Giles Goodwill & Andrew Macken

 

In this interview, Montaka’s account manager, Giles Goodwill, sat down with Andy Macken to discuss his outlook for 2024.

GG: Hi Andy. Let’s start with a fun one. If you were to guess one thing that might surprise investors in 2024, what would it be?

AM: Hi Giles. Well, it’s certainly possible that Chinese equities could surprise investors in 2024. The primary reason for this is that expectations baked into Chinese stock prices are just so damn low! Most foreign investors have stayed away from Chinese equities for several years now over concerns of political risks and punitive policies being put in place against the private sector.

But over the last few weeks and months, we have been seeing positive steps being taken, and policies being put in place, to support a slightly more welcoming environment for foreign investors and for the private sector domestically in China.

We’re also seeing signs of more supportive economic stimulus domestically in China. So the combination of all of these things could result in Chinese equities outperforming in 2024.

GG: And this would be good for Tencent no doubt?

AM: That’s right. Montaka’s largest investment in China is Tencent. And the situation I just described would surely be favorable for Tencent.

By way of reminder, Tencent owns WeChat, the largest messaging platform in China with 1.3 billion users, and it’s the primary platform on which the Chinese communicate, socialize, transact, and entertain.

There are many levers for earnings growth that Tencent has been building over the last few years, particularly in digital advertising and AI. But these levers have not yet really been pulled. And so it’s currently a situation in which Tencent owns one of the most prized platforms on planet earth, yet their current earnings are depressed as a result of significant investments they’ve been making.

Those investments are now coming to an end, and earnings will likely increase significantly. The expectations that are implied by Tencent’s very depressed stock price are very, very low relative to the future earnings power that we see. This means that, as earnings exceed expectations over time, we should see the stock price re-rate upwards.

Also, it’s worth reminding investors that Tencent has been buying back a lot of stock and taking actions that are very friendly to shareholders, which is always a positive thing as well.

GG: A select group of tech companies that are key players in Artificial Intelligence (AI) performed particularly well in 2023. Do you think Montaka’s AI thesis is now largely priced in by the market?

AM: The short answer is no. Of course in 2023, the world became much more aware of artificial intelligence in a way that was not the case prior to 2023. I think many market participants are beginning to see the power that AI can have, and will have, in many aspects of many businesses. Enterprise leaders certainly see that.

It’s important to understand that AI, at least as we see it, is a really important large, long-term revolution in technology. And it’s only just started. And when we go and survey enterprises who are going to be major consumers, if you like, of AI infused applications, they are currently in the very early days of investigation and have barely even started implementation.

So most enterprises are at the stage of evaluating their own internal data sets to see where AI could be really powerful. Thinking about opportunities for enterprises to use AI to better serve their own customers and strengthen their own competitive advantages. In addition, enterprises are looking at ways that AI can be used internally to boost productivity in areas right across their cost bases.

So there’s just enormous runway ahead that’s going to go on for many, many years. And we don’t think that’s even close to being priced in appropriately to the world’s leading suppliers of AI infused mission critical enterprise software applications – including the likes of Microsoft, Amazon, ServiceNow, and Salesforce, for example.

GG: Last year, global equities rallied pretty hard in November and December. Does that mean that a lot of the 2024 returns have already been captured in 2023?

AM: Well, I think it’s really difficult to make a comment on what it means for the aggregate market. The aggregate market obviously includes hundreds or thousands of stocks, depending on which index you look at. And we believe that where stock prices end up will be largely driven by their earnings power and their returns on investment over time. And that’s different for each individual business.

One of the really interesting observations of 2023 was that there was significant dispersion in the market, meaning that some businesses did really, really well.  And some businesses were down a lot throughout the year. So it’s been increasingly difficult to generalize about equities in the aggregate.

Now in the case of Montaka, as you know, we run a highly concentrated portfolio. The top 10 stocks in Montaka’s portfolio account for three quarters of our exposure. So that’s really concentrated. So for us, we care a lot less about what the market does in the aggregate. And we care intensely about what the prospects look like for the select few companies that Montaka owns.

And for these businesses, despite a pretty strong showing for most of them across the board in 2023, our analysis suggests that they are still significantly undervalued, given the substantial increase we see in their earnings power over the coming years.

GG: Many people thought there might be a global recession right about now, but it hasn’t happened. Do you think it’s still to come, or have we simply avoided it?

AM: I think it’s fair to say that the global economy, and particularly that of the United States, has surprised many people in that so many of the signals and ‘rules of thumb’ that many forecasters rely on just haven’t worked. And that’s led to a whole bunch of forecasts being made that have turned out to be wrong.

The underlying dynamics that have led to the economy that we’re in now stemmed from a global pandemic, related lock-downs, and subsequent policy responses all over the world – the timings of which were very unsynchronized. We then had Russia’s invasion of Ukraine – which impacted global food and energy prices in very unique ways.

And so, while something as complex as the US economy is extremely difficult to understand and forecast at the best of times, the dynamics that led to where we are today make it even more difficult to summarize at an aggregate level.

And what I mean by that is – a little bit like the stock market of 2023 – the constituent components of many macroeconomic parameters have included a lot of dispersion of late.

So for example, within the inflation numbers: headline inflation will say one thing, while core inflation will say something different. And then even within core, what’s happening with goods inflation is different from services inflation. And then the shelter component is all skewed because it’s a longer-term trailing average that is different from what’s actually happening on the ground. And so all of these have told varying stories.

So we don’t know what the future holds. We observe that inflation is decelerating which should bring interest rates down. The US consumer is weakening gradually, but offsetting this are lots of capital investments that are taking place.

To me, the big wildcard is the Fed. If the Fed keeps rates too high for too long, then this could well cause a recession in the US. But let’s see. Fortunately, a lot of the underlying growth drivers of Montaka’s investee companies are more structural in nature, and therefore relatively less tethered to short-term GDP growth rates.

GG: Thanks Andy.

 

Note: Montaka is invested in Tencent, Microsoft, ServiceNow, Amazon & Salesforce.

 

Andrew Macken is the Chief Investment Officer while Giles Goodwill is the Account Manager at Montaka Global Investments.

To learn more about Montaka, please call +612 7202 0100 or contact us on contact