Birkoa Newsletter 50 (end of Jan '25)

This newsletter will focus on a few key areas, particularly AI, recent US administration policies, and the impact on China, especially under Trump’s leadership.

Fund Performance Overview

January marked a strong start to the year for Birkoa, as both of our flagship funds outperformed the broader market:

    •    Birkoa Max Fund: +7.5% net of fees, fully recouping December’s losses.

    •    Birkoa Pro Fund: +3.5-4% net of fees, a strong result for our newest fund.

    •    Market Comparison: The broader market returned +2.7% gross for the month, meaning Birkoa’s flagship fund more than doubled the market’s gains.

This month’s performance was driven by AI and semiconductor strength, a rebound in select software names, and continued outperformance in strategic asset classes. While we remain focused on long-term positioning, these results reinforce our macro-driven investment framework and sector selection expertise.

AI & Semiconductors: Navigating Market Misconceptions and Structural Growth

AI continues to be one of the strongest drivers of Birkoa’s performance, and we remain bullish on its long-term monetization potential. However, recent market narratives—particularly surrounding DeepSeek Innovation—have created confusion, which we aim to clarify.

Addressing DeepSeek Innovation Misconceptions

There has been speculation that DeepSeek Innovation, a Chinese large language model, threatens Nvidia and American semiconductor leaders. This is inaccurate. The reality is that DeepSeek’s focus is on inference, not training, and does not undermine the long-term positioning of Nvidia or related AI infrastructure companies.

Historically, new AI models and architectures have expanded the addressable market for AI hardware, not reduced it. DeepSeek and similar innovations actually accelerate AI adoption, particularly at the edge and in real-time applications. This fuels greater demand for semiconductors, networking infrastructure, and specialized AI chips, which are core holdings in our portfolio.

Jevons Paradox & AI’s Economic Flywheel

We emphasize Jevons Paradox—as the cost of AI inference decreases, demand for AI increases exponentially. This has profound investment implications:

• Lower AI costs democratize access, enabling more industries to adopt AI-powered solutions.

• This increases demand for computational power, driving up consumption of AI hardware, networking solutions, and semiconductors.

• In turn, companies like Nvidia, AMD, ARM, and Qualcomm benefit from sustained AI expansion, as more businesses integrate AI into their workflows.

Rather than making AI infrastructure companies obsolete, cost-efficient inference unlocks new applications, sustaining semiconductor demand well beyond 2025.

Big Tech AI Expansion: Strong Earnings and Infrastructure Commitments

The world’s largest technology companies continue to scale their AI investments:

• Microsoft, Apple, and Meta (Facebook) have already reported stellar earnings, with sustained growth in their AI services sectors.

• These companies have also projected hundreds of billions in infrastructure costs, a claim supported by ASML’s recent earnings, confirming strong semiconductor demand.

• This bodes extremely well for chipmakers like Nvidia, reinforcing the strength of Birkoa’s AI infrastructure investments.

• DeepSeek Innovation has no impact on hyperscalers’ infrastructure buildouts, as their AI investments extend far beyond inference and into full-scale AI model training and enterprise AI solutions.

Semiconductor Sector: Structural Strength Despite Market Overreactions

The recent sell-off in AI-related semiconductor stocks reflects short-term sentiment, not long-term fundamentals.

• ARM, Qualcomm, and AMD saw declines on Monday but have since recovered, signaling that the market is starting to digest the reality of AI’s continued expansion.

• Nvidia, despite its pullback, remains the undisputed leader in AI compute, and we expect a recovery as market misinterpretations fade.

•  ASML’s recent earnings guidance further underscores the long-term demand for advanced semiconductor fabrication, which is critical for AI scalability. Furthermore, LAM Research too reported stellar earnings and issued strong guidance, thereby boosting the materials part of our semiconductor holdings as well with Applied Materials too catching a bid.

Software AI Plays: Benefiting from Lower Inference Costs

Our medium and small-cap software holdings have performed well and are positioned to benefit as AI inference costs decline.

• Salesforce, and Atlassian have all reported strong earnings and exceeded growth estimates, reflecting the strength of AI-driven SaaS demand. We expect Snowflake and various other software plays like MongoDB, Datadog, etc. to reflect similar growth projections, thereby springing up a sector that's underperformed for us for over a year. 

• Lower inference costs increase AI adoption across industries, making it easier for enterprises to integrate AI into their data infrastructure and operations. Palantir has been an obvious winner in this and has continued to do well for us.

Tesla & AI: Self-Driving Developments

• Although Tesla missed estimates in its earnings, it guided well on its AI capabilities, with a promise of Unsupervised Full-Self Driving (FSD) by mid-2025.

• At CES 2025, Nvidia rolled out a new chip designed specifically for self-driving training, with Tesla being its main customer. This further reinforces Nvidia’s leadership in AI infrastructure.

China: A More Resolute Approach in 2025

Following a solid 2024, the Chinese government successfully met its 5% GDP growth target, largely due to its aggressive stimulus measures aimed at reviving the economy. Birkoa has consistently maintained that these policy interventions were the primary reason for our flatline China bet dating back to May 2022, and now we are seeing the results.

In 2025, we expect to see an even more decisive approach from the Chinese Communist Party (CCP), which has committed to:

• Supporting the property sector, a key area of past weakness, to restore investor confidence.

• Developing its AI industry, which aligns directly with our investment strategy.

Both of these policy shifts benefit our positioning, as Birkoa holds exposure to both the property and AI sectors in China.

Economic Indicators Confirm Stimulus is Taking Effect

• December services PMI exceeded expectations, signaling that the economy is beginning to feel the effects of 2024’s stimulus efforts.

• Chinese EV companies remain strong, and we expect continued government support to fuel their momentum.

DeepSeek & China’s AI Capabilities

While DeepSeek Innovation has been overhyped, it underscores China’s growing AI capabilities. Despite its negative short-term impact on U.S. markets, it has benefited Chinese tech stocks:

• Most, if not all, Chinese tech ADRs in the U.S. have surged since DeepSeek disrupted the market last week.

• Hong Kong markets were closed for the last three days of January due to Lunar New Year, but if U.S. ADR performance is any indication, they could see significant upside upon reopening.

Birkoa believes we are in a prime position in Chinese assets, and now that macroeconomic and political forces are playing out as expected, markets should follow suit. The DeepSeek development further supports this thesis, reinforcing China’s AI potential in the global race for dominance.

Trump’s New Tariffs: A Negotiating Tactic?

As of this writing, Trump has imposed a new 10% tariff on Chinese goods, which is lower than expected.

• We view this as a mere negotiating tactic rather than a structural trade war escalation.

• The market reaction should be temporary, if any.

• Birkoa’s portfolio is not significantly exposed to sectors that would be negatively affected by Chinese export controls.

• In fact, some of our commodities positions in lithium and other metals could benefit from supply constraints caused by China’s potential countermeasures.

Sincerely,
Pranjit K. Kalita
Chief Investment Officer