This dynamic traces back to the summer of 2024, when Macron suffered a crushing defeat in the presidential election to Marine Le Pen and her far-right National Rally, prompting Him to call a snap election in the hope of clarifying French politics and restoring his standing. But instead of providing clarity, the election destroyed the parliamentary logic that was allowing normal governance to proceed.

True, the snap vote did stop National Rally from taking control of France’s already precarious finances, but that was nearly all it achieved. A left-wing coalition finished with the most seats in the National Assembly; Macron’s centrist bloc survived the new political landscape with more legislative backing than one might have expected given his personal defeat, and Le Pen emerged as the biggest single political force in the country. But no party managed to seize the 289 seats needed for an outright majority, leaving the entire country effectively split three ways.

Stopping one party had made it nearly impossible for anyone else to govern.

For the last year, this period of prolonged parliamentary improvisation was characterised by a succession of prime ministers: Michel Barnier, François Bayrou, and, most recently, Sébastien Lecornu. The first two fell after each tried to repair France’s public finances, with Barnier lasting just 3 months in office, and Bayrou slightly longer, for 9 months. That it was necessary to appoint Lecornu for a fourth time just four days after he resigned shows the pretty desperate state of affairs within France. He survived largely becuase the moderate left conceded that extracting concessions from a weak government was preferable to bringing the whole thing down.

France has rivalled its arch-rival, the UK, in the political circus stakes.

But now the Lecornu minority government and its centrist allies have been plunged into its most treacherous season yet as opposition parties dig in over deficit-cutting plans designed to calm both the bond market and most of France’s disastrous finances. This all comes at an awkward juncture with a presidential election due in April-May 2027.

Ever since the Macron government faced a hung parliament following the June 2024 vote, it has tried, and largely succeeded, in using Article 49.31 to force its proposed budgets through without debate, much less a vote. It is true that the opposition may respond with a no-confidence motion, which would force the government to either make concessions to pass its budgets or accept collapse. Yet there is little appetite to compromise at a time when opposition parties are positioning themselves for the 2027 presidential race.

The risk is that it would become impossible to agree on a full budget for the second half of 2027 as the next president dissolves parliament and calls new elections at some point while work was beginning on the 2028 budget. Such a rollover would cause unprecedented budget paralysis, freezing investment and planned defence-spending increases while welfare costs keep climbing. That would widen the deficit by at least half a percentage point, denting investor confidence further and pushing up borrowing costs.

Public debt in France stands at 117% of gross domestic product, expected to rise to 121% by 2027, to be among the largest in the euro area. Behind the US, France also runs the largest deficits, without any forecast that this is set to change soon. The International Monetary Fund (IMF) projects a 2026 deficit of 5.2% of GDP versus a budget target of 5.0%. A series of proposals for fiscal consolidation now being debated in parliament are politically dangerous at a time when candidates are fighting for dominance in the heartland of Blue France.

La Toile de Fond (The Backdrop)

Early indications are that President Macron’s final finance bill may be the most perilous of his presidency so far.

The excess that France pays to borrow money over German bonds (a key barometer of investor mood) is near its highest level since the sovereign debt crisis of 2012. Political and fiscal worries always manifest first in debt markets.

France has had no shortage of problems, but the first presidential debate was consumed by bickering over how best to deal with rising debt. In particular, there was robust dispute over a far-left proposal to cancel a portion of debt.

The on-stage questioning gave the far-right and far-left candidates a chance to stress-test unorthodox ideas. The leading far-right and far-left candidates, Marine Le Pen and Jean-Luc Mélenchon, have vexed senior business leaders in the past with disruptive propositions and have seen their repeated runs for president fall short of victory.

After three hours of hard-hitting probes, the contenders agreed only on the need to narrow the runaway budget deficit as a matter of urgency. The options ranged from clawing back welfare spending to hiking taxes, raising the retirement age, juicing the economy with more spending, or even cutting payments to the European Union.

Mélenchon doubled down on his plan to cancel debt held at the European Central Bank as a negotiable package with other euro members, telling Reuters he would be willing to go further and “just take the bonds and burn them.” We have heard similar appeals before: in Europe as the euro zone debt crisis detonated, and around the same time in the US. Debt cancellation, however, is nothing more than monetary financing and would be highly inflationary.

As these ideas increase, the case for investing in real over financial assets only strengthens. Mélenchon may have said it, but this is in no way a realistic outcome. Yet, even if low-probability, high-impact events don’t come to fruition, they materially warp the distribution of risks, skewing it with fatter tails. We should take them seriously, particularly now that the US Treasury has panicked over its long-end buyback announcement.

We expect to hear more avant-garde debt approaches, such as cancellation, in the months ahead and not just in France.

Former prime minister Philippe said the debt effect “risks generating an extremely brutal shock that will hit hardest those most exposed.” He dismissed Mélenchon’s proposal as “extremely dangerous” and risking cutting France off from financing.

Le Pen, meanwhile, claimed her savings plan of €125bn ($146bn) could be achieved by shrinking the French state, cutting immigration, and possibly reducing contributions to the EU. She proposed a constitutional “golden rule” to ensure balanced budgets, saying she would make sure France honoured its debts.

She reiterated her pension reform, allowing retirees to cash in on their schemes as soon as age 60, which she puts at around €9bn a year.

What options does France have to reduce its debt? Fiscal consolidation is too risky to drum up the votes for, and growth is already heavily driven by massive deficits (and forced down by austerity in the past). Inflation is already an issue for rising interest payments. Financial repression is coming, but too late to save the day (it’s already partly at work via enhanced Treasury buybacks). Selling off government assets such as the gold that sits in Fort Knox may make a one-off splash, but it’s unlikely to move the dial. Debt restructuring or default would cause more damage than good.

Macron seems stuck in a bind: no parliamentary majority, no budget room, and no political capital. It is not obvious what Emmanuel Macron can do to stop the bleed. Instead, the risk is that the bleed accelerates.

The 15y15y forward rate is a way of looking at borrowing costs that strips out the impact of near-term monetary policy. The spread between this metric for France and the equivalent German rate is now just short of its highest level since 2012, a sign that investors are pricing a structural deterioration in France’s financial health relative to Germany in the coming decades.

So what is the story for investors? France’s fiscal arithmetic may be ugly in aggregate, but markets will not experience the adjustment in aggregate. Any credible attempt to stabilise the debt trajectory will create winners and losers across sectors, households, and asset classes depending on where the government chooses to find the money. Tax rises, spending cuts, pension reform, changes to corporate incentives, and further pressure on household savings would each transmit through the French equity market in very different ways.

The approach, therefore, is to determine how it tries to consolidate, who ultimately pays, and where that pain is likely to appear first in markets. We start here, then turn back to the sovereign complex and lay out our convictions on OAT yields and the relative-value trades we prefer across European government bonds.

Below the paywall, we detail our favoured stock-specific long/short trade, which we believe has asymmetric opportunities, along with three rates trades, including one relative play that we have added to our portfolio.

Equity Approach

Constituents of the country’s benchmark CAC 40 Index make less than 20% of revenues at home, which limits the impact of political risk on earnings. However, domestically focused sectors such as banks, utilities, telecoms and construction do feel the stress of a wider French-German yield spread. A bigger yield gap reduces the attractiveness of French stocks and keeps a lid on companies’ ability to invest, ultimately hurting their competitiveness.

Read more

UK equities trade at their widest valuation discount to developed-market peers in decades. We believe the tide is already turning, and highlight the stocks best positioned to benefit.

With the UK macro backdrop central to the thesis, and the UK being our home, we felt the team was well positioned to offer a strong and reputable voice on the topic.

At the same time, we teamed up with , a leading Canadian-based equity research firm, to leverage their equity-specific knowledge and expertise. The piece includes their latest discussion with ARM Holdings (NASDAQ: ARM), one of the UK’s largest companies and a global leader in semiconductors.

UK equities lack the AI exposure that drives valuations in the S&P 500, which has clearly contributed to the valuation gap. But there is much more to the story, including shifting investor sentiment, domestic capital reform, and a sector mix better suited to the next cycle.

Table of Contents

1. The State of the UK Market

2. Why We Are Bullish on the UK

3. Growth Driver 1: Legacy Investor Ignorance

4. Growth Driver 2: Political Capital

5. Growth Driver 3: Index Composition For The Next Cycle

   5.1 Financials

   5.2 Energy & Materials

   5.3 Healthcare

6. In Conversation: Arm Holdings

7. UK Equities: Pool of Ideas

8. Key Risks

9. Concluding Thoughts

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1. The State of the UK Market

Over the past decade, UK assets have significantly underperformed their global peers. The clearest example is the FTSE 100, the UK’s flagship stock index, which has gained 62% over this period, compared with a 254% gain for the S&P 500.

However, FTSE 100 performance has started to turn over the past year. With almost no tech exposure, the UK market’s gains have been driven mainly by financials, defence, and expectations of lower interest rates.

We then turn to the British pound (GBP), which was trading at 1.39 against the US dollar in August 2021 and remains at a similar level today, at 1.36. Notably, GBP/USD fell to a low of 1.035 in September 2022 amid growing political concerns in the UK.

Next, we turn to the bond market. The long end of the Gilt curve has risen significantly in recent years, with both 10-Year and 30-Year UK government bond yields reaching their highest levels in decades. Loose fiscal policy, weak economic growth, and persistent inflation have pushed yields higher as investors demand greater compensation for holding UK government debt.

The UK’s move has been partly driven by a global selloff in long-term bonds. 30-year US Treasury yields reached their highest level since 2007, while German 30-year yields reached levels last seen in 2011. However, the UK stands out for both its higher absolute yields and the large increase in the extra return required to hold longer-term UK debt. This reflects concerns over government spending, weaker demand for UK bonds, and persistent inflation, all of which have been more pronounced in the UK than in most other G7 economies.

Taken together, these three asset classes paint a consistent picture. Over the past five years, the market has demanded a higher risk premium to own UK assets.

Equities have been held back by weak earnings expectations, political uncertainty, and continued capital outflows. Sterling has struggled as weak productivity growth, a current account deficit, and inconsistent government policies have weighed on international confidence.

Meanwhile, Gilt yields have risen significantly as the market has demanded more compensation for lending to a government facing higher debt, large borrowing needs, and an economy struggling to generate sustained growth.

In our view, there is some irony here: these same headwinds have also created the foundations for an opportunity. The UK is starting from a much lower base, while some of the factors that held the market back are beginning to improve.

2. Why We Are Bullish on the UK

We split our reasoning into three growth drivers.

The first is what we call legacy investor ignorance.

Despite many of the UK’s largest companies generating the majority of their revenues overseas, they continue to trade at a sizeable valuation discount to peers in the US and other developed markets. This discount may have been justified in the years immediately following Brexit, but six years later, it increasingly looks disconnected from the fundamentals. We see this as our first growth driver because the market is already starting to recognise this valuation gap.

Takeover activity has also picked up significantly, as overseas buyers and private equity firms continue to take advantage of depressed UK valuations. UK public M&A reached £35.3bn in the first half of this year, compared with £22bn in H1 2025 and £18.5bn in H2 2025. Overseas bidders accounted for 94% of total deal value.

Inbound cross-border M&A activity tells a similar story, with foreign buyers showing a growing appetite for UK companies.

Meanwhile, the FT recently reported that takeover activity involving UK-listed companies has surged 188% year-to-date, marking the strongest pace since 2007.

A second pillar of our bullish view is the political capital being spent by new PM Andy Burnham to kick-start the UK economy. He may have been in office for only a few weeks, but the market’s initial reaction has been broadly positive.

More importantly, the government’s early priorities have focused on unlocking long-term investment rather than short-term fiscal giveaways. Alongside an ambitious programme of planning reform and housebuilding, Burnham has repeatedly emphasised the need to “mobilise British savings to back British growth.” Ministers are also exploring reforms to ISAs and pension funds that could encourage more domestic capital to flow into UK-listed companies.

Even a modest shift in domestic capital allocation could have a meaningful impact on UK equities. We explore how even a partial reversal of pension fund outflows from domestic markets could bring billions of pounds of additional demand into the FTSE 100 and FTSE 250.

Finally, at the index level, the UK market is dominated by large companies in healthcare, commodities, and financial services.

These are three areas where we are currently overweight and expect to remain so in the next cycle, with each benefiting from different tailwinds. As a growth driver, we believe the market is underestimating the potential upside in these sectors as we enter a period of higher infrastructure spending, larger defence budgets, strong commodity demand, and fundamentally higher interest rates.

3. Growth Driver 1: Legacy Investor Ignorance

The shrug of the shoulders when some overseas investors are told about UK equities tells the broad story here. Even though ignorance might be too strong a word, investor indifference and persistent under-allocation certainly help explain the valuation gap between the UK and its developed-market peers.

The scale of the discrepancy is being arbitraged away, but still remains striking. As of the end of July, the MSCI UK traded at 12.85x forward earnings, against 20.37x for MSCI USA and around 15.5x for MSCI EAFE, while offering a 3.05% dividend yield, versus just 1.13% in the US.

In other words, investors are currently paying roughly 37% less for a pound of forecast UK earnings than for the equivalent dollar of US earnings, while simultaneously receiving almost three times the dividend yield.

Of course, some discount is justified. The US market contains many of the world’s highest-growth and highest-margin technology businesses, and those companies deserve higher multiples than mature banks, miners or oil majors.

But we believe the valuation gap is still too large.

We don’t need the valuation gap to disappear entirely for the return implications to become meaningful. If UK forward valuations moved from 12.85x to 14x, for example, that alone would represent roughly 9% multiple expansion.

UK vs. US Equity Valuation Gap (2023–2026)

Signs of this process are already emerging. The FTSE 100 has lagged the S&P 500 by only around 250bps over the past year, an impressive result when considering the radically different sector compositions of the two indices (more on that later).

Arguably, the most compelling evidence that the UK discount is becoming excessive comes from ongoing corporate arbitrage. Financial and strategic buyers appear increasingly willing to exploit a valuation discrepancy that public-market investors have been slower to recognise.

By July 1, 2026, announced M&A involving UK targets had exceeded $231bn, 210% above the same point in 2025. Even more strikingly, foreign bidders represented around $197bn and a record 86% of UK-targeted deal value.

It’s not hard to sniff out that when overseas corporations and private-equity firms repeatedly conclude that UK-listed businesses are worth substantially more than their prevailing market capitalisation, there’s money to be made.

Companies themselves are reaching much the same conclusion.

UK companies had announced £34.6bn of share buybacks by April 24, 2026. Management teams are opportunistically retiring capital for shares.

This creates an interesting dynamic. Foreign buyers are removing undervalued UK companies from the market, while listed companies are simultaneously shrinking their own share counts through buybacks. Both reduce the available supply of UK equity. Then if we see a continued demand increase from other marginal buyers for UK stocks, it creates a rising tide.

Just as there is some ignorance around ignoring the UK, we also don’t want to be seen as ignorant in simply saying “UK stocks are cheap”.

Cheap markets can definitely remain cheap indefinitely.

The more compelling argument is that identifiable shifts are now starting to close this valuation gap, creating opportunities for investors to generate meaningful alpha through stock selection. Rather than simply buying the cheapest UK stocks, we favour companies where the valuation discount looks hardest to justify.

For example, international businesses still trading on UK multiples, companies with strong free cash flow and significant buyback capacity, and businesses whose strategic value appears materially higher than their public-market valuation, making them potential M&A targets.

Mid-caps are particularly interesting in this respect, as lower analyst coverage and weaker domestic flows can create more pronounced valuation gaps.

Now, let’s take a look at two ideas we find interesting.

4. Growth Driver 2: Political Capital

Andy Burnham entered Downing Street on July 20, 2026, promising a “new political model and a new economic model” after replacing Keir Starmer as Labour leader. The UK has become something of a political laughing stock in recent years, with Burnham becoming the country’s seventh PM in a decade.

Andy Burnham’s First Speech as Prime Minister

The consequences extended well beyond politics, with repeated fiscal missteps triggering serious market turmoil. The clearest example came in September 2022, when Liz Truss’s government, with Chancellor Kwasi Kwarteng, unveiled a mini-budget containing around £45bn in unfunded tax cuts.

Markets reacted badly, with gilt yields surging and severe pressure building across pension funds, particularly those using liability-driven investment strategies. To prevent the stress from turning into a broader financial crisis, the Bank of England stepped in with a temporary programme to buy long-dated gilts, initially offering up to £65bn in purchases. In the end, it bought £19.3bn of gilts before gradually unwinding the entire position once market conditions stabilised.

Even though this shows the damage that can be done, the opposite is also true. Burnham does not need to transform productivity overnight.

He needs to convince companies and investors that the direction of travel has changed, that approved projects will actually be delivered, and that domestic capital will no longer be encouraged to bypass UK assets.

In a market priced for disappointment, simply reducing policy uncertainty can be almost as valuable as an immediate improvement in earnings. Before we even get to the policies, there are already some positive signs. Labour is now polling ahead of Reform UK, the right-wing alternative in the UK’s increasingly fragmented political landscape. The recent improvement largely reflects growing confidence that Burnham can deliver the change he has promised.

What has been more constructive is the absence of a sustained fiscal-risk spiral. The 10-year Gilt yield is almost unchanged if we compare the current yield to the day Burnham took office.

Of course, yields remain high in absolute terms, but the market has so far treated Burnham’s programme as a conventional fiscal debate rather than a broader credibility issue. So, what policies could drive this change, and which sectors should we watch? One of the most interesting levers is savings reform.

UK workplace defined-contribution (DC) pensions held roughly £600bn in assets in 2023, but only 6% was invested in UK equities, compared with 70% in overseas equities. The domestic share of DC assets has also fallen from just over 50% in 2012 to just over 20% today.

The government’s own analysis estimates that a five-percentage-point increase in domestic DC allocation would add £30bn of investment into UK markets. At the same time, ISA reform will reduce the under-65 Cash ISA allowance to £12,000 from April 2027, while keeping the overall £20,000 ISA allowance unchanged. The goal is clear: encourage more savings to flow into investment products.

Given how little the current ISA and pension system supports UK equities, this growth driver does not require a dramatic change. From our calculations, a one-percentage-point increase in DC home bias, a modest shift in ISA cash savings, and a half-percentage-point increase in LGPS listed-equity allocation could generate roughly £6.7bn of incremental demand for UK-listed equities. The impact could be particularly meaningful for the much smaller FTSE 250.

Pinpointing exactly which stocks would benefit is harder. These funds would act as marginal buyers, making the impact difficult to trace directly.

However, we see two clear points.

First, money is likely to flow toward companies seen as undervalued. This supports the first growth driver we discussed above and could help close some of the valuation gap.

Second, it matters less where all the money ultimately ends up, as much of it will pass through UK asset managers, brokerage platforms, insurers, and other financial institutions. These businesses should benefit from higher AUM, greater trading activity, and increased demand for actively managed products.

There are, of course, other ways to play these reforms, such as homebuilders benefiting from potential housing reform or retail and leisure companies benefiting from measures aimed at easing the cost of living.

But if we want direct exposure to the financial reforms themselves, we believe UK financials offer one of the most attractive risk/reward opportunities.

5. Growth Driver 3: Index Composition For The Next Cycle

The lack of AI and broader technology companies in the UK public market is no secret. In theory, this should have caused the UK to lag the S&P 500 even more, given the huge contribution from tech and AI-related stocks.

Yet that has not been the case this year.

YTD, the FTSE 100 is up 8%, compared with 12% for the S&P 500.

Ironically, one factor supporting the UK market is its index composition. While the FTSE 100 has little exposure to technology, it has large weightings in sectors that are already performing well. Financials account for roughly 28% of the index, followed by healthcare at 11.6%, energy at 10.4%, and materials at 8.1%.

The contrast with the US is significant.

Information technology alone represents 36.8% of the S&P 500 and 28.9% of the MSCI World. This means the UK offers investors a very different mix of sector exposure, with greater weightings toward financials, healthcare, energy, and materials, all areas where we see strong potential in the next cycle.

So why does this setup look appealing going forward? Let’s focus on three sectors we are bullish on right now: financials, healthcare, and energy.

5.1 Financials

UK banks have performed strongly over the past year as the interest-rate backdrop has remained far more supportive than many investors initially expected. The Bank of England held its policy rate at 4% through much of 2025 before cutting by just 25bps to 3.75% in December, where it has remained.

This has allowed banks to maintain healthy net interest margins and deposit spreads. Looking forward, we see this continuing based on our macro outlook for monetary policy. The BoE held its policy rate at 3.75% at its July 2026 meeting, with a 6-3 vote and three MPC members voting for a hike.

Current market pricing indicates 25.4bps worth of hikes priced through to the end of the year. A “higher for longer” or even modestly higher rate path, driven by energy price inflation and Middle East tensions, would be incrementally positive for bank NIMs.

Importantly, the benefits of higher rates have increasingly been reinforced by fundamental hedges. Barclays, Lloyds, and NatWest have large hedge books that gradually roll onto higher yields, providing a delayed boost to net interest income even if the BoE cuts rates modestly. All three have guided towards year-on-year growth in fundamental hedge income over the medium term, making the earnings benefit more durable than simply relying on rates staying high.

When you put it all together, it’s clear that the full benefit of this cycle has yet to be reflected in earnings.

The next leg of this cycle could come from a further re-rating of the sector alongside supportive monetary policy. Investors are increasingly recognising that the improvement in profitability since Covid is more fundamental and not simply the result of higher rates. With UK banks still trading within a domestic equity market that remains heavily discounted versus other developed markets, stronger returns and better earnings visibility could give investors a good reason to close at least part of that valuation gap.

5.2 Energy & Materials

Over the past 12 months, UK materials stocks (FTSE 100 members) delivered a total return of +80%, while energy stocks returned +34%. Materials were the standout sector across the entire index, comfortably ahead of even Technology (+55%) and Financials (+26%).

The main driver has been the broad rally in commodity prices over the past year, with the Iran war acting as a key catalyst. However, it would be wrong to attribute all of these gains to the oil complex.

In fact, copper has been the strongest performer across the major commodities, rising 44% on supply deficits and recovering Chinese demand.

Next is Brent crude, up 34%, driven higher by the Iran conflict and related disruptions to maritime trade. Gold is slightly behind at +32%. While it struggled for much of Q2, it remains supported by central bank buying, a weaker US dollar, and safe-haven demand. Not all commodities have performed equally, however, with natural gas (-1%) and iron ore (-7%) standing out as notable laggards.

Looking ahead, we don’t believe this is the end of the road for materials outperformance, even with precious metals having pulled back in recent months.

Copper is a good example. Physical copper markets are likely to remain in deficit in 2026, as production growth cannot keep pace with rising consumption, supporting further price increases. Copper is forecast to average $12,800/t in 2026, with demand supported by China’s power grid, renewable energy, EVs, and machinery, while supply remains constrained.

More importantly, we expect the copper deficit to persist well beyond 2026, creating a longer-term supply problem for the market.

The fundamentals are highly compelling. A decade of underinvestment, combined with the rising capital intensity of new projects, means higher prices will likely be needed to incentivise new supply. This is already reflected in the FTSE 100, with the Anglo American–Teck merger moving towards completion and expected to create the world’s leading listed copper company.

Copper isn’t the only metal expected to face a deficit over the coming year. Aluminium is another market where the supply picture looks increasingly tight. Middle East disruptions are estimated to have caused 3.5–4.0 Mtpa of outages, with around 2M tonnes of regional supply expected to be lost in 2026. If these disruptions continue, aluminium prices could move above $4,000/t.

Regarding gold and silver, we believe the recent bounce still has further room to run higher. More broadly, UK energy and materials stocks still trade at low valuations despite their strong performance.

The median forward P/E is 10.5x, while median forward EV/EBITDA is 4.7x. If commodity prices stay high, we believe these stocks still have room to move higher as earnings grow and valuations improve.

5.3 Healthcare

The case for UK healthcare stocks is becoming increasingly attractive following a prolonged period of neglect. The sector has faced real headwinds, both in the UK and globally, including drug-pricing reforms and reimbursement pressure.

There have also been concerns that AI could reduce rather than improve margins. These factors have led investors to use healthcare as a source of funding for more popular AI and tech names, leaving positioning in the sector unusually light.

We believe this neglect is now part of the opportunity, especially given the UK’s limited exposure to healthcare. Valuations also look reasonable relative to the broader market. The FTSE 350 trades at an average forward P/E of 15.2x, while GSK trades at 10.4x and Hikma at 9.6x. On a P/B basis, versus a 3.5x average for the FTSE 350, Smith & Nephew trades at 2.4x and Hikma at just 1.9x.

Positioning also remains far from crowded, meaning even a modest rotation away from expensive tech names could provide a meaningful boost to healthcare stocks.

The fundamentals offer another reason for optimism. Healthcare companies typically benefit from strong pricing power, high margins, and limited exposure to commodity inflation. An improving earnings environment could therefore create meaningful operating leverage as margins recover. Meanwhile, healthy balance sheets and the need for large pharmaceutical companies to replenish their drug pipelines could support further M&A, particularly across biotech.

We also think the AI angle is under-appreciated.

Investors have largely focused on AI as a threat to healthcare margins, but productivity gains in areas such as drug discovery, diagnostics, and administration could eventually create meaningful upside to earnings.

6. In Conversation: Arm Holdings

Earlier this month, Aurelion Research had a really insightful discussion with ARM Holdings’ VP of Investor Relations, Ian Thornton, who has been with the company for more than 20 years. Let’s just say he knows the ARM business pretty well, and we definitely felt it during the conversation.

For context, ARM is one of the largest companies in the UK and one of the most important semiconductor companies globally.

It develops energy-efficient CPU architectures and licenses them to major technology companies around the world.

It was a great call, and they came away with much more than they typically get from larger companies. Bigger companies often stick to the same points they make on earnings calls. These conversations are about getting a better sense of growth drivers, what customers and investors are saying, as well as how competitors are moving.

First, the long-term margin opportunity is much more interesting than initially thought.

Financial Targets & A Very Different Margin Model

The IP business could become very attractive, with management targeting around a “99% gross profit margin” and potentially 60-65% operating margins.

Those numbers may sound aggressive at first, but ARM has a very different cost structure from most semiconductor companies. The reason is that “everything that goes into that chip is IP that we also license and sell.”

As management put it, “chip costs are just assembly... basically assembly costs.”

That makes the gap between gross and operating margins “a lot, lot tighter than most other semiconductor companies.” Longer term, reaching operating margins around 60% would require moving further toward customer-owned tooling, where “you own the tools that live at the test equipment factory.”

The point here is that ARM is leveraging its existing IP advantage to move further up the value chain while maintaining a relatively asset-light model.

Bringing More of the Chip Development In-House

ARM is also gradually bringing more of the chip development process in-house.

For the first chip iteration, ARM used SocioNext for the back-end processes. For the second, it moved toward a direct relationship with TSMC.

The company also recently completed its acquisition of DreamBig, giving ARM greater capabilities in high-speed interfaces. Previously, it relied on third-party tools from companies such as Synopsys.

The strategy is simple: bring more of the development stack in-house, have greater control over the product, and capture more of the economics.

This also addresses a broader issue ARM encountered when it first started approaching hyperscalers. According to management, the response was essentially: “We don’t want to design chips. We are software and service companies. Don’t make us become silicon designers.”

That is important because ARM is not necessarily asking customers to become chip designers. It can provide much more of the finished solution itself.

And there is a meaningful economic opportunity here.

Management pointed out that if “90% of the IP that goes into that chip is ours,” there is a question of why ARM should let someone else capture a 30% cut for assembling what is largely its own architecture into a finished product.

Enterprise Could Be a Much Bigger Opportunity

One of the more interesting parts of the conversation was around enterprise demand. Companies don’t want to design its own chips. Instead, the question they were asking was essentially: “Why is there no one to sell me this chip?”

That is where ARM saw an opportunity. If “90% of the IP that goes into that chip is ours,” there is “very little opportunity” for competitors to differentiate.

That creates a pretty unique position for ARM. Customers get a chip tailored to their needs, while ARM can capture a significant portion of the economics because it already owns most of the underlying IP.

We think this could become an increasingly important part of the story.

The hyperscalers have already shown that custom silicon can make sense, but there is a much larger group of enterprise customers that simply does not have the resources or desire to build an internal chip team.

Competitive Moat & Future Workloads

When it comes to competition, management was pretty direct:

“The only boulders on the runway are Intel and AMD with their x86 chips.”

ARM’s core advantage remains performance per watt. As they put it, “the primary performance metric customers care about today is performance per watt.”

That becomes increasingly important as AI infrastructure puts more pressure on power availability. The computing industry can keep adding GPUs, but eventually you run into a simple problem: there is only so much power available.

This is also where agentic AI becomes particularly interesting.

Management believes “the rise of agentic workloads” could be an important opportunity because “the agentic is pretty much 100% a CPU task.”

GPUs handle the heavy matrix computation, but the orchestration, API calls and sequential logic around those workloads are largely CPU-driven. If agentic workloads become a meaningful part of future computing demand, ARM could benefit from another structural shift toward more efficient CPU architectures.

Robotics & Physical AI

The other area we found particularly interesting was robotics and physical AI.

These applications require much more than raw computing power. They need “redundancy, safety islands, parallel processing.” As management explained, you need “safety critical systems to go into robotics and cars” because a computing failure in these environments can have very serious consequences.

That plays directly into ARM’s strengths. As more computing moves into environments where power efficiency, reliability and safety are just as important as raw performance, ARM’s architecture should become increasingly relevant.

Overall, the biggest takeaway for us was how broad ARM’s opportunity could become. AI infrastructure is only one part of the story. The company is gaining exposure to data centers, enterprise computing, agentic AI, robotics and physical AI, all of which are pushing demand toward more efficient computing. After this conversation, we came away with a much clearer view of why management is so confident in ARM’s long-term growth potential.

7. UK Equities: Pool of Ideas

We built a Pool of UK Ideas classified by the three growth drivers we identified earlier, with exposure to financials, healthcare, commodities, and other areas where we see the strongest potential for a re-rating.

This basket is live and investable for eligible accounts via Plutus and can be viewed here.

8. Key Risks

The simplest way to explain the main risk from our primer is that UK equities are not necessarily expensive, but the catalysts needed to unlock their value may fail to materialise.

1. The Valuation Gap Could Persist

The UK discount, particularly in equities, could prove to be more fundamental than we expect. Although we believe it is cyclical and already starting to change, our thesis assumes that the valuation gap continues to close as international investors rediscover the market. Cheap, however, does not automatically mean mispriced, and investors could continue to look elsewhere for years.

2. Reforms Could Disappoint

Another risk is that Burnham fails to turn political momentum into meaningful economic reform. The early days of any government are not always a good indicator of future investment performance. A key part of our thesis is that greater political stability and policies aimed at mobilising British savings can improve domestic investment. The risk is that implementation disappoints, reforms are watered down, or political opposition prevents meaningful change.

3. Fiscal Risk

Finally, there is fiscal credibility, an area where the UK has struggled in recent years. Burnham has so far avoided a major fiscal-risk event, but the October Budget will be an important test.

Higher borrowing, unfunded spending commitments, or overly optimistic growth assumptions could push gilt yields higher and put pressure on sterling and UK equity valuations. The 2022 experience under PM Truss showed how quickly UK assets can reprice when confidence in fiscal policy is lost.

9. Concluding Thoughts

Here we fly the flag for the UK.

Expectations remain relatively low, valuations remain attractive, and for the first time in a while there are identifiable catalysts capable of changing the narrative.

Importantly, our bullish case doesn’t require Britain suddenly to become the world’s fastest-growing economy. That’s just not realistic. Rather, we need the direction of travel to improve. The signs are there that this can be the case, from credible fiscal policy and a modest redirection of Britain’s enormous savings pool.

AP and Aurelion Research

Disclosures & Methodology

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

The past few years have been bogged down by AI thematics, leaving little room for markets to explore opportunities elsewhere. That’s not to say they haven’t existed, but one had to search past the noise to find these opportunities.

Of course, markets never turn up on an opportunity for durable growth, and we see healthcare as an under-appreciated market theme. It offers a rare combination of durable growth, Technology-like profitability, attractive valuation and diversification away from concentrated AI and AI-adjacent themes.

For much of the past three years, capital has been singularly focused on the momentous shift in the technology landscape, the biggest change since the start of the millennium. Whether it be building the models, semiconductors and other parts of the supply chain, or data centre buildouts, markets have judged and rated themes based on their proximity to this overarching narrative. Healthcare, conspicuously distant from the centre of the enthusiasm, became a popular funding source for the market’s most crowded positions.

Performance has underscored this dynamic. If we mark the release of ChatGPT as the unofficial start of the tech trade, US healthcare stocks have underperformed the broader market in every calendar year. On five occasions, healthcare has experienced drawdowns of more than 10% even as the market moved higher. Sector weighting in the S&P 500 index has fallen from 16% to 9% (see Figure 2), moving from the second-largest constituent to the fourth-largest (see Figure 1).

A wholesale demotion.

There have been reasons, beyond a hot theme appearing, for healthcare to underperform. Drug pricing reform, reimbursement pressure, Medicaid cuts, and policy uncertainty (initially DOGE1, then tariffs, alongside ACA2 exchange policy) have all weighed on sector sentiment. Investors have also begun to question margin compression, viewing AI as a compressor rather than an improver.

That has led to a deeply negative 3-month correlation (see Figure 3) between Healthcare and Tech, and one of the largest positioning resets in the sector’s history.

Neglect eventually creates opportunities. Healthcare stocks trade at a discount to the broader market, near the 26th percentile of its historical range. Many of the concerns that weighed on sentiment have either moderated or have been reflected in valuations. Earnings growth (inflecting up from -1% in 2026 to +22% in 2027) is expected to be among the largest contributors, outside of technology, to S&P 500 growth next year. A potential gridlock outcome in the coming midterms could alleviate concerns around policy uncertainty, while the bar remains low for potential upside surprise from AI productivity improvements.

Following this period of underperformance, we believe the balance of risks has shifted in favour towards US Healthcare. Not all of its problems have disappeared, but the dynamics have shifted enough to expect the next phase of the recovery to be increasingly driven by stock selection.

With sector weights, active ownership, and relative performance still near cyclical lows, Healthcare appears better characterised as a recovery opportunity, particularly as investors seek to broaden exposure beyond AI-driven market leadership.

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Under Owned

The positioning backdrop is fundamental to our exploration of Healthcare as an overweight allocation. As the sector lived through a prolonged period of underperformance, Healthcare has become a main funding short against AI exposures (see Figure 4). Per S3 data, short interest remains near five-year highs and has steadily increased over that timeframe as markets crowded into AI names. This has also led to an increasingly negative correlation between Healthcare and Technology.

Even with recent relative outperformance, Healthcare remains one of the least crowded areas of the market, while Tech and AI remain at elevated levels by historical standards. Within Healthcare, Equipment & Services remains deeply under-owned, with net exposure in the 3rd percentile of the past 12 months and just the 1st percentile versus the full history since 2018.

We expect capital flows to be a tailwind for this trade. Healthcare ETF flows appear to be turning in favour of investors (see Figure 5), something that had previously been a significant headwind to sector performance. ETFs have received $6.4bn of net inflows over the past 12 months, representing 6.3% of ETF AUM. This is the first time that flows have been significantly positive since early 2023. The largest three US ETFs are shown below.

This combination of funding shorts, low crowding, and structural inflows points to a positive backdrop for Healthcare outperformance and an increasingly attractive allocation away from crowded themes.

Inexpensive

Alongside a constructive positioning backdrop lies an inexpensive valuation. We often argue that expensive valuations are no reason to under-own stocks, so the same should be applied to the opposite. Cheap valuations are no reason, on their own, to hold an asset. We view valuations as a breeze. A high valuation means you are unvesting with the wind in your face. Healthcare, at its current rate to history, is a gentle breeze to our backs. Always welcomed.

Like many sectors in the S&P 500, Healthcare is expensive relative to its own history, but remains fair relative to the broader market (see Figure 6).

These valuations not only attract public market investors, but may also create a more constructive M&A backdrop. Healthy balance sheets, accessible capital markets, ongoing innovation (not even including the potential for AI to enhance this innovation), and a need for large companies to replenish product pipelines should support acquisitions, particularly in Biotech.

Combined, fair valuations and potential catalytic drivers add to Healthcare’s high-quality growth, an area overlooked amid the AI trade.

Poised to Accelerate

Looking towards 2027, the sector is expected to deliver steady revenue growth, but earnings growth is poised to accelerate significantly as margins recover. Consensus estimates see revenue growth of 5%, while net income is expected to shift from -1% currently to +22% in the upcoming year.

Healthcare is expected to have the largest contribution to earnings growth in the S&P 500, second only to the Tech sector. Due to pricing power, the sector enjoys tech-like margins and remains much higher than defensive peers. Most Healthcare industries earn margins north of 20% given patent protection and scale, while Biotech (25.4%) and Pharma (26.2%) generate among the strongest margins of all S&P 500 industries.

As for inflation factors, Healthcare margins remain insulated from rising costs, especially components like agriculture and energy, due to the industry’s limited exposure, whereas other defensive peers, namely Staples, are some of the largest users of commodities.

Demand Drivers

Healthcare has three fundamental demand drivers that support growth in the sector: an ageing population, rising life expectancy, and continued expansion of the middle class.

On the latter point, within the US, Healthcare expenditures as a portion of consumer spending have risen from 5% in the 1950s to 21% as of today (see Figure 7). In contrast, food and beverage spending has decreased from 21% to 7% over the same period. This sustained shift in spending has driven exceptional growth in Healthcare revenue. Since the GFC, Healthcare has generated the second-strongest revenue growth of all sectors, with a 9.2% CAGR vs 5.3% for the S&P 500.

Of course, rising energy costs and inflation concerns are a risk to this measure. These concerns could weigh on discretionary spending and potentially crowd out healthcare spending in the short term, but dynamics could offset this. A shift in spending demographics, along with strong household savings and rising wages, should keep discretionary spending resilient despite macro concerns.

These structural demand advantages have led to consensus estimates of mid-single-digit revenue growth over the next two years. This reinforces Healthcare’s position as an attractive source of durable growth, especially one outside of AI risks.

Midterms

One overarching question in any thematic report in the coming months is connected to the US Midterms. What effect do the Midterms have on the market in general, and specifically towards Healthcare?

While Midterms are often the weakest-performing year in the four-year cycle, performance has been dispersed by sector. Healthcare (10.7%) and Energy (8.9%) have historically held up better, while Industrials (0.6%) and Financials (-0.6%) have tended to drag the market down in midterm years.

Election outcomes, of course, matter. Scenarios where one party lost control of the political trifecta (holding the presidency, and majorities in the House and Senate) saw material underperformance in the six months after midterms (10.4%) compared to when control was gained, or Congress remained divided (16.1%). Thus, the market has still rallied, but it was likely hampered in part by the market re-pricing the expected ability of the government to pass legislation. This, in particular, is key to our thematic.

While healthcare affordability and OBBBA-linked3 Medicaid changes are likely to be included in the political discourse heading into the midterms, we do not see a material change in Washington towards the health policy backdrop. Why? Given limited incentives to compromise between the Administration and Democratic-controlled chambers of Congress, we believe other economic and affordability concerns are more likely to be more central and more impactful in voter behaviour. Therefore, we see minimal policy risks for the Healthcare sector in the coming months.

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Sub Industries

US Pharma remains healthy (no pun intended there). 2026 has been a solid year with upside to estimates. For the upcoming calendar (18 months), Pharma has a rich pipeline and minimal policy risk after the late-2025 MFN4 agreements. The sub-sector also trades at a 10% discount to the broader market, with potential for multiple expansion on improving sentiment.

As for Biotech, performance in 2026 has been mixed. However, sentiment has turned positive, with tailwinds (M&A, clinical catalysts) balanced against headwinds (regulations, rates). As for our recent calls within Biotech, we have now closed out of AtaiBeckley (ATAI US) following its acquisition by Eli Lilly (LLY US) (see Figure 9), marking a 59% return in just over one month.

Life Science Tools has underperformed YTD, with the end-market lagging in any recovery and minimal generalist appetite against AI, semis, or memory. However, Agilent’s (A US) move higher (see Figure 10) in May following its earnings call highlighted a change within this sub-sector.

After a three-year losing streak to the broader market, MedTech is either broken or undervalued, depending on who you ask. Decelerating growth, negative revisions, and a thin calendar have weighed on it this year. The potential as an AI hedge has done little to draw investor interest so far, but that could change if it becomes part of a recovery trade; support would need to come via positive 2027 estimates and new catalysts.

Managed Care may have hit a turning point. We see most MCOs troughing on earnings in 2026 (or already in 2025), setting up upward revisions, with Medicare Advantage a likely margin-upside driver and early signs of positivity in tougher products. Distributor volumes support growth at or above targets. Across facilities, conditions remain stable despite ACA/Medicaid headwinds.

Finally, the area of Healthcare most prone to AI risk: Vertical SaaS and HealthTech. This remains the most cautious sub-sector while the market still finalises its decision and quantifies ROI. The dynamic is driving investors to differentiate between “AI that sells” (revenue expansion) and “AI that saves” (measurable efficiency, lower cost-to-serve).

Now to the part of the article that puts the research and the thesis into action: our Second Opinion Thematic Basket.

Second Opinion Basket, “The Cure for Crowding”

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We first explored this theme in early February, as AI disruption risk became front and centre for software investors and private credit markets. As SaaS valuations compressed, attention naturally turned towards the lenders that had spent the better part of a decade financing those businesses at generous multiples.

Our focus was less on software equities (which had already experienced a significant downturn themselves) and more on the companies behind them. Alternative asset managers (Alt AMs) and business development companies (BDCs) had found themselves under scrutiny as investors questioned how resilient private credit portfolios would prove in a rapidly evolving technology landscape.

Nearly five months have passed. Now, we’re seeing a new trade emerge around private credit risks, outside of the SaaS-pocalypse and Loan-mageddon.

Software-as-a-Selloff

If you missed that piece or simply need a refresher before we move the story forward, it is worth reading below.

Since publication, our short basket of alternative asset managers and BDCs has returned approximately 19%, validating much of the original thesis.

Several of the largest listed alternative managers have reported increased redemption requests as institutional investors become more selective about committing fresh capital to illiquid strategies. That itself is not indicative of a run on private credit, but it does represent a growing shift in behaviour. After years of almost indiscriminate inflows, allocators are beginning to ask harder questions about liquidity, valuations, and borrower quality.

The software story has evolved as well. Rather than indiscriminately selling anything with recurring revenue, investors have begun separating businesses with genuine competitive moats and AI implementation ability from those without. Companies built around proprietary datasets, embedded workflows, or regulatory complexity have proved far more resilient than generic application software.

The original software sell-off may have been only the first-order effect. Credit cycles rarely announce themselves all at once. Equity investors react immediately; credit investors tend to discover the damage in instalments.

Which brings us to today. The market is asking a different question altogether: If private credit becomes the problem, who ultimately owns the loans?

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Insurers

Where we’re starting to see this trade pick up on Wall Street relates to insurance companies. More specifically, it relates to the credit default swaps linked to these companies.

We could continue this article by explaining private credit markets or credit default swaps. Fortunately, we have a catalogue of primers published across our research, and both topics have been explained in depth previously.

We move, then, to the trade itself.

Private credit risk has been building for some time. What matters now is that markets are beginning to identify where the next pressure point might emerge in public markets: Insurance companies.

At first glance, this may seem an unlikely focal point. Insurers are not originators of software-linked loans in the way that BDCs are, nor are they the architects of private credit structures like Apollo (APO US), Ares (ARES US), KKR (KKR US), Blackstone (BX US), or Blue Owl (OWL US). They do not sit at the obvious centre of the narrative — which is precisely why they merit attention.

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AI has spent the past three years proving that it can write, summarise, and imitate. One of the next phases will be far more commercial: can it lift, sort, grasp, walk, inspect, and do it repeatedly enough to earn a line item in an operations budget? Of course, we’re talking about physical AI.

Nvidia’s (NVDA US) own definition is useful here. “Physical AI” is not just a humanoid that represents the science fiction future we imagined as children, but AI that can understand and interact with the physical world, spanning industrial manipulators, mobile robots, humanoids, and even robot-run infrastructure such as warehouses and factories. In that sense, physical AI is the attempt to turn intelligence into labour.

The installed base is already large before the humanoid dream fully arrives. The International Federation of Robotics says 542,000 industrial robots were installed globally in 2024, taking the worldwide operational stock to 4.664 million units. Physical AI is already underway. It began in factories, fulfilment centres, and logistics networks that already buy automation.

Amazon (AMZN US) is the clearest reminder that the “physical” part of AI need not look like a person to matter. In mid-2025, the company said it had deployed its one millionth robot across more than 300 facilities, making it the world’s largest operator of mobile robotics, while its new DeepFleet foundation model is designed to improve fleet travel time by 10%. Far from science fiction. Long before a humanoid folds your laundry, a more prosaic machine will probably move your parcel.

Humanoids, though, are where the imagination and the optionality sit, because the world is built to human dimensions. Apptronik says Apollo1 (a General Purpose Humanoid Robot) is designed to work in areas built for people, and Amazon made the same point about Agility’s Digit2: its size and shape are suited to buildings designed for humans. Figure’s 11‑month deployment at BMW’s Spartanburg plant gives the best recent evidence that this is moving, slowly, from concept to shift work: its Figure 023 robots ran 10-hour shifts, loaded more than 90,000 parts and contributed to the production of more than 30,000 X3 vehicles. GXO, meanwhile, says it has trialled three humanoid prototypes and was the first logistics provider to deploy such technology in a live operating facility.

This is the real split in the theme. The public sees the sci-fi skin, while corporates see another way to fill a repetitive task in a human-native space.

The Market Shift

This theme has plainly become louder over the past year. Investor interest in embodied AI accelerated meaningfully after Jensen Huang’s CES presentation on physical AI and robotics in 20254, adding that it was fielding questions daily from investors on how to express the theme in public markets. By January 2026, Arm Holdings (ARM US) had reorganised to create a dedicated Physical AI unit. In market terms, that is how a phrase becomes a sector. Humanoids are the next phase of the AI hype cycle, but turning viral machines into useful workers remains difficult and expensive.

The reason the fascination is not only promotional is that the underlying software stack has improved meaningfully. Nvidia’s Isaac GR00T N1, launched in March 2025, is presented as the first open humanoid robot foundation model and is paired with synthetic-data generation blueprints and a robotics physics engine. Figure’s Helix, unveiled in February 2025, is a vision-language-action model that combines perception, language and whole upper-body control, and Google DeepMind’s Gemini Robotics and Gemini Robotics‑ER extend Gemini 2.0 into robotic action, embodied reasoning and spatial understanding. In non-technical terms, the market hears that large-scale AI may now translate language and perception into motor control with fewer hand-coded rules and more generalisation.

Embodied AI may be a secular trend even while many of its listed beneficiaries still look, and are priced, like industrial or automation companies. The first money made in a theme is often made by the infrastructure.

The Economics of Embodied Labour

The long-run economic case for physical AI is not difficult to sketch. Start with labour. Labour shortages raise recruitment and operating costs, disrupt production, and can weaken growth and innovation. The UN’s latest population work points to a world that is ageing steadily, with the global population aged 65 and above projected to reach 2.2 billion by the late 2070s, surpassing the number of children under 18. Sure, we’re not looking at 2070 for this thesis to play out, but it goes to illustrate the direction of travel. GXO makes the same point from the warehouse floor, arguing that growth in the working-age population is slowing. This is the first durable pillar of the theme: in many rich economies, the question is whether there is enough labour in the right place, on the right shift, at the right cost.

The second pillar is that the human form can be economically convenient. Humans designed the world for the human body, so a humanoid can, in principle, operate without a full factory redesign. Mercedes-Benz said much the same when it announced its Apollo pilot, noting that humanoids could automate physically demanding, repetitive tasks in spaces designed for people, not robots. For a meaningful class of environments (brownfield logistics, general manufacturing, internal transport, tote handling, machine tending), the retrofit burden can be lower than many sceptics assume.

The third pillar is the cost curve, and here the market should watch what is already happening. Morgan Stanley estimates that the cost of a humanoid in a high-income country may fall to around $150,000 by 2028 (from $200,000 in 2024) and $50,000 by 2050, with lower-income supply chains potentially far below that. Meanwhile, Unitree’s G1 is currently listed at $13,500 on the company’s own shop page. Those are not like-for-like products in capability, of course, but the hardware price tag is coming down, especially at the lower and narrower end of the capability curve. When paired with software improvements, an absurd prototype becomes a tolerable capital request.

The fourth pillar is the financing model. In the latest IFR service-robot dataset, professional service robot sales reached almost 200,000 units, with transportation and logistics accounting for 102,925 units, or 52% of the market. This is already the most commercial part of the physical AI stack: mobile robots moving goods through warehouses, factories and hospitals. The category grew 14% year-on-year, while robots-as-a-service adoption in transportation and logistics rose 42%, with the broader RaaS fleet up 31%. The payment model turns robotics from a capex decision into an operating-cost decision, allowing the technology to get out of the demo room and into the P&L. Apptronik explicitly pitches Apollo through a RaaS lens, arguing that it can deliver ROI from the start and reduce total labour cost.

The fifth pillar is the learning flywheel. Nvidia says synthetic data, simulation and post-training are central to robot improvement, while Amazon’s DeepFleet shows that once large robotic fleets exist, software can extract additional efficiency from the installed base. This is what makes the sector potentially self-reinforcing. More deployments produce more data > more data produces better policies > better policies improve ROI > better ROI produces more deployments. The bridge years are unlikely to be cleanly autonomous. They will probably be messy, with narrow-task deployments, supervised autonomy, and staged roll-outs. But economically, that’s good enough. Markets rarely wait for perfection if acceptable productivity arrives first.

The Bottlenecks

“Bottlenecks” might be the most featured word in research this year. However, Dexterity remains the most underappreciated hurdle. Useful robot models must be general, interactive, and dexterous. Many everyday tasks still require fine motor skills that remain difficult for robots. One of the top hardware failure points in the field was the forearm, a subsystem constrained by tight packaging, dexterity demands and thermal limits. The machine can look splendid in a demo and still lose a shift to heat, cabling, or wrist complexity.

Battery life, payload, grip quality, and stability are equally unforgiving. Apptronik’s own specifications still centre on a four-hour battery pack and a 55-pound payload, while GXO says its field feedback has focused on battery life, ability to carry heavier loads, floor stability, dexterity, and integration with other automation. In other words, the three unlovely ingredients of industrial reality (uptime, safety, and interoperability) are still doing the vetoing.

Timing, then, is the issue. Morgan Stanley’s forecasts assume adoption remains relatively slow until the mid-2030s, with acceleration later in the decade, and it expects roughly 90% of humanoid use in 2050 to be industrial or commercial rather than domestic. Investors should think in layers: arms and AMRs are already commercial, humanoids in structured industrial settings are the emerging wedge, and the household generalist remains the expensive mirage that sells narrative before it sells units.

So, who are the beneficiaries in the short-term?

A Public-Markets Basket for Physical AI

To build a public-markets basket around physical AI today, we would avoid the temptation to bet everything on one future humanoid champion. Most of the marquee OEMs are still private, and the listed route is cleaner through the stack: compute, simulation, factory automation, motion control, machine vision, and precision components. Morgan Stanley’s “Humanoid 100” value-chain framing is the right instinct (more details of this further on). Deployed automation already exists, while the sexier part of the story is only just entering controlled commercial use. The best basket is therefore a barbell between AI infrastructure and industrial incumbency.

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Global markets were busy dealing with the situation in the Middle East for much of Q1. This overshadowed events in Brazil, where a combination of early positioning ahead of the elections in the autumn, an energy-driven export tailwind and a continuing carry appeal in FX provided some with healthy gains across various Brazilian assets.

We turn to Brazil as one of our favourite places to allocate capital in the emerging market space right now. For some of the thematic drivers, like carry, the consensus framing is relatively simple and attractive. Yet for other narratives (that a shift to a right-wing regime under junior Bolsonaro would be a large positive), the picture is more nuanced.

Below, we outline our outlook on Brazilian politics, energy, interest rates, and broader cross-asset dynamics, alongside actionable trade ideas. Consider this a structured guide through one of the more compelling opportunities in emerging markets, best read with a caipirinha in hand.

SUMMARY

We believe that Brazil has the potential to outperform both at an absolute and relative level this year, based on three strands of reasoning:

• A Lula continuity victory could be taken as a better outcome than a right-wing regime change. Lula is not fighting Jair Bolsonaro, but rather his unproven son, who risks alienating voters from better right-wing candidates.

• The net energy export status provides beneficial terms of trade, boosting related domestic equities and providing a tailwind for continued BRL appreciation.

• Elevated interest rates will continue to satisfy yield-hungry investors, especially when paired with low-yielding currencies like JPY, which is likely to remain under pressure throughout this year. The potential for an energy-driven inflation shock further reduces the likelihood of any material easing from the BCB.

Continuity Over Convexity

A BTG Pactual/Nexus ​poll published at the end of March showed Brazil’s President Lula da Silva and Senator ‌Flavio Bolsonaro tied at 46% in a potential run-off in the October elections. When you consider that Bolsonaro only entered the race in December and had an assigned probability of winning of 15% in the middle of January, the poll highlighted a trend that had gone under the radar for much of Q1, namely that Bolsonaro is now seen as the main challenger to Lula.

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Yet from a macro perspective, Q1 opened with a familiar tone. Disinflation narratives fraying at the edges, commodities reasserting themselves as the marginal driver of macro, and equity markets still leaning into a narrow set of secular winners.

That equilibrium of constrained volatility did not last for long.

With the benefit of hindsight, writing in April, what followed in Q1 was a period defined by an abrupt regime shift. More specifically, the conflict in Iran (which began on February 28th) provided a sharp transition from a pre-conflict environment to a global headache. It forced markets to confront the reality that geopolitics is no longer a background variable but a primary driver of cross-asset pricing.

For macro traders, the period was one in which a year’s worth of P/L could be made or lost in a single day. When considering moves in oil and Euribor futures, we can reframe the timeline to hours.

The distinction between thematic investing and tactical positioning blurred as macro shocks forced even the highest-conviction ideas to pass through a liquidity filter. This ultimately punished anyone that though those forces would play out in a straight line.

What follows is our attempt to map that transition, assess where we were right, where we were not, and how the experience reshapes our positioning into Q2.

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Q1

The portfolio entered the year leaning heavily into the themes that defined the tail end of 2025: commodities, defence, and the evolving AI stack. In the opening weeks of January, it felt as though we were playing a game of Texas Hold’em where we had been dealt the “bullets.”

However, the quarter can be categorised into two definitive dynamics: pre-war and post-war.

Commodities led the charge, as our thematic basket gained 30% into the end of February as the “debasement” narrative took hold. The momentum was checked by the silver crash in late January, but ultimately the names held up strong considering. The real momentum unwind in metals came after the start of the Middle-East tensions and forced a recalibration of these holdings and our “hot hand” portfolio.

Our defence exposure acted as a necessary hedge to this volatility, providing a steady return while the macro dust settled. Global geopolitical friction is now a permanent feature of the investment landscape.

The sudden removal of Maduro in Venezuela provided the catalyst for our idiosyncratic Venezuela basket, which capitalised on the prospect of regional stabilisation and debt restructuring to return 23.5% over the quarter since inception.

We also saw significant alpha from our alternative asset manager basket, which rose 18% since its inception in early February. This thematic was an expansion of a short trade that we started in Blue Owl (OWL US) in Q4 of last year. As the Software-as-a-Selloff trade consumed markets in the form of the latest AI development, we increased this single trade into a basket of short trades in BDCs, looking to gain from rising stress in private credit. Markets were already punishing private credit before the war, and a risk-off environment to end the quarter only aided these positions.

The market has a way of punishing hubris. The outbreak of hostilities in Iran shifted the board entirely. The dynamic played into your hand if you were a commodity-focused shop (notably Andurand, finishing Q1 up 31.1%), but the broader impact for strategies was a tougher one, and we did not go unscathed.

The most fascinating (and painful) development was the behaviour of gold. Despite its status as a geopolitical hedge, gold fell 24% following the breakout of the war. As we detailed in our market memo, we witnessed a decoupling: sovereigns who had spent years building gold reserves were forced to use the metal as a “funding vault” to acquire dollars for oil. The fundamental fear bid was overwhelmed by a need for liquidity.

Read more: “A Chink in Gold’s Armour”

To protect the core, we spent mid-March raising cash and reducing exposure across the portfolio. This defensive posture cushioned the end-of-quarter sell-off in the equity portion of the portfolio (tracked on RunPlutus).

FX & Rates Portfolio

Our dedicated commentary channel for FX and Rates is APFX Research, where users can find regular trade notes and a portfolio trade tracker.

YTD trades and performance can be found below:

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Most consensus trades are bruised, but still fighting.

The AI trade, however, has turned the page to a harsher chapter. Over the long arc, artificial intelligence should be pro-equity, and we believe it will be: productivity up, margins up, multiples justified. In the meantime, it is indiscriminately killing SaaS stocks.

The catalyst of the recent software slaughter is Anthropic’s new tooling, Claude Code and Cowork (as well as other “vibe-coding” startups), which repositioned AI capabilities from a clever assistant to a junior employee. While various business models are threatened, software-as-a-service is particularly vulnerable. AI-native firms can often offer quicker and cheaper solutions, meaning companies that once operated in a defensible sector are now at risk of competition from new players. Users with no coding experience can now build software, dramatically lowering the programming skill barrier and undermining rigid, one-size-fits-all products.

Markets are in a shoot-first, ask-questions-later environment. Guilty until proven innocent.

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The other casualty is private equity’s decade-long software binge, something credit desks have started calling “Loan-aggedon.” Wall Street’s largest alternative-investment firms are under pressure, driven by fears that artificial intelligence-driven disruptions would cause steep losses on their books. Blue Owl (OWL US), built on financing software businesses and a name we hold short exposure to in the portfolio, now trades where it last did in September 2023.

The latest leg lower reflects mounting concerns about the fallout that AI will cause among software companies, many of whom received funding from alternative asset managers at lofty valuations. UBS Group AG analysts this week estimated that private credit could see default rates surge to as high as 13% if the disruption is aggressive.

Anxiety about software has been simmering for months, but in recent weeks has boiled over into the leveraged-loan market, and this week the splash reached alternatives and business development companies (BDCs). Shares of BDCs, which pool private credit loans, have also hit multi-year lows as investors assess the level of software exposure in their portfolios. The lack of reporting means that while shares may trade daily, their portfolio health is only updated quarterly.

The SaaS Slaughter and the Capital Structure

We were not positioned for the velocity of the SaaS unwind and missed the boat with this one, but the momentum leg of this trade may have run its course. Markets occasionally hand out perfect pitches. More often, they do not, and the job is to recognise when the easy money has been made and where the asymmetry now sits.

There are reasonable arguments that the equity slaughter pauses from here, or at least the worst of it is done. Businesses such as Intuit are defended by proprietary data and by the swamp of the US tax code, a moat that even an eager AI struggles to drain. Bank of America made a point on SAP, which is busy turning the threat into a product by embedding its own agents inside client workflows. The market has not yet separated the indispensable from the ornamental.

Our preference is therefore to express the theme lower in the capital structure. The loan market offers cleaner asymmetry. More than $17.7bn of US technology loans have slipped into distressed territory over the past month, taking the total SaaS-heavy distressed pile to roughly $47bn, the largest since 2022. Equity can stabilise on hope and narrative; credit eventually meets the covenant.

This is why we have leaned on shorts in the alternative managers space, with Blue Owl the clearest expression in the portfolio to date. The risk-reward here is more convex than in listed software. Equity can stabilise on a story about reinvention. Private credit cannot mark to a narrative forever.

The structure of the business model compounds that problem. Alternative managers collect fees on assets, not outcomes, and many of these assets were financed at lofty valuations with thin equity cushions beneath them. The risk/reward is therefore skewed. Upside is capped at maintaining current marks and fee streams, and the downside is disproportionate because loan recoveries rank ahead of the manager’s equity. When underwriting assumptions fail, the write-downs bypass the fee layer and land directly on shareholders.

Unlike SaaS equities, where prices can overshoot and rebound on a single product announcement, the credit cycle moves in arrears. Defaults arrive with a lag, restructurings grind on for quarters, and quarterly reporting means investors discover the damage in instalments. Slow recognition on the way down and capped participation on the way up is why we prefer expressing the theme through shorts in the financiers rather than the software itself.

Per Barclays, BDCs have around 20% of their portfolios tied to the sector. However, if a software company sells into healthcare, many funds classify it as healthcare exposure. The result is that true software risk is materially higher than headline allocations suggest.

Some words from the Street…

• UBS: While the timing of future disruption remains uncertain, under an “aggressive AI disruption” scenario, we expect defaults to rise unevenly across markets to 2%-4% in high yield, 6%-8% in leveraged loans, and 12%-13% in private credit.

• Citigroup: We initiate an underweight recommendation on software loans, in line with our general cautious positioning in the asset class. In our view, yields in the 6%-8% range for much of the sector mean it has limited appeal beyond real money and CLO investors.

• Morgan Stanley: We like shorting loan total return swaps vs. high yield total return swaps on the back of higher software exposure and worse convexity.

• Barclays: Software equities are down around 15% YTD, and software BSLs have declined 3-4 points in the past few weeks. At a minimum, this decline could increase the LTVs of the loans that BDCs make to the sector. More serious risks include possible obsolescence of some software borrowers, which could introduce more material asset quality issues in BDC portfolios.

Alongside our short position in OWL US, we’re adding short exposure to ARES US and KKR US.

As we get underway in the second month of the year, the lesson learned is that 2026 will sort the AI winners from the AI victims, and the scarce skill will be avoiding the latter rather than discovering the former. For now, we would rather own the data centres, the GPUs, the robotics, and short the financiers than chase a SaaS rebound or further leg lower.

AP

Heading into 2026, that challenge hasn’t gone away. Several themes have raced out of the gate in January, putting them front and centre in the portfolio:

• The continued spike in Commodities merits serious attention.

• Defence has come out of the background and firmly warrants a seat at the table when it comes to allocating capital right now.

• The rise of GLP-1 is another theme we continue to bang the drum on, with headlines so far in January indicating it has legs to run higher.

• In other areas, conviction in picking becomes harder. For example, as the AI capex cycle matures beyond raw hardware into power, grid, and real-economy bottlenecks, the task isn’t just identifying the themes (anyone can say buy AI), but understanding where infrastructure, energy, supply chains, and demand drivers intersect in ways markets are just beginning to price.

This note updates our views on each thematic basket and current portfolio positioning (live portfolio access linked at the end).

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Don’t Fade The Commod Boom

+32%. Plenty of tailwinds are driving us to increase our existing allocation to hard assets.

The boom in metals, both precious and non-precious, has been quite extraordinary. Yet despite some calling for a crash in position unwinds late last year, the commodities have pushed even higher over the past month, with silver leading the charge, +41.9%, and +73% from our longs in mid-November.

We’ve been in the bullish camp for some time now and outlined in our November note that we prefer to play the moves on related equity names to benefit from operational leverage. What we mean by that is when a miner experiences an increase in the price of the underlying metal, the boost to revenue outstrips any higher costs. Of course, this works the same way on the way down: fixed costs must be paid even when the metal is trading below the firm’s breakeven price. But when we’re in a bull market (hint, we are), it can provide scaled upside. This is reflected in our holdings in Freeport-McMoRan, which provides a high-beta vehicle for both copper and gold, along with Pan American Silver, a key silver name.

We see a supportive macro and micro backdrop for gold, silver, and copper this year, with each metal offering a distinct but complementary expression of the broader commodities bull case.

Gold remains the clearest vehicle for what we would characterise as the ongoing “debasement trade,” as persistent fiscal expansion and rising sovereign debt burdens globally reinforce the case for reserve diversification and hard-asset hedging. The situation in Japan this week is a good case in point. With the Federal Reserve likely to move further into an easing cycle, the prospective decline in real rates should reduce the opportunity cost of holding gold, while elevated geopolitical risk related to Trump should continue to put a bid under the precious metal.

Silver appears positioned to benefit both from idiosyncratic fundamentals and from its historical tendency to lag and then accelerate after gold-led moves. The market continues to face a meaningful supply-side imbalance, driven by constrained mine output and limited primary silver project development, even as industrial end-use demand remains firm. At the same time, silver’s higher beta to US equities and risk sentiment gives it convexity in a risk-on environment, creating a setup where firm equity markets can reinforce the ongoing move.

Copper, meanwhile, reflects the industrial backbone of the cycle. Years of underinvestment have tightened the supply outlook. The data below suggests it’ll enter a supply deficit this year.

This comes just as demand is being structurally reset higher by electrification, grid expansion, and, increasingly, the build-out of AI and data-centre infrastructure. These projects are copper-intensive across various parts of the build-out, embedding long-duration demand into the outlook at a time when new large-scale supply remains scarce. The combination of constrained mine development and accelerating technology-driven consumption leaves copper well positioned for sustained pricing power.

Both platinum and palladium are experiencing related supply deficits, with basket exposure via Valterra Platinum and Impala Platinum.

Finally, a word on natural gas. We continue to hold EQT, which is still up circa 2% over the past year despite the 23% fall in Nat Gas over the same time period. This has impressed us, and partly speaks to its delivering strong earnings growth and cash flow generation even as gas prices have softened. Therefore, we’re happy to hold here. Even though the opportunity cost of allocating the capital elsewhere exists if gas continues to roll over, it provides a great way to capture upside on a bounce.

We currently hold in our basket:

• Freeport-McMoRan (FCX US)

• Pan American Silver (PAAS US)

• EQT (EQT US)

• Valterra Platinum (VALT US)

• Impala Platinum Holdings (IMPUY US)

• Rio Tinto (RIO LN)

A New Dawn for Defence

+117%. Defence spending has shifted to a new gear in 2026 on the back of rising geopolitical tensions.

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Anyone who spends their days immersed in this business—tracking the swings in data (or the absence of it), the ever-rotating narratives, the sudden bursts of liquidity and the equally sudden vacuum—knows how arbitrary that ritual really is. The calendar offers no extra edge. January 1st does not magically improve anyone’s visibility into the future. If anything, the market usually prefers to humble anyone who starts the year with too much conviction.

And yet, every December, we all do it anyway. We zoom out, wipe the P&L slate clean in our minds, and try to make sense of the bigger picture. Not because the date matters, but because stepping back matters, and December just happens to give everyone an excuse.

So here we are. End of December. Reflecting again. But this year, rather than returning to the usual formats that often make for an insightful read—the “26 for ‘26,” the panoramic cross-asset outlook, the greatest hits of upcoming themes—we wanted to approach this exercise from a different angle.

“Consensus Trades” are supposed to offer comfort: a large crowd seeing the same thing usually feels like validation. But the market has never cared for validation. A trade embraced too tightly, repeated too confidently, or extrapolated too linearly tends to approach its natural limits. And when everyone starts using the same language to describe the future, that’s usually the moment when the future finds a new language.

So we asked ourselves a simple question: Which consensus views have become overstated, over-owned, or over-trusted? And are we willing to take the other side?

From that came this year’s note: “Out of Consensus.”

A thematic watchlist of mispriced stories, stretched assumptions, and contrarian trades that might only matter when nobody expects them to. Maybe they won’t materialise. Perhaps only one will prove decisive. But if the past year taught us anything, it’s that preparation beats prediction, and that being slightly less wrong at the right moment is often enough.

To start, we need to determine the consensus trades. In all honesty, finding these wasn’t hard. Anyone who has spent time reading the year-ahead notes from the sell-side, coupled with social media musings, will be able to discern what the crowd believes.

So let’s get into it.

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The Crowd’s Consensus

There are a handful of consensus trades markets will carry into the new year with a fair degree of confidence.

• Equities — Long AI, RoW > US, underweight UK, SPX 8,000, double-digit gains

• Commodities — Bullish gold, silver, copper on continued rallies, nat gas as a more recent consensus long, bearish oil on increasing surplus

• FX — USD underperformance, EUR strength, long FX carry

• Debasement Trades — out of fiat and into gold (making an appearance again) and alternative assets like crypto/bitcoin

• Deflation and Rate Cuts — especially from the US, while the EU and UK hold more steady

• “Run It Hot” — Trump “juicing” the economy ahead of midterms, alongside his sidekick, Bessent, and incoming new Fed Chair

None of this is contrived. These views come straight from headlines, strategist notes, and conversations with readers. Some are simply extensions of what worked in 2025, others are newer expressions of the same underlying instincts.

And to be clear, most of these are not easy—or even sensible—to fade. Trends persist for a reason, and many of the catalysts behind them are unlikely to unwind neatly over the next twelve months.

But every so often, a consensus becomes a little too comfortable. That’s where we’re willing to step in. For 2026, we have four views where we’re prepared to take the other side.

First up…

A Consensus Too Comfortable

The first contribution to our Out of Consensus list is the simplest one to articulate and the hardest one for markets to price correctly: Rate cuts.

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UK politics has moved from a brief post-election honeymoon into something closer to managed instability. Prime Minister Starmer’s approval ratings have deteriorated sharply as voters struggle to connect Labour’s technocratic tone with any tangible improvement in daily life.

That weakness has opened the door to the first murmurs of internal dissent. So far, we haven’t seen outright coups, but there’s enough background noise for leadership threats to feel plausible if the party’s polling slide continues.

Chancellor Reeves, once positioned as the steady hand of economic credibility, is now carrying the heaviest burden. The upcoming budget has become a political and fiscal headache. If Reeves pitches too much towards austerity and breaks any of the three main tax pillars included in the manifestos, Labour risks accusations of betrayal. If she’s too loose and she spooks the gilt markets, the Truss/Kwarteng fiscaco might look like a minor inconvenience.

Put simply, everyone from institutional rate desks right through to grandma in the north of England is already wary of the UK’s debt dynamics.

Welcome to Rachel’s Reckoning.

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The Delicate Dilemma

Labour came into power promising a tightly defined set of tax commitments: no rises in income tax rates, national insurance for employees, or VAT, and a cap on corporation tax at 25% for the full Parliament.

Those pledges were designed to signal stability and reassure voters after a decade of erratic fiscal policy. But the reality facing Reeves is far harsher than the manifesto’s assumptions allowed. The UK’s public finances now show a fiscal shortfall variously estimated at £30–50 billion, with some five-year projections stretching closer to £100 billion once downgraded productivity forecasts and higher debt-service costs are included.

Even the most conservative numbers (around £22 billion just to keep public services standing still) imply a structural gap that the government cannot ignore.

This leaves Reeves in an awkward position for the budget next week, in that she needs to raise revenue without breaching the headline tax promises that helped Labour win power.

The current composition of Government receipts highlights the difficulty of boosting revenue when key sources (such as income tax) are off-limits.

As a result, attention has turned to measures that sit around the manifesto rather than through it. Freezing income tax thresholds, which quietly pulls more earners into higher tax bands, is a near-certainty and could raise £7–10 billion.

Reforming reliefs are also very much on the table. These range from pensions to dividends to specific business allowances. Each measure offers more scope for revenue without touching the protected headline rates. Wealth-focused measures, including changes to non-dom rules or second-home taxation, remain politically attractive. And while corporation tax may be capped, pressure is building around employer contributions and the broader business-tax ecosystem.

The fiscal hole is too large for cosmetic tweaks, but breaking manifesto pledges outright risks the government’s political credibility at a delicate moment.

In this note, we run through the budget’s implications for specific asset classes, drawing on insights from good friends (and experts in their respective fields), then present our own actionable ideas across markets.

Politics & Macro

From Ryan Paisey, Founder at PiQ

The political dimension of this budget cannot be separated from its economic consequences.

Starmer’s net satisfaction score stands at -66, placing him ahead of Rishi Sunak and Liz Truss, and even beyond alongside Gordon Brown, Boris Johnson, and Margaret Thatcher as among the weakest Prime Ministers at similar points in their first terms, while polling shows 56% of voters think the Prime Minister should step down, with 57% believing the same of Rachel Reeves.

Yet the uncomfortable truth for markets is that, as damaged as Reeves’ credibility may be, the alternatives are considerably worse. The obvious Treasury replacement would be Torsten Bell, whose enthusiasm for aggressive taxation would likely trigger the gilt market panic everyone is working to avoid.

Splinter groups within the Labour Party are beginning to prepare for a leadership contest, but the names being floated from various factions across the party represent politicians who are woefully inadequate for navigating a fiscal crisis.

The political calendar compounds this dynamic, as Labour faces local elections on 7 May 2026. Significant losses are widely expected. Any serious challenger would be better served waiting until after May’s drubbing to pin the blame on Starmer and Reeves.

What this means in practice is political purgatory. Markets know this government is finished, but the exit sits beyond May 2026.

We have a lame-duck Government trying to maintain fiscal discipline while lacking the authority to enforce it.

This is why a number of analysts are identifying politics rather than fiscal policy itself as the biggest risk to gilt markets. Any leadership challenge could raise concerns about fiscal discipline, particularly if it led to a more left-leaning chancellor replacing Rachel Reeves. The “better the devil you know” principle applies with unusual force. Reeves may lack credibility, but she understands that breaching fiscal rules triggers market crises. Her likely replacements either don’t grasp this reality or don’t care.

The base case isn’t a functioning government delivering sensible policy. It’s a mortally wounded administration stumbling toward May 2026 while trying not to spook markets.

Put another way, in my view, the real tail risk isn’t Reeves failing. It’s what comes after her.

A leadership contest producing a more left-leaning Treasury team could transform today’s manageable fiscal concerns into a confidence crisis.

FX & Rates

From Michael Brown, Senior Research Analyst at Pepperstone

Perhaps the simplest way to look at UK assets in the run-up to the Budget is to look at Gilts as a barometer of fiscal risk, and at the GBP as a pressure release valve for if, or indeed when, that fiscal risk grows too great.

Naturally, looking at Gilts in isolation doesn’t tell us especially much, given that the direction of travel is almost always identical to that of other DM govvies. Instead, a much better gauge of the market’s perception of UK fiscal risk is to look at the spread on the 10-year Gilt yield, over that of the next highest G7 benchmark – a market that’s been nicknamed a ‘moron premium’ by those less charitable than I!

Perhaps surprisingly, this spread was actually slowly but surely fading away for much of the pre-Budget period, from over 60bp in mid-September, to as tight as 25bp in mid-November, in a sign that while market participants had accepted that the upcoming fiscal consolidation would largely take the form of sizeable tax hikes (most notably an increase in income tax which, while far from being the ‘best’ option given the obvious negative impact on personal consumption, was the ‘least bad’ of the options available), with the government both unwilling, and seemingly unable, to enact sizeable spending cuts.

Energy

By

Last week, Doomberg put out an article titled Late Britain. In it, the team laments a compounding failure of energy policy, industrial strategy and political will. When it comes to the key energy sector, there are some good takeaways ahead of the budget.

To begin with, Reeves will have to decide on the Energy Profits Levy (EPL). As Doomberg notes:

“Although the Californication of the British energy regulatory regime has been decades in the making, it reached its zenith in May of 2022, when Chancellor of the Exchequer Rishi Sunak introduced a windfall profits tax on oil and gas companies. Ostensibly, the move was in response to soaring energy prices and was originally set to expire in 2025. Instead, the Energy Profits Levy (EPL) has been raised twice and extended to 2030, leaving energy companies facing a stifling 78% marginal tax rate. It’s no wonder the stampede for the exits has been disorderly.”

A few weeks ago, the Financial Times published a classic trial balloon about her thinking:

“Chancellor Rachel Reeves could scrap a windfall profits levy on the UK oil and gas industry sooner than expected, after Prime Minister Keir Starmer said he wanted to ‘double down’ on North Sea extraction.

Reeves is considering using her Budget to end the energy profits levy in March 2029—reversing a decision in last October’s Budget to extend it by a year to March 2030—according to people briefed on her thinking.

But the chancellor, under fierce fiscal pressure in her Budget, is seeking assurances from oil and gas companies that the move would result in new investment and jobs, and ultimately more tax revenues for the exchequer.”

At the start of November, Offshore Energies UK (OEUK) and Scottish Renewables sent a letter to the Chancellor calling for the EPL to be replaced urgently, the first time both groups have made such a joint effort. It warned that “we face a widening gap in jobs, investment and capability that will weaken our economy.”

This follows on from an OEUK letter signed by more than 110 companies. It noted:

“We are witnessing an accelerated decline in activity that is undermining the value of the sector and the supply chain capability we need for our energy future. Job losses are occurring at an unacceptable scale, and there is an urgent need for supportive policy to unlock investment, drive economic growth, and safeguard the UK’s energy transition.”

Doomberg concludes his piece by noting the following.

“This is the political backdrop against which Reeves will soon decide the fate of the EPL and, with it, what’s left of British heavy industry. If she flubs the Autumn Budget, Britain could be thrown into a bond-market crisis like the one that crippled Truss. If major changes to the EPL are not proposed and ultimately passed in Parliament, the country’s economic death spiral will likely accelerate. If she does try to scrap the tax, she’s likely to face fierce opposition from the Miliband wing of the Labour Party.

One way or another, Reeves will soon confront a historic fork in the road. Let’s hope she takes it.”

AP Trade Ideas

The UK heads into Budget week with political capital draining, market patience thinning, and a structural fiscal problem that can no longer be smoothed over with clever wording or marginal tweaks.

Even though pessimism has partly been priced in, there’s still a long way to go for some assets, depending on what exactly gets announced next week. Time to distil the above thoughts into tangible ideas.

Macro Angles

Rates: Long UK 2s30s

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2025 has been a year where opportunity and ambiguity have arrived in equal measure. Markets haven’t lacked for themes; they’ve just lacked clarity at times. The narrative tape has been running fast. AI build-outs reshaping capex cycles, geopolitical tensions shifting supply chains in real-time, and yes, the occasional policy signal delivered via Truth Social at 2:14 a.m.

For macro and thematic investors, the challenge hasn’t been finding stories, but filtering the signal from the spectacle.

In a landscape where headline noise travels faster than fundamentals, the aim is simple: identify the themes with structural longevity and rotate out of those running on narrative fumes. With that in mind, we’ve taken stock of where our current thematic baskets stand, how each thesis has evolved, and where the next leg of alpha may come from.

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We receive messages from subscribers looking to allocate capital to our portfolio. Alongside the likes of Citrini and Le Shrub, we’ll shortly be listing our baskets on Run Plutus.

There, you can link to your IBKR or brokerage account and allocate funds to any/all of our baskets. When we rebalance a portfolio or basket, it automatically adjusts on the client’s side. Think of it as an institutional-level copy trading service.

Register for the launch here.

Art of the LNG Deal

Original Note: 16th April

The core idea here was that liquefied natural gas (“LNG”) was being positioned as a geopolitical and transactional lever, a deal-making tool for Trump’s trade objectives. We emphasised how supply/demand dynamics, contract structures and geopolitics intersect in the LNG space.

We have reduced some exposure to this theme towards the end of the summer, but like to retain it for a few reasons. Geopolitics remain very much alive: energy security, Europe’s push to diversify away from dominant suppliers, and Asian demand growth all give potential upside for LNG exporters. In the short term, if demand spikes (cold winter, supply constraints) while new capacity is delayed, LNG can outperform general energy commodity baskets.

However, our choice to take some risk off the table mainly stems from oversupply concerns. New LNG capacity is still coming online globally, which could put pressure on the margins of various stocks within the basket.

We’ve also seen AI push for clean energy, which doesn’t bode well for sentiment around LNG.

Bottom line: Hold

Back to Basics

Original Note: 28th August

From Gap’s viral denim campaign and American Eagle’s Sydney Sweeney ad, the notion of companies outperforming from broad appeal, shared recognition, and cultural resonance was the key driver in this theme.

The thematic play remains very much alive and well, but is a basket that needs to be actively traded, given the fleeting nature of some virality campaigns and subsequent share price movements.

Some of our highest conviction names in the basket, including AEO, have performed very well in just a couple of months, and we see traction in holding these for the foreseeable future.

Yet evidence of being careful came from us buying CPRI (the owner of Jimmy Choo) in early September, with a volume spike on the stock following Sydney Sweeney’s appearance in a new campaign. We ultimately sold this position earlier this month after a lack of meaningful follow-through.

Bottom line: remain active and nimble

Lean Mass, Fat Margins

Original Note: 30th July

The explosion of GLP-1 therapies (weight-loss drugs) is reshaping not just the obesity market but the broader pharma landscape. The next leg of the trade, which we flagged in the summer, was finding companies that can preserve or build lean mass while delivering fat loss. Think of combining GLP-1s (or GLP-1/GIP combo drugs) with myostatin inhibitors or other muscle-anabolic adjuncts. If you don’t know all the details, don’t worry.

This theme still has a large upside. Clinical efficacy is real, as GLP-1s deliver sustained double-digit % weight loss.

The article’s poster child, Regeneron, is up 15% since publication. It reported strong Q3 2025 results on Tuesday, with revenue of $3.75 billion (beating estimates) and non-GAAP earnings per share (EPS) of $11.83 (significantly beating estimates). It saw positive performance in key drugs like Dupixent, whilst also achieving several regulatory and clinical milestones, including FDA approval for Libtayo and positive Phase 3 results for drugs in trials.

Bottom line: Overweight (pardon the pun)

Lighting the AI Fuse

Original Note: 11th September

Are AI stocks in a bubble? Yes and no. The broad notion of buying AI is a problem due to the varying ways in which it is being used and adopted, both at a commercial and a personal level.

That’s why we laid out three phases in the AI boom:

• Phase 1: Chips & raw hardware—basically “buy Nvidia and chill”. (The market caught this early.)

• Phase 2: Infrastructure—hyperscaler cap-ex, racks, data centres, power, cooling. The build-out.

• Phase 3: Enabled revenues—the moment when the infrastructure delivers monetisable applications, services and business models.

We feel this differentiation has become even more relevant for investors evaluating their equity exposure heading into year-end and beyond. Does the risk/reward stack up in adding new longs to NVDA as it passes $5trn in market cap? Probably not. Want selective beta exposure in case of a potential short-term tree shake? That’s where we feel people can be more confident in owning Phase 2/3 names and not fretting over a drawdown.

The bottom line: Be selective, but don’t bet against AI.

Power in Play

Original Note: 3rd July

The core argument of Power in Play is that the global power sector is shifting from a simple “generate electricity and sell it” model to a more complex landscape where control of the grid, pricing architecture, and regulatory positioning determine where returns accrue.

AI compute loads are driving power requirements sharply higher, as evidenced by last week’s news of Alphabet and NextEra Energy partnering to revive a nuclear site in Iowa.

We’re in a multi-year capex cycle for transmission, storage, and grid flexibility. Yet baskets need careful review. Our three core longs of NRG, VST and CEG are all up from July, but our short legs (the companies most exposed to regulatory lag, wildfire liability, rate cap risk, and renewables margin compression) have actually risen in value too, as the sector in general has been bid. As a result, we’ve shed the short positions and now run this as a long-only basket.

The bottom line: Long-only for the build-out.

The Emerging Markets Mosaic

Original Note: 2nd October

The mosaic concept from October was built on the idea that emerging markets (EM) aren’t a monolithic block anymore, but a mosaic of very different country stories.

Argentina has proven in recent weeks that these countries can exert a strong influence on global markets, along with selective intervention from developed economies (in this case, the US).

We believe EM has been neglected, with countries like Brazil posting substantial equity gains YTD yet receiving little coverage. The broader appeal of this theme lies in its truly cross-asset nature, which allows it to be covered.

Given we only posted this theme a month back, there are no fundamental changes to comment on, bar the incredible moves in Argentinian assets post-election, which show the size and nature of flows that can get involved at very short notice.

The bottom line: Go company-specific for in-depth views, or passively track MSCI EM:

That wraps up the rundown of where the portfolio sits to date. As always, a like and/or comment if you’d like us to provide these thematic ledgers more regularly.

AP

Emerging markets live in the gap between fragility and opportunity. Right now, that gap is widening. A softer Fed and a weaker dollar are breathing life into battered valuations, even as political risk keeps everyone honest. After a lost decade of underperformance, EM is finally benefiting from liquidity rotation out of the US and Europe. Investors are still structurally underweight, and that under-ownership leaves plenty of room for flows to do the heavy lifting.

It is not a single story but a kaleidoscope of moving parts. Equities are the headline, but the real drivers are scattered across FX carry, local rates, and sovereign credit. The common thread is dispersion. Some markets are thriving on global liquidity, others remain hostage to politics, and a few offer both at once.

So Far, So Good

Emerging markets have quietly stitched together one of their best runs in a decade. After eight straight monthly gains through August, the MSCI EM index added another +6% in September, taking YTD gains to +25%. The backdrop has been classic “risk on”: the Fed delivering its first cut since December 2024, AI optimism spilling over into equity multiples, and foreign investors finally re-engaging with an under-owned asset class.

The leadership has been clear. Tech-heavy North Asia and China have surged on semiconductors, hardware and internet stocks. South Africa has outperformed on miners, especially gold. The strength has been led by improving earnings sentiment, a critical confirmation that the rally has more than just liquidity behind it.

Looking ahead, the drivers remain in place. Fed easing is set to continue into year-end, the dollar is on the back foot, and flows into EM remain light relative to history. While inflows in Europe-focused funds have moderated after a strong 1H, EM funds have seen accelerating fund inflows in recent months as investors continue to diversify regionally.

Our view: In short, the EM rally can extend into year-end, but it won’t be a blanket trade. The opportunities lie in the dispersion. China is riding AI, Brazil offers a clean carry and commodity leverage, South Africa is finally finding momentum, and India is still a growth story but priced for perfection. Argentina, meanwhile, remains hostage to politics and is more a tactical trade than a structural allocation, and Saudi Arabia is a quiet outlier. Beyond equities, currency and rates markets add another layer of opportunity—themes we explore within this note.

In this article, we’ll review:

• Key EM markets we’re watching

• The macro drivers shaping them, from currencies to politics

• Where the trades lie, across equities, FX, rates, and credit

La Albiceleste, “The White and Sky Blue”

To start with, let’s consider Argentina and President Milei.

Argentina’s rebound has slipped into a holding pattern. The promise of a $20bn US lifeline and a temporary export tax windfall stopped the bleeding (news headline below), but neither has resolved the imbalances. The peso is already back under pressure, forcing interventions just days after its sharp rally. Bonds, briefly stronger, have resumed sliding. Words can reset sentiment, but sustainability demands details.

Milei has secured an impressive array of facilities: a $20bn IMF loan (frontloaded with $14bn), a $20bn swap line from the US Treasury’s Exchange Stabilization Fund, and accelerated disbursements from multilaterals. On paper, this looks like overwhelming support. In practice, it is a patchwork of short-term lifelines with little policy conditionality. Argentina’s reserves are thinner than reported, much of them tied up in yuan or bank requirements, leaving perhaps $7bn of usable cash. The danger is that fresh dollars get spent propping up an overvalued peso rather than rebuilding a credible external position.

The US package is particularly striking. Unlike past Treasury rescues (Mexico in the 1990s, for example), Washington has offered support without hard conditions. That gives Milei room to maneuver, but it also heightens the risk that funds are quickly depleted if policy does not shift. Without real exchange-rate flexibility or stronger reserve accumulation targets, Argentina risks burning through dollars and ending up back in the foxhole.

Politics sharpens that uncertainty. October 26 midterms are the fulcrum. Milei governs with thin margins, and a Peronist sweep would leave his reform agenda boxed in. His recent outreach to Mauricio Macri hints at a search for broader alliances, while cabinet changes after the vote are already being floated. These moves may stabilise his standing, but they also underline the fragility of his political base.

That makes this trade one against the clock. Carry remains attractive, and ADRs have offered a liquid proxy for those willing to ride the swings (a list of ADRs is shown below). But the market has already tested the limits of sentiment-driven rallies. Without political momentum and clarity on external financing, the peso will stay vulnerable and bonds capped.

Market Takeaway: From our perspective, Argentina is drifting back toward volatility. Milei has bought time, but not stability. The October midterms are the hinge, and until then, every peso move and policy signal is a referendum on whether the US backstop is real or just rhetorical.

Trade Idea:

YPF has been a high-beta Argentina vehicle, leading the post-election rally in November 2023 with a 40% gain versus ARGT’s 13%. Its recent pullback from late March to early April highlights its dual role: as a vertically integrated energy company, YPF is also a play on oil. With OPEC+ considering accelerated output hikes and US stockpiles building, crude faces headwinds on thin technical support. A sub-$60 CL print is not implausible near term.

Against this backdrop, we like YPF as a short if Milei falters in this month’s midterms.

Those following Argentina more closely will know the story doesn’t stop at sovereign bonds or ADRs. The peso’s violent swings this month highlight just how unstable the FX setup remains.

For our institutional clients, we’ve written separately on ways to position around that volatility, including relative value expressions against Brazil and tactical plays in NDFs. The full note is available below.

APFX Research

When $20bn Isn't Enough

The Argentine peso (ARS) closed Q3 with a thud, sliding 6% against the dollar on Tuesday. That follows a sharp rally earlier in the month after US Treasury Secretary Bessent dangled a $20bn lifeline…

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a year ago · 6 likes · AP Research

The trade ideas in that piece are high-octane, but the core takeaway is simple: without a credible FX policy, Argentina remains reliant on other people’s money, and that leaves ARS skewed toward devaluation risk. For most investors, equities and bonds are already a high-risk punt. For those running dedicated EM macro books, the peso is the cleaner volatility trade.

If Argentina is the perennial cautionary tale, Brazil is the counterpoint next door—same neighbourhood, same political tensions, but very different outcomes.

Pindorama, “Land of the Palm Trees”

Brazil remains one of the cleanest stories in EM. It offers high carry, deep local investor demand, and commodity leverage in a world where both growth and inflation are diverging. The BCB’s cautious turn toward easing keeps real rates among the highest globally, anchoring the real as one of the best-performing EM currencies this year. For FX investors, BRL is not just a carry play, but a defensive one when global sentiment wobbles. The combination of yield and resilience has kept it at the top of EM currency performance tables in 2025.

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