Fundamental Signals

Editor’s Note

• Japan’s “Takaichi Bump” is real, but no longer forgiving. Optimism around policy continuity and corporate restructuring continues to support the market, yet valuation discipline is creeping back in. Elevated PBR levels and sharper currency moves are a reminder that this phase of the Japan trade is about stock selection, not beta.

• Hong Kong and China are showing early signs of a regime shift. The semiconductor rebound, catalyzed by a major IPO, feels less speculative and more like positioning ahead of potential capital flow changes. While it’s still early, sentiment has clearly improved in pockets that were previously written off.

• The US market remains deeply bifurcated on AI. We are seeing an “AI SaaSpocalypse” for per-seat software models at the same time as a broadening “Enabler” trade that now extends well beyond chips. Infrastructure, connectivity, and even industrials are becoming core parts of the AI value chain.

• The common thread across regions is differentiation. This is no longer a market that rewards simple narratives. It increasingly favors investors who understand where a company sits in the value chain, how its cash flows are generated, and why certain trades continue to work while others quietly fade.

Market Themes & Sentiment: AI Divergence and the Takaichi Tailwind

Japan: A "Celebratory" Rally Facing Structural Resistance

The Japanese market is currently a global outlier, propelled by a "Takaichi Bump" — a rally following the LDP election. The Nikkei 225’s 2.2% surge to record highs reflects optimism for pro-business continuity. However, savvy investors are closely monitoring the Topix PBR, which now sits at +4 standard deviations from its 10-year average, signaling multiple overextension.

While technicals suggest a run toward 60,000, the macro backdrop is fraught. A sudden 1% appreciation in the JPY suggests the carry trade unwind remains a lurking liquidity landmine. The "next leg" of the Japan trade isn't solely market beta; it primarily hinges on the acceleration of corporate restructuring, as seen with Hitachi’s successful pivot and divestitures at Sony and Panasonic. Currently, pure-play firms are trading at a 3x P/B premium over diversified laggards (1.2x), indicating a market preference for focused enterprises.

Hong Kong & China: The Semiconductor Rebound

Sentiment in Hong Kong has shifted to "risk-on," largely driven by a massive spillover from the Montage Technology IPO debut, which surged +63.7%. This event has acted as a catalyst for Greater China semiconductor stocks, with investors rotating into undervalued tech and pharma sectors before Western fund flows normalize. A key development to watch is the "de-risking" of US Treasuries by Chinese regulators, which could tighten US yields and potentially pressure growth multiples globally if divestment accelerates.

US: The SaaSpocalypse vs. The Infrastructure Enablers

The US market is grappling with a fundamental bifurcation in AI sentiment. On one side, the "SaaSpocalypse" narrative is weighing on firms with "per-seat" models, such as Intuit and Salesforce, as AI advancements threaten to commoditize data analysis. On the other side, the "Enabler" trade is broadening into infrastructure beyond just chips.

For example, Corning ($GLW) is now viewed as a fiber-optic play for AI data centers, underscored by Meta's $6 billion contract. Companies like Snowflake ($SNOW) are being re-rated as essential AI agent data conduits. Retail health is also gaining significant focus as $10 billion in federal funding (RHTP) begins to impact telehealth and remote monitoring sectors.

Notable Stock Moves, Earnings & Developments

Ideas & Qualitative Takeaways

• PayPal ($PYPL): Currently trading at an attractive 15% FCF yield ($5.6B in 2025). The recent hire of Greg Archibald (ex-Criteo) for ads signals a pivot to high-margin revenue streams, a strategic move that the market appears to be pricing at zero.

• FactSet ($FDS): Down 60% from its highs, FactSet is trading at 12x P/E compared to its historical 30x. While AI is often viewed as a disruptor, FDS’s CUSIP monopoly and impressive 95% client retention suggest its fundamental moat is resilient to AI disruption, not vulnerable.

Infrastructure Winners of the RHTP

The $10 billion Rural Health federal infusion (RHTP) presents a direct tailwind for companies like Medtronic ($MDT) and Dexcom ($DXCM). As the focus shifts towards expanding telehealth and remote monitoring, these established players are strategically positioned to capture government-funded growth in underserved markets.

The Carry Trade Liquidity Event

Investors should closely watch the 1% intraday moves in the $JPY/USD pair. This isn't just currency volatility; it serves as a global margin call signal. If the carry trade continues to unwind, the decoupling of crypto from equities (as recently observed during the Binance glitch) will accelerate, favoring volatility-linked instruments over traditional long-only equity beta.

Deep Value in "Broken" SaaS

Japan's Material Science Monopolies

While the market widely chases GPU beta, the critical supply chain bottleneck is increasingly moving towards material science. Nittobo, for example, dominates the ultrathin glass market essential for AI chip packaging. With no significant capacity expansion planned for months, this creates a structural supply squeeze that inherently favors price-setters like Nittobo over chip-makers.

The "100-Year Bond" Deathcurse

Alphabet ($GOOGL) is seeking to raise approximately $15 billion, including a 100-year bond priced in sterling. Historically, ultra-long corporate bond issuance has often preceded a 5-10 year stagnation in share price, a phenomenon dubbed the "deathcurse." This move raises critical questions about AI Capex intensity and a potential strategic shift away from dollar-denominated debt.

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.