Editor's Notes:

• Mentioned a few days ago about BOJ rate impact mostly priced in and hence the JP market recovery. Continue to bet that AI "broadening out" trend will lift up Japan-listed supply chain companies. Now seeing a few names coming up - Kioxia, Tokyo Electron, Disco, Organo, Advantest, etc. Unless Japan gov shoots itself in the foot next year with unnecessary rate hikes, Japan is set to benefit from continued AI / industrial demand. Remains bullish on Japan stocks return in 2026.

• Given AI narrative being "stuck", we will likely see core names (TSMC, Nvidia, etc.) fluctuating for the next few weeks (or months - but I'm still bullish in the long run). The likely dominant US theme in 1Q26 is around Fed chair and rate cut trajectory, which may benefit housing, auto, etc., and turn the cycle for them.

• Oh... and just checked... Pop Mart is really at 13x fwd P/E, 7% fwd FCF yield. Key question is whether 13x is at a peak eps. If not, this may be a good entry point to bet on global expansion / continued IP success.

Key themes in the past 24 hours include AI's impact on semiconductors and software, shifting Fed rate expectations, and the critical demand for power in data centers.

Overall Market Themes, Sentiment & Debates

US Market Dynamics: AI, Macro Policy, and Energy Demands

The core debate in the US market centers on AI's exponential growth versus potential bubble concerns. Proponents point to strong earnings from Micron ($MU) and maximum production capacity at TSM ($TSM) as evidence of robust, sustained demand for AI components.

Conversely, the counter-narrative highlights OpenAI's low revenue relative to massive spending, potential accounting issues (unused GPUs), and challenges in monetizing compute resources effectively. This suggests a "stuck in a narrative" phenomenon among tech giants, revealing a bifurcated market where AI-driven leaders surge, but the sustainability of their valuations is rigorously questioned.

A notable shift in Federal Reserve expectations is underway regarding macro policy. Comments from FOMC voting member Hammack indicate no immediate rate changes. However, market discussions are accelerating the first rate cut forecast from June to potentially March 2026. Speculation about a new Fed Chair under a different administration, potentially favoring more aggressive cuts, introduces significant uncertainty and potential volatility for interest rate-sensitive sectors.

AI's insatiable power demand is emerging as a critical theme. Discussions around major tech companies needing to build their own power plants for data centers point to a potential new energy boom in the U.S. This could accelerate permitting for traditional and nuclear projects and create substantial demands on the existing grid, with broad implications for utilities and energy infrastructure.

The narrative that "AI will 'eat' software" faces increasing challenge. While "relegation risk" exists (e.g., Adobe ($ADBE)'s "content generation risk"), many believe core software competencies, strong distribution, brand equity, and customer lock-in will persist. This sentiment may present an opportunity in currently undervalued software names, including NOW, CRM, INTU, VEEV, CDNS, SNPS, which are potentially poised for rerating.

Overall US market sentiment is a complex mix of speculative fervor, particularly in high-growth tech and meme-adjacent stocks, alongside an analytical focus on AI's sustainability, semiconductor supply chains, and identifying undervalued software. Precious metals are gaining traction as both a macro hedge and a standalone bullish play, demonstrating diverse capital flows that challenge traditional market correlations.

Japan Market Outlook: Nikkei Gains and BOJ Expectations

The Nikkei 225 closed strongly, up 1.84%, with broad gains across real estate, banking, and textiles. This performance is interpreted as a recovery signal after earlier concerns about potential Bank of Japan (BOJ) rate hikes.

The yen's recent slip, largely attributed to fading BOJ rate hike expectations, provides a tailwind for export-oriented stocks. This confluence creates a cautiously bullish sentiment. Investors remain vigilant for any pullbacks, especially in chipmakers like Advantest and Tokyo Electron, which are heavily influenced by AI-related spillover effects.

Seven & I Holdings Co., Ltd.'s plan for a U.S. convenience store IPO is a notable corporate action, aiming to fund new investments and boost shareholder returns. Separately, an unnamed Japanese company is on the radar for potential activist involvement from AVI, with a product launch delay linked to tax reform clarification.

Hong Kong Market Performance: HSI Gains Amid Sector Divergence

The Hang Seng Index (HSI) saw a modest gain of 0.43%. However, this masks underlying sector divergence. While some selective upward momentum was observed, sectors such as banking (Merchants Bank), energy (PetroChina), and telecom (China Telecom) underperformed.

This underperformance reflects broader concerns about China's economic growth trajectory and a cautious outlook on its tech sector (SMIC). Consumer staples like Nongfu Spring also showed mixed results. Despite these headwinds, the market is experiencing a "slow bull" outlook, with attractive valuations highlighted for certain stocks like Hua Hong Semiconductor.

Macro and Cross-Market Trends: Gold, Tech, and Offshore Wind

Gold and silver continue their upward trajectory. This is driven by anticipated Fed rate cuts, increased government spending, heightened geopolitical risks globally, and consistent buying from central banks and retail investors. The simultaneous rally in both gold and tech stocks suggests complex underlying market dynamics, where investors seek both growth and perceived safety concurrently.

A significant development in the offshore wind sector is the U.S. halt of five projects due to national security concerns, specifically radar/defense interference. This introduces considerable uncertainty into an already capital-intensive industry grappling with high interest rates and rising costs, making it a "messier" investment landscape.

Notable Stock Movements: Earnings and Key Developments

Interesting Market Comments, Key Facts, and Investment Ideas

AI and Tech Landscape: Strategic Shifts and Key Players

• Nvidia ($NVDA): Continues to significantly influence Asian equity market rallies. Plans to ship H200 AI chips to China (pending approval) highlight its market positioning, despite increasing competitive pressure. SoftBank's aggressive sale of its entire $5.8 billion Nvidia stake to fund a $22.5 billion commitment to OpenAI underscores the immense capital demands and strategic reallocations in next-gen AI development.

• Micron ($MU): Reported record Q1 FY2026 earnings and optimistic guidance, reaffirming its "strong Buy" status driven by AI demand and healthy inventory levels.

• TSM ($TSM): Remains the unequivocal leader in advanced node foundry services (5nm, 3nm). Operates at capacity limits due to robust demand from High-Performance Computing (HPC) and data centers, reinforcing its critical role in the AI supply chain.

• Celestica ($CLS): Presents as a compelling "picks-and-shovels" AI play, providing essential infrastructure (racks, power, cooling, networking) irrespective of which specific AI solution ultimately prevails.

• Amazon ($AMZN): AI growth is largely "hidden" within its massive retail segment. AWS (17% revenue, 60% operating income) is re-accelerating, fueled by cloud-native, compute-intensive AI. Strategic wins with major clients like Anthropic further validate its position.

• Adobe ($ADBE): Faces "relegation risk" and "content generation risk" directly from advancements in AI models, a key concern for software investors.

• Meta Platforms ($META): Expanding AI operations with significant power purchase agreements. Reportedly in talks to spend billions on Google's TPUs, indicating a potential strategic diversification from Nvidia's GPUs to seek alternative, cost-effective AI compute solutions. This aligns with Samsung's HBM4 SiP reportedly outperforming Nvidia in performance tests, signaling intensified competition in AI memory.

• Cummins Inc.: Strategically expanding its focus on the data center business, a direct response to increasing AI adoption and data localization trends.

Emerging Technologies and Space Sector Innovations

• Rocket Lab ($RKLB): Maintains strong conviction among retail investors, with long-term confidence stemming from tranche 3 contracts and broader space industry growth. However, its current $40 billion valuation warrants scrutiny compared to SpaceX's total revenue, especially considering RKLB's likely market share.

• SpaceX IPO: Speculation is high for a SpaceX IPO in 2026. A key question is the future of Starlink; spinning it off could make the IPO more attractive, but risks it being priced like a traditional telecom.

• AST SpaceMobile ($ASTS): Following a Vodafone investment, it is positioned as an emerging innovator in direct-to-smartphone satellite broadband, aiming for global connectivity.

• Autonomous Vehicles (Tesla ($TSLA) & Lyft ($LYFT)): Both companies are making tangible progress. Tesla is testing Robotaxis in Austin, and Lyft plans self-driving vehicle tests in London. However, Waymo's recent service suspension in San Francisco due to traffic jams during a blackout serves as a stark reminder of the practical limitations and real-world challenges faced by autonomous technology.

Global Market Insights and Thematic Investment Opportunities

• Kaspi ($KSPI): Dubbed Kazakhstan's "super app," combining features akin to WeChat, Amazon, and Klarna. Despite a recent dip from short reports and macro concerns, its strong financials (51.3% operating margin, 66.9% ROE, 9.5% FCF yield, P/E of 6.9) and expansion into Turkey suggest significant undervaluation and growth potential.

• TRX Gold ($TRX): Stands out as a de-risked gold producer, currently trading at an early-developer valuation (0.39x P/NAV vs. 0.68x sector average). With internally funded production growth expected for FY2026 and zero net debt, it offers over 80% upside in a base-case valuation.

• Popmart ($PMRTY): A Chinese consumer discretionary stock, appears undervalued at 16x P/E. Projected strong net profit growth, doubling of U.S. stores, and unmet IP demand in China position it for a potential rerating to 20x-30x P/E by 2026.

• Weststar Industrial ($WSI): An Australian industrial contractor, seems undervalued, priced as if facing "permanent desertification" rather than a cyclical trough. Bullish cases anticipate significant upside as margins revert to normal levels following recent contract wins.

• Uber ($UBER): Despite recent stock dips influenced by Tesla's AV news, it is strategically positioned as the essential common AV platform. Expectations are for Uber to fill the market need for a single, ubiquitous ride-hailing app.

• Pattern Group Inc. ($PTRN): An AI-powered e-commerce acceleration platform, shows strong revenue growth (40-46% YoY) and high customer retention. Bullish analysts project over 70% upside, anticipating profitability soon and and a rerating to SaaS multiples from its current low valuation (0.9x sales, 12x EBITDA).

• Criteo ($CRTO): A European AdTech company, transitioning from web cookies to a retail media platform utilizing Microsoft data. It currently trades at a steep discount to historical and peer valuations, suggesting undervaluation.

• Reddit (the company): Following its IPO, shows strong revenue from advertising and data licensing, robust international user growth, high gross margins, and solid product velocity. It offers potential for an undervalued entry if concerns about monetization ceilings and demographic shifts prove overstated.

• Novo Nordisk ($NVO): Described as an "absolute no-brainer" value stock, with a compelling core business in obesity/diabetes and increasing demand. Trading at a P/E of 13, significantly lower than Eli Lilly's 52 despite comparable revenue growth, and with a new weight-loss pill expected, it presents a strong opportunity.

• Corcept Therapeutics ($CORT): Possesses a successful drug for Cushing's disease and a potential blockbuster for ovarian cancer expected this year. A fund manager's 15% portfolio allocation anticipates a 150% rise.

• Utilities Sector (SO, DUK, AEP, XEL, ETR): Appears undervalued compared to the broader market. These established companies with solid fundamentals and growing dividends offer portfolio diversification and stability.

• Market Psychology: A crucial observation is that "a strong breakout at the START of a trend looks identical to a strong breakout at the END." The sole differentiator is collapsing volume after the initial spike, underscoring the importance of scrutinizing volume alongside price action.

Happy Alpha Hunt!

- Distilla

Disclaimer: This content is generated using AI, synthesizing public data (filings, reports, news) and social media (Reddit, X). It may contain errors, inaccuracies, or hallucinations. Nothing herein constitutes financial advice. This newsletter is for informational purposes only; please consult a qualified professional and conduct your own due diligence before making any investment decisions.