Update from the PMs – April 2025

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– Andrew Macken & Chris Demasi

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It’s been an extraordinary few weeks. While US equities fell sharply, European equities were booming (at least, prior to Trump’s sweeping tariff announcements). Perversely, the strength in Europe has its roots in Trump’s thinly veiled threats to revoke security guarantees that have been in place since 1945. Such intense uncertainty on the European continent catalyzed a rare moment of cooperation in Germany to pass historic legislation to carve-out of defense and security expenditures from the country’s ‘debt break’ in addition to a new stand-alone €500 billion infrastructure and climate fund to make investments over the next 12 years.

This is a very large fiscal package relative to the €4.5 trillion p.a. German economy. And this is the primary reason why European equities performed so strongly during the quarter.

In Five reasons why Europe’s stock rally may not live up to expectations, Andy reviews these recent historic developments in Europe. As the title of Andy’s essay suggests, while massive fiscal spending out of Germany is surely positive for stocks in the short-to-medium term, we have concerns about the longer-term fundamentals of Europe. These include structural competitive disadvantages that hinder returns on capital investment; complex regulatory burdens that erode productivity; demographic headwinds; national security risks; and political fragmentation that is emboldening far-right, Eurosceptic parties.

As we look through the daily noise and volatility, rest assured that Montaka’s portfolio companies remain advantaged, highly profitable, and cash generative. Importantly, we assess their future prospects to remain very attractive, resulting in the aggregate earnings power of Montaka’s portfolio companies growing substantially over time. We believe the reliability of this growth remains substantially underappreciated by the market today.

AI is one important area in which we continue to see major long-term investment opportunity. While some observers see too much hype and are calling for caution, our research continues to point to large opportunities ahead.

CEOs of the world’s largest cloud computing platforms – those with arguably the most accurate line of sight into future demand for AI compute and services – are unanimously pointing to a large opportunity ahead based on demand signals they are seeing today. And across the board, they remain capacity constrained today and are substantially increasing their capital investments in AI infrastructure.

That said, with the enormous capital investments being made to expand AI infrastructure capacity (i.e. approximately US$300 billion this year from just four companies: Amazon, Microsoft, Alphabet and Meta), some observers are wondering if this is all too much. We address this important question in more detail in Montaka’s March Quarterly Letter in which we underscore several salient points for investors to keep in mind:

• External enterprise adoption of AI applications, such as Salesforce’s Agentforce, remains in its infancy having only been available for a handful of months. But in Montaka’s private discussions with customers who are in the process of adopting Agentforce, there are genuine use cases where this technology is unlocking substantial productivity gains and is already resulting in lower headcount needs. Amit expands on the opportunities we see in enterprise software, titled: Transforming Labor with AI: The big winners from the Agentic Boom
• Internal use cases are proven, and capacity is fungible, for many of those making these enormous investments. Google, Meta, Tencent and others have all demonstrated, first-hand, the enormous value AI can unlock for their core businesses. And given that AI infrastructure is mostly fungible across use cases, substantial internal demand helps to reduce the risk of poor returning excess capacity.
• The underlying models continue to improve in capability – most recently in the form of chain-of-thought reasoning capabilities. At the same time, custom-designed AI chips are helping to drastically reduce the cost-to-serve. This combination is obviously positive for adoption across enterprise and consumer use cases. (Even Montaka’s internal research team workflows have substantially evolved over recent months to incorporate these new technologies to unlock substantial productivity gains).

And, of course, it’s not just in enterprise applications where AI will enable major new productive use cases. Robotics is another example where AI is being applied to unlock tangible productivity gains. And, as Andy and Lachlan discuss in this month’s Spotlight Series podcast, Amazon’s Robotics Revolution: How AI & Automation Fuel Its Unstoppable Flywheel, this is happening today. And its Amazon’s use of robotics at scale that has started to drive down Amazon’s enormous US$100 billion in annual fulfillment costs and US$90 billion annual in shipping costs.

 

Sincerely,

Andrew Macken & Chris Demasi

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Podcast: Join the Montaka Global Investments team on Spotify as we share real-time examples and investing tips that govern our stockpicks. Click below to listen. Alternatively, click on this link: https://podcasters.spotify.com/pod/show/montaka

 

 

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