happened when you get back. And don’t worry. It will work out. We’ll be fine. Love you.”

Things were not fine. Erik didn’t see how he would ever have a job again. What had had happened in Nairobi was not something you could explain to a recruiter back in London.

Yet, the Nairobi Solution felt right somehow. It was right for the rail project, right for the team at Turkana, right for Kenya and right for Claire. And somehow, he didn’t know how, he thought it would be alright for him too.

Epilogue:

One year later.

Erik liked his small office in Hammersmith and it’s view of the Thames. It wasn’t a fancy address in the City, but he could come here and do his work in peace and quiet. It was near a section of the river were many of the rowing clubs trained. When he needed a break to think he would stare out the window and watch the rowers.

After the events in Nairobi Dwight’s lawyers had sent some nasty letters, but in the end it had gone nowhere. Everything Erik had done was by the book, and Dwight knew he couldn’t push too hard without exposing the fragile situation of what he had tried to pull off with Opus.

But events in Nairobi also meant Erik was no longer hireable as an analyst or portfolio manager in the City. His career had gone too far off the conventional rails. It was impossible to explain to anyone. Instead, he had started a small consulting firm advising other private equity funds on their Africa investments.

Erik wasn’t sure of his future, or how would get a normal job again, but he was coming to peace with it. His path was apparently not meant to be normal.

A few months ago, there had been a story in the FT about the strength of the Kenyan Schilling along with a paragraph about the surprising growth in Kenyan exports. He had smiled while reading this. It reminded Erik of Grace and her chia seeds. He hoped she was doing well with 15 Degrees.

Today Erik was in his office reading some market news when his phone rang.

He looked down at the screen to see who it was and was surprised. It was Niko. Niko from Zimbabwe. They hadn’t spoken since the call in Mukueni County where Niko had given him the bad news about EcoRail.

“Niko. Hi.”

“I’m good. It’s been awhile. How are you? How are things on your end?”

Erik listened while Niko explained why he was calling.

“It’s a new stock exchange? And it trades in US$’s?”

“How much did you invest?”

Erik tapped his pen on the desk and looked pensive.

“Would it mean moving to Zimbabwe?”

Erik stood up from the desk and walked over to the window. He looked out at the Thames and the rowers, and smiled, still listening to Niko on the other end.

“Obviously, I would need to think about it and talk to Nicole, but it sounds interesting.”

“Oh. One other thing. Does it have a Landcruiser?”

“OK. See you in 2 weeks.”

THE END

Isn’t that what they say?

Semis and memory have been great, but it’s time to hand the baton to someone else.

Like the Hang Seng Index.

The Hang Seng has had a sluggish start to 2026 (-1.5%), but I think it’s still going to be a great year.

Let’s start with the chart. I LOVE the chart. Where else has a developed market index gone sideways for 15 years in hard currency?

This thing looks like a coiled spring. Which is why I remain patient. Because I think the move is going to be big (IMHO).

35,000 at the index level seems very achievable.

Besides the chart why could the Hang Seng be about to gallop?

Here are 4 reasons.

#1 Earnings growth is expected to accelerate from 6% to 11%.

Note: I created my own rough approximation of the Hang Seng Index fundamentals using 89 constituents. So warning, this is an approximation, not the official index.

From 2015-2025 earnings grew at a 6% CAGR, which is slow and caused the index to derate. China and Hong Kong have experienced an epic property crash so the earnings CAGR at the big Chinese banks (ICBC, CCB, BOC), has been just 1-3% for a decade. When you think about it, it’s actually amazing the big banks have been growing earnings at all in the midst of a property crash and falling interest rates. Think back to the Evergrande days. We all expected China would go through their own GFC and these banks would need to get bailed out. Instead they muddled through.

The property problems spilled over into many other Hang Seng constituents like China Resources Land (4% EPS CAGR), China Overseas Land (-9% EPS CAGR), Sun Hun Kai Properties (-5% EPS CAGR), Henderson Land, Wharf, and Hang Lung Properties.

There was also the crash in earnings at Alibaba (3% EPS CAGR),

But that is the past.

Over the next 3 years the EPS CAGR is expected to improve to 11%!

Tencent, the biggest earner, is expected to grow EPS at a 17% CAGR. Alibaba works through the hit to online retail and grows again (+17% CAGR). The Big Banks accelerate to 6% growth (from 3%). PetroChina, CNOOC, China Petroleum & Chemical benefit from the oil price recovery. The New Energy EV stocks, BYD and CATL, also kick in with a 26% EPS CAGR. And the property stocks go from negative EPS growth to positive.

#2 Earnings revisions are swinging positive.

This is one of the most important trends. Earnings are starting to beat expectations. Importantly, the big banks are beating earnings. You have growth accelerating and EPS estimates rising.

#3 HK Property prices are recovering.

For a city built on property it’s a big deal that property prices are recovering. Rising property prices improves risk appetite and collateral values.

After a gruelling 4 years, Chinese mainland property might be stabilising too.

#4 Where else do you find a hard currency index on 10x P/E?

This growth pick up leaves the Hang Seng valuation looking like a dripping roast. If earnings develop as expected the index would be trading on 9x in 2028. Be safe and assume I’m wrong by a turn and it’s 10x 2028 earnings. Again, this is an approximation using 89 constituents and consensus EPS estimates through 2028.

Only a few of us remember the good old days, but Hong Kong investors love to trade, and in a HK bull market this P/E can easily expand to 15x.

Below is the full dataset I used for the analysis if you want to dig in and find the best mix of valuation and expected growth.

Read more

“Give me a call when you can. I need you to come to London.”

He reread the words searching for extra layers of meaning.

Why did Dwight need him to come to London? Was it to fire him? But then why say to give him a call when ‘you can’? It didn’t seem like the right language to use when you need to speak to someone so you can fire them. But you could never tell with Dwight.

It had been 3 weeks since the trip to Emali, the bad news from Niko and the phone calls to Dwight and Claire. He hadn’t wanted to speak to any of them since. He’d stayed in his office, depressed, and focused on bank paperwork.

Now here was Dwight telling him to come back to London.

He picked up his mobile and filled with gloom and dread called Dwight. As he clicked dial Erik made a final mental effort to try to sound upbeat.

“Hi Dwight. It’s Erik. I got your email. What’s up?”

“Hey Erik! Yes. I need you to come to London. When do you think you can make it over?” Dwight sounded strangely friendly. Like a completely different person from the last conversation.

“If you need me there quickly, I can take the BA flight on Wednesday night.”

“Yes. Do that.”

Erik took a big risk next, but Dwight seemed in a good mood and he wanted to know.

“May I ask what’s up in London? Is there something you want me to help with?”

“No. There’s someone I want you to meet. You know Opus? They want to make a bid for Turkana.”

“Opus Partners wants to buy Turkana? That’s great news!”

“Yeah. The price isn’t amazing, but we make a small profit, and the best part is it gets us out of this mess so we can focus on something else. Anyways, they want to meet with you. Part of the due diligence.”

“Tell them anytime Thursday afternoon. I’ll get in that morning, take a quick shower then go to Mayfair.”

“Great. You’re going to meet with Dipak who is a partner and leading the deal. Keep a look out for an email they are going to send through. There’s a whole bunch of documents they want to go over and discuss in the meeting. Thanks. See you soon.”

What amazing news. What a complete turn of events.

Opus Partners was a smaller EM focused private equity fund also based in London. There was a bit of a stink around Opus, but they knew emerging markets and would be comfortable owning an asset in Kenya. Their CEO had been investigated several times by the FCA for questionable transactions but had never been formally charged with anything.

Opus wasn’t the buyer Erik would have wished for Turkana, and the team here in Nairobi, but maybe it didn’t matter as long as Belway got paid and could exit. Likely Opus were getting a good deal from Dwight (0.8x book Erik guessed) with the plan to work through the East Africa Rail situation then get an even higher price down the road. 1.5x or maybe 2x if EM markets were hot. All in 2-3 years. It made sense.

Erik was excited as he booked his BA ticket to Heathrow. Nicole would be happy too. He was going home.

Later that week Erik emerged from Green Park tube station into the grey skies and rain of London. This was the complete opposite of Nairobi Erik thought. He had a short walk to Berkeley Square where Opus had their offices. Erik ran the bell at what had long ago been a nice private residence on the square but was now the posh offices for a private equity fund. A receptionist took his wet coat, hung it in the closet and escorted him to a conference room where Dipak and the rest of the Opus team were waiting for him.

Two hours later Erik stepped back into the rain again to give Dwight an update.

“How did it go?” Dwight asked.

“Good. I guess. They went over all the information we sent them. The financials, the regulatory updates, the internal risk reports, the auditor statements. They asked a lot about the East Africa Rail deal. They kept asking if everything had been disclosed. They also asked me to initial some of the disclosure documents we sent over. They said it was to prove they were verified by Turkana management.”

“That’s normal deal due diligence. They’re just being thorough.”

“Yes, I know. I guess. I was just surprised they didn’t ask anything about the economy, the new government, or the growth strategy of the bank, or anything. It was just all dotting I’s and crossing the T’s about the documents we sent them. Just wasn’t what I expected.”

“Sounds fine. They’ll probably ask you all that stuff in a later meeting. In the meantime, please stay in London until we get this closed. They told me they are willing to focus 100% on this and move quickly. So maybe work from the office here so you can give Opus your full attention and get this over the line.”

“Sure Dwight. Let’s get it done.”

For the next week Erik worked out of the Belway office near Liverpool Street. Mostly he was responding to information requests about Turkana from Dipak. The deal seemed to be moving along. It was also nice to be able to go home and for walks and dinners with Nicole.

Then on Thursday Dipak sent Erik the following email:

Subject: Updated SPA and Disclosure Schedule – Insurer Comments

Hi Erik,

Please find attached the latest mark-up of the Share Purchase Agreement and related Disclosure Schedules.

Nothing substantive — mostly definitional tightening and clarification following feedback from our advisors and insurer. We’ve expanded certain knowledge qualifiers and refined the East Africa Rail disclosure to ensure completeness.

Would be grateful if you could review and confirm the updated language, in particular:

· Clause 7.4 (Material Contracts – East Africa Rail)

· Definition of “Knowledge”

· Bring-down confirmation language for Closing

If possible, we’d appreciate your initials on the revised Disclosure Schedule (attached separately) confirming management verification.

Happy to discuss if helpful.

Best,

Dipak

Opus Partners

What was all this about “We’ve expanded certain knowledge qualifiers and refined the East Africa Rail disclosure to ensure completeness,” Erik thought feeling slightly uneasy.

And what was a “Definition of ‘Knowledge’?

And why are they referring to an insurer?

He was about to get up and ask Dwight, who was over at his terminal staring at stock prices, but something stopped him. He wanted to know more first.

He wanted to run this by Harry.

When most people think of London as a financial capital they think of the investment banks in Canary Wharf, the stock exchange and the fund managers in Mayfair, but underappreciated is that London is also the world’s largest insurance market. Erik couldn’t remember exactly what types of insurance Harry worked on, but it was specialty insurance for a Lloyds syndicate.

Later that week Erik and Harry were seated in a pub in Leadenhall Market where the everyone in the insurance market liked to meet and drink beer.

Harry had a printout of Dipak’s email in front of him.

“So. What do you think?” Erik asked.

“Run me through again what you sent them and what they asked in the meeting.”

Erik went over the events from the previous week.

“Hmm..”

“And they asked you to initial some disclosure documents while you were in their offices?”

“Yes. I realise I probably should have got legal advice first, but it seemed OK. They were the documents we sent then. It seemed to make sense.”

“And they didn’t ask you much about the business, or anything else?”

“No. That was what struck me as strange. Then this email seemed like more of the same. And then the mention of the insurance company going over all the documents. It made me want to run it by you. Dwight thinks this is all standard procedure.”

“And off the record as your friend. Is there anything material you probably should be disclosing?”

“Well… totally between you and me. There is a potential delay involving one of the major suppliers to the rail deal. But it’s not anything official stated, just a ‘likely delay’. Just a verbal phone conversation I had. Nothing’s written down and there is no way they could know it. So I left it out. And Dwight would definitely would want it out because it would kill the deal.”

“Hmm…..” Harry was thinking and kept looking at the printout of Dipak’s email.

Finally, he looked up.

“Erik.. I think given what you are saying that behind the scenes there is actually a delay to the East Africa Rail project (which they are asking a lot about), and now this email from Dipak asking exactly about it in highly specific language, I think you should consider the possibility Opus knows about the delay. Everything they are asking and doing (the extra schedules, the change in the language, getting you to initial the documents) double checking with the insurance company, could be to make sure their claim is 100% watertight if/when they need to file a Representations and Warranty claim that you never disclosed the delay.”

“And if they found something they would get a payout,” Erik mused.

“Like your Dwight guy said it could all be normal, but the fact you said they have been only focused on this and not asking about the rest of the business is suspicious. Erik, I would highly recommend getting private legal counsel before signing anything else from these guys.”

Thanks a lot Harry for reviewing this. You are confirming what I suspected. Thank you again.

Erik got up, left the pub and headed in the direction of the Thames for what would be a long walk. He needed to think.

First things first. Accept brutal truth number #1. Somehow Opus knows about the EcoRail delay and is setting up all the legal language to prove it was never disclosed to them and file a Representations and Warranties claim. Which fit exactly with the Opus reputation and now made sense.

But how did Opus find out about the EcoRail delay?

It could only have come from Dwight or Claire. Or, possibly from Niko. Did Opus know Niko somehow? And why would Niko tell that to Opus? Was there some relationship between Dwight, Niko and Opus he didn’t know about? He didn’t think so. That wasn’t it. And Claire? Some backdoor job offer to come back to London and do private equity? No way too convoluted. It wasn’t Claire.

Brutal truth number #2 was that Opus had to have learned about the EcoRail delay from Dwight.

But why would Dwight tell them that?

Erik kept walking and thinking. He crossed London Bridge over the Thames to the South Bank and started walking back up towards Westminster Bridge.

An upsetting possibility was taking shape in his mind.

Erik calls Dwight from Mukueni County and tells him about the EcoRail delay. Dwight freaks out. He knows the IFC is going to want to review things and delay the project. Eventually, the EcoRail FX problem would get resolved, the project is completed, and the loan repaid. It would all work out, but in the meantime the regulatory accounting would require the loan to be marked impaired, and the regulator would want more capital in the bank. Which Dwight would not want. Which was why he was furious on the call.

Then 3 weeks later all of a sudden Dwight’s happy and has found a buyer for the bank.

But how do you sell a bank with a major loan that is about to go bad?

There was one explanation which answered everything. And it fit why Dwight wasn’t concerned about any of the extra disclosure requirements Erik was being forced to sign as CEO of Turkana. Because Dwight wasn’t the one who was going to get investigated.

What if Dwight had offered Turkana Bank to Opus at a discount with the sweetener that they could file an insurance claim after the deal was closed. Meaning Opus knew about all the problems, and were intending to get both a discounted price for the bank, plus make an insurance claim that they were never informed of the EcoRail delays.

It would explain why Opus was the buyer. Opus were exactly the type of firm who would go for a deal like this. Opus would make money on the deal coming and going, and so would Dwight. Meanwhile, Erik would be the one who the insurance company would be calling. Dwight would say he was never involved in the operations of the bank and knew nothing. It was all Erik. Erik signed everything.

Erik sighed and kept walking. His shoes were getting wet, but he didn’t care. Somehow the rain and the evening lights across the Thames were calming.

An idea started to come to him. A potential way out of this trap.

He pulled his phone from his pocket and called Nicole.

“Hi Nic. I’m sorry I’m late. I went for a walk. Needed to clear my head. I should be home soon. But I’m going to need to head back to Nairobi tomorrow.”

“I know. It’s sudden. I have to meet a few people and do something. But the good news is it’s all going to be over soon, and I’ll be back in London for good.”

“OK Erik. See you soon, but whatever you have on your mind and plan on doing in Nairobi. Make sure it’s the right thing.”

“It is. Don’t worry. Love you.”

Dwight was going to have another thing coming.

Previous: Ch.8

Next: Ch.10