Market Pulse
Tuesday, August 29, 2023
Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
In this week’s edition we have:
Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.
Adrian (Portfolio Manager), and the rest of the Sidekick team.
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
Few sectors garner as much interest from investors as the e-payments sector [1]. And rightly so when you look at the characteristics of e-payment companies.
These companies are riding the wave of the ongoing shift from cash to digital payments, often supported by government efforts to curb tax evasion [2]. Most of the e-payments companies boast low capital requirements and strong cash generation, which gives them impressive returns on capital employed—an essential gauge for investors.
Notably, they've demonstrated resilience during economic downturns, as seen in 2008/2009, with card volumes rising despite a real GDP decline [3]. Furthermore, their revenue models, typically tied to transaction volumes, position them to benefit from inflation.
But while the above factors certainly fuel investor excitement, they also contribute to a growing sense of competition that's reaching its boiling point. Last week, shares of Adyen, one of Europe's leading payment processors, hit their lowest levels over three years, adding to the previous week's record 40% loss in one day.
Adyen is a payment processor between a merchant and a card network like Visa or Mastercard. They claim that their key strength revolves around their ability to reduce complexity for merchants and offer them the lowest total cost of ownership [4][5]. This ability is being challenged now as some merchants in the US - a less complex payments market than Europe - are switching processing volumes to lower-cost competitors.
Adyen chose not to reduce prices to keep their volumes[5], and it's unclear if those competitors can sustain the price cuts. But what is clear is that at least the US part of the business is more commoditized than the market previously thought. A weaker business deserves a lower multiple, so investors punished Adyen promptly.
There's also competition at the checkout, whether online or in-store. Giants like PayPal, Google, Apple and Amazon are fighting for users' preferred payment method. Many smaller, fintech startups are trying to ease life for the consumer, the merchant or both – as was the case with Buy Now Pay Later companies like Klarna or Affirm.
A more complex landscape is not all bad news. It means better opportunities for stock pickers, so we've spent considerable time looking at the sector in the last month. While intensifying competition is something no investor wants to hear, we also know that consumer habits are tough to change. Companies closer to the user thus have better chances of coming out triumphant.
Even though it feels like Trump vs. Biden happened long ago, the first Republican presidential primary debate took place last week in Milwaukee, signalling that the 2024 U.S. presidential election is getting closer. Eight candidates qualified for a spot on the stage, and with Donald Trump opting out, the void was seemingly filled by political newcomer Vivek Ramaswamy, whose unlikely rise[6] has revealed the remarkable degree to which the former president has reshaped the party.
The U.S. political divide and increasing societal polarisation are widely discussed topics. Still, researchers at ESADE and Columbia Business School [7] have found that the polarisation of political ideology extends well beyond Washington to consumers’ preferences, intentions, and purchases:
Perhaps it comes as little surprise that Republicans are more into golf and Harley-Davidson while Democrats are more into tennis and Lyft rides. But researchers at the University of Utah went a step further [8]. They examined the differences in the stock holdings of wealthy households in different counties of the U.S. with different political preferences over the past 25 years.
Their findings show that in the past, investment portfolios across different counties were quite similar. However, since 2013, a significant divide has emerged. The research points to the rise of conservative media as a key factor driving this divide in investment choices. In areas with more Republicans, investors avoid stocks of companies led by Democrat CEOs. In contrast, in more Democratic areas, people steer clear of companies with environmental or labour issues. As a result, Republican investors often have higher allocations to oil & gas and mining companies, while Democratic investors lean towards tech companies [8].
While the future performance of tech or oil & gas remains to be determined, making investment decisions solely based on political affiliations could lead to a strategy that is more likely to result in failure.
There's no issue more universally relatable than the weather. Attempting to forecast it seems quite challenging though, as the likelihood of making accurate predictions beyond five to ten days in advance appears to be rather slim[9]. However, thanks to sophisticated modelling techniques and the advent of digital computers, the precision of 10-day weather forecasts has more than doubled according to some experts[10].
Such advancements empower scientists to predict the resurgence of an El Niño cycle with greater confidence. Characterised by the warming of the Pacific, El Niño leads to changes in overall sea temperatures and the strength of ocean currents, which affect local weather patterns.
El Nino occurs every two to seven years. Currently, the chances of an intense El Nino event are >50%, and a moderate event is>95%. This is important because of its impact on both commodity prices and the overall economy.
Researchers at Dartmouth found that El Nino events can have a $3-6tn impact on the global economy (2-6% global GDP) in the five years following the impact [11]. This impact is felt differently across all areas, with a particular impact on Sub-Saharan Africa, South America and South East Asia. Amongst developed markets, the US is impacted more than Europe.
But despite the research discoveries, the fact remains that each El Niño occurrence is different, leading to widely varying effects. This makes it almost impossible to accurately gauge the potential impact on the companies we're looking at, especially given the unpredictable nature of weather forecasts.
So, what do we do? Since El Niño affects different things differently, we're closely watching our investments in companies linked to sugar and cotton—two crops that tend to be hit the hardest. Food and clothing companies fall into this category, for example. In addition, we monitor the geographical exposure of our portfolios, paying particular attention to over reliance on supply chains in South America, Southern US and Southeast Asia.
Lastly, and perhaps most importantly, we ensure our companies have enough pricing power to handle any inflation caused by El Niño's impact on commodities. While weather prediction isn't always certain, there's no reason not to be prepared for whatever it may bring.
[1] https://www.cbinsights.com/reports/CB-Insights_Fintech-Report-2022.pdf?
[2] https://www.sciencedirect.com/science/article/abs/pii/S0176268017302239
[3] https://www.ecb.europa.eu/press/pr/date/2010/html/pr100913.en.html
[4] https://adyen.getbynder.com/m/1c083afb0227c840/original/Adyen-Prospectus.pdf
[5] https://investors.adyen.com/events/h1-2023-earnings-call
[6] https://www.theguardian.com/us-news/2023/aug/23/vivek-ramaswamy-focus-republican-debate
[7] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3471477
[8] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4381330
[9] https://journals.ametsoc.org/view/journals/atsc/76/4/jas-d-18-0269.1.xml
[11] https://www.science.org/doi/10.1126/science.adf2983
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
Sidekick is not yet regulated but has applied to the FCA for authorisation to operate. Prior to Sidekick becoming fully authorised, none of the information provided is intended as an invitation or inducement to apply for any Sidekick product or service.
Please remember, investing should be viewed as longer term. When we launch, your capital will be at risk — the value of investments can go up and down, and you may get back less than you put in.
