The Physical Layer of the Cycle

What was said:

Last week, the focus shifted from defence spending to how it is financed. This week, the conversation has moved further down the chain, from capital to the real assets that underpin both AI and defence.

The key development is that AI is no longer just a technology story, it is a repricing force across the entire corporate landscape. The speed of change is accelerating beyond what most organisations can absorb, with model releases coming at a pace that forces constant reassessment of strategy, cost structures and workforce.

At the same time, markets are beginning to separate companies that are adapting from those that are not. Some management teams are responding with buybacks and short-term signals of confidence. Others are holding capital back and investing in restructuring, recognising that the shift is structural rather than cyclical.

Overlay that with the current geopolitical backdrop, and the picture becomes clearer. AI-driven demand for compute is pushing energy and infrastructure requirements higher just as supply is becoming less reliable. Disruption in oil, helium and refining capacity is exposing how tightly connected these systems are.

The result is a shift in focus. As the software layer becomes harder to defend and easier to replicate, attention is moving toward the physical and operational foundations that support it.

Why we give a ****:

This is the point where multiple forces converge.

AI is compressing margins and differentiation in software, forcing companies to rethink how they allocate capital. At the same time, the physical inputs required to run that technology, energy, power systems and industrial capacity, are becoming more constrained and more valuable.

For investors, the distinction is becoming clearer. The winners are likely to be those that reinvest and adapt early, not those that signal confidence through buybacks. The same logic applies at the macro level, where governments are prioritising resilience, infrastructure and security over efficiency.

The implication is not just about AI or geopolitics in isolation. It is about how both are pushing value toward what is harder to replicate and slower to rebuild. In that environment, patience remains important, but so does positioning.

Relevant stocks: EuroNext: SU, NYSE: MT, WSE: KGH, NYSE: NEM, NASDAQ: ASPI, LSE: CNE, LSE: AET, LSE: HBR, LSE: BP, SSE: 600938, LSE: KIST, LSE: BAB

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Stock of the Week

Installed Base Driving Resilient Earnings

Vestas is a global leader in wind turbine manufacturing and services, but the stock remains under pressure due to political uncertainty in the US. Trading at roughly 12–20x earnings versus peers closer to 60x, the valuation gap reflects sentiment rather than fundamentals.

The core of the story is its installed base. Vestas operates one of the largest fleets of turbines globally, generating predictable, recurring revenue through long-term service contracts. Regardless of policy shifts, turbines already in operation require maintenance, creating a visible earnings floor.

The upside comes from multiple angles. A shift in US political momentum could ease regulatory pressure and support a sector re-rating. Potential consolidation among major wind players adds optionality. At the same time, its positioning provides a hedge, with the stock tending to perform when current policy headwinds weaken.

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