Dear Investor
The ELMRI ANZ Conviction Fund returned 3.2% in May, while the ELMResponsible Investments Global Fund returned 15.3%, outperforming their respective benchmarks.
Global markets moved higher through May, supported by resilient economic data, solid earnings and continued strength in AI-linked technology and semiconductor businesses. Market leadership remained concentrated, particularly in the United States and parts of Asia, where investors continued to reward companies exposed to semiconductors, data centres, cloud infrastructure and related enabling technologies.
By contrast, the Australian market faced a more challenging backdrop. Restrictive monetary settings, weaker consumer confidence and the market’s lower exposure to AI leaders all contributed to relative underperformance. Local inflation remained elevated, although headline CPI eased in April, while banks and the RBA continued to highlight the drag from tighter policy and fuel costs on domestic growth.
Market Outlook
The outlook remains uneven, with geopolitics still influencing the path of inflation and interest rates, primarily through energy markets. Recent Middle East tensions drove oil higher as markets priced supply risk, but the subsequent easing in prices has begun to unwind that risk premium and should, if sustained, flow through to lower headline inflation and reduced pressure for further rate increases.
Against that backdrop, corporate earnings growth remains very strong, particularly in the United States, and the recent rally in share prices has been driven largely by earnings rather than multiple expansion. In our view, valuations across many parts of the market therefore remain compelling. Within the AI complex, memory companies such as Micron still trade on modest forward multiples relative to their earnings potential, and if AI demand continues to build, the usual cyclical downturn in this part of the market may be delayed, supporting the case for current valuations.
At the same time, a range of high-quality growth businesses in areas such as healthcare, consumer discretionary and other structurally growing sectors have significantly underperformed in recent years, despite fundamentals that remain sound and, in many cases, improving. As oil prices ease, inflation expectations moderate and earnings continue to grow, we see a broadening opportunity set in these areas, where underlying business quality is intact but valuations still reflect past headwinds rather than forward-looking earnings power.
AI and the Data Centre Capital Cycle
Recent results continue to show that AI investment is generating real returns across a much broader value chain than the market often assumes. While NVIDIA remains the most visible beneficiary, value is also accruing to memory, networking, power, cooling and physical data centre infrastructure.
A key debate now is whether the scale of AI investment is becoming excessive as large technology companies increasingly supplement internal cash generation with external capital. This is no longer a cycle funded purely by free cash flow, and that is a valid risk to monitor. However, it does not yet suggest that the investment cycle is close to rolling over.
The working assumption remains that global AI capital expenditure will continue to rise, with multiple forecasts pointing to annual spending of more than $1 trillion in the coming years. Goldman Sachs estimates AI infrastructure capex could reach $765 billion in 2026 and rise to $1.6 trillion by 2031, while more recent reporting suggests the $1 trillion threshold could be crossed as early as 2027.
On that capital base, the key question is whether monetisation is emerging quickly enough to justify continued investment. Our view remains that incremental inference revenue across the AI ecosystem could plausibly reach $300 billion to $500 billion on that level of spend as AI moves from training to inference and into more commercial deployment. While the exact numbers remain uncertain, the direction of travel points to broadening revenue pools rather than a stalled buildout.
This remains a multi-layer capital cycle rather than a single-company theme. Value is being created across semiconductors, memory, power, networks, cooling and physical infrastructure, and that breadth remains one of the most important features of the current investment environment.
Risks and the Next Phase of AI
The risks in AI are evolving rather than disappearing. The market is moving beyond a phase where success was often defined by token maximisation, effectively maximising model activity and compute demand, toward a phase where customers are more focused on return on investment and the cost of each token processed. Falling unit costs for inference help, but they also shift attention to efficiency, workload design and software orchestration.
The next phase of AI is also likely to be increasingly agentic. Agentic AI refers to systems that do not simply respond to individual prompts, but autonomously execute sequences of tasks to achieve an objective, often calling tools, APIs and other models along the way. This is likely to increase compute intensity materially as adoption broadens across both consumers and enterprises.
This evolution has important implications across the technology stack. More persistent, stateful and multi-step AI workloads are likely to require greater memory intensity and more CPU coordination alongside accelerators. That should benefit companies leveraged to memory and general-purpose compute, including Micron, Arm and AMD, as data movement, context windows and orchestration overhead become more important constraints.
At the same time, this next phase should also create opportunity at the software layer. As enterprises seek to complete tasks across multiple models while optimising for cost, latency and quality, forward-looking software companies that can orchestrate workflows, route models intelligently and deliver measurable productivity gains are likely to be well placed.
Importantly, this opportunity is not confined to software vendors. Traditional companies that are leaders in their sector and are investing aggressively in AI should also be well placed, particularly where they combine proprietary data, deep domain expertise and clear operational use cases. Eli Lilly is a strong example. Its partnership with NVIDIA includes a major multi-year investment to apply AI across drug discovery, development and manufacturing, demonstrating how an industry leader can use AI not simply as a tool, but as a strategic advantage.
Mega AI IPOs and Enablers
The emergence of very large, high-profile AI and space IPOs such as SpaceX, alongside prospective listings from OpenAI and Anthropic, naturally raises questions around opportunity cost and portfolio construction. For many investors, there will be pressure to participate simply to avoid being underweight potential future index leaders, even where near-term valuation support is limited.
A disciplined, benchmark-agnostic approach instead focuses on relative risk-adjusted returns. Rather than reallocating capital into headline listings at any price, the focus remains on using any volatility around these deals to selectively add to or build positions in excellent businesses elsewhere in the value chain, where earnings visibility is improving but expectations remain more measured.
Linde is a clear example of this approach. Its industrial gases are critical inputs across the launch value chain, including liquid oxygen and hydrogen for engine testing and launches. As launch volumes rise, Linde stands to benefit from growing demand, but importantly this exposure is gained through an established, highly profitable business with durable competitive advantages, long-term contracts, high switching costs and a proven ability to compound earnings over time.
Pro Medicus Limited (ASX:PME)
Pro Medicus delivered another important proof point for its North American expansion in mid-May, announcing a seven-year, A$90 million contract with Boston-based Beth Israel Lahey Health. The agreement covers Visage Viewer, Workflow and Open Archive, and is notable for being fully deployable in the cloud, reinforcing the ongoing standardisation of CloudPACS across major healthcare networks.
The significance of the announcement extends beyond the contract itself. It supports the broader view that healthcare digitalisation remains a structural source of growth for high-quality medical software businesses, while further underscoring Pro Medicus’ leadership in a niche but mission-critical part of imaging workflow. The company continues to execute strongly against a deep commercial pipeline and retains exceptional competitive advantages in performance, integration and customer trust.
Vestas (CPH:VWS)
Vestas delivered a strong first-quarter result, with revenue increasing 14.4% year on year and EBIT margins improving, reflecting better execution across both onshore and offshore operations. The order book remains a key source of confidence. Wind turbine order intake rose 44% year on year to 4,504 MW, lifting turbine backlog to EUR 36.3 billion, while service agreements represented a further EUR 39.8 billion of expected contractual future revenue. Combined backlog increased to EUR 76.1 billion, up EUR 6.3 billion from a year earlier, providing substantial long-term revenue visibility.
Vestas remains an important example of how rising electricity demand can create opportunities well beyond traditional technology businesses. As one of the world’s largest wind turbine manufacturers, with an increasingly valuable installed base of long-duration service agreements, the company is well positioned to benefit from the structural need for additional generation capacity as data centre growth, electrification and grid modernisation continue to lift power demand. The growing backlog is particularly important because it reinforces the view that renewable generation and related infrastructure will remain an essential part of meeting the power requirements created by AI, industrial electrification and the broader transition in energy systems.
Conclusion
Over recent months, market returns have been driven by a combination of powerful structural themes and shifting macro conditions. AI and digital infrastructure continue to account for a significant share of global equity gains, while easing oil prices and moderating inflation expectations are beginning to create a more constructive backdrop for high-quality healthcare, consumer and other growth businesses outside the AI complex.
The portfolio is intentionally concentrated in businesses with robust balance sheets, durable competitive advantages and clear exposure to long-term tailwinds. That includes both companies at the centre of the AI and digital infrastructure buildout, and sector leaders elsewhwere that are investing aggressively in technology to deepen and extend their competitive edge.
Near-term volatility from inflation data, interest rate expectations and geopolitical developments is likely to persist, but it does not alter the underlying earnings power of the core holdings. A patient, long-term, business-owner mindset remains central to how capital is allocated and risk is managed through this phase of the cycle.
Thank you for your continued support and trust in ELM Responsible Investments.
Kind regards,
Jai Mirchandani
Founder, CIO and Portfolio Manager
ELM Responsible Investments
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
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This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.
ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.
Past performance is for illustrative purposes only and is not indicative of future performance.