Market Pulse
Friday, September 20, 2024
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.
Our three stories this week:
1. A Dovish Surprise? Fed Cuts by 50 Bps
2. Stocking Up: Britons Have £430bn of Excess Savings
3. Alternatives Competition Heats Up
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.
The Fed delivered a larger-than-expected rate cut on Wednesday, cutting their target rate range by 50 basis points to 4.75-5%. The jumbo rate cut reflects the first decline in interest rates in more than four years, signalling the launch of the Fed’s long-awaited cutting cycle.
Despite an initial pop in response to the news, equity markets closed Wednesday slightly lower after the announcement. The following day, however, markets surged, with the S&P 500 climbing over 1.5%. We believe this mixed reaction highlights the complex signals of a larger rate cut at this point in the cycle.
Generally speaking, bigger rate cuts are more expansionary for the economy and more bullish for investors than smaller cuts. But as the US labour market continues to cool, the Fed’s decision to cut by 50 basis points could be an admission that policymakers are behind the curve. Moreover, markets may fear that the Fed sees reason for serious concern in the data.
At the post-meeting press conference, chair Jerome Powell stated that Fed officials “do not think we are behind [in cutting rates].” In a nod to the continued difficulty investors will face in anticipating the Fed’s behaviour, Powell also noted that the Fed is not following a predefined policy path and may decide to slow down cuts if inflation proves stickier than expected.
Owing to the risk of sending negative signals to the market, we were somewhat surprised by the Fed’s decision. Still, our investment strategy does not depend on precisely predicting the Fed’s policy decisions. We build our Flagship portfolio for an all-weather macro environment. In our view, the fact that interest rates are coming down is far more important than the precise level of cuts at each stage.
A recent research report from Barclays indicates that British savers have at least £430 billion in excess cash savings, defined as amounts greater than six months’ worth of income. At just under 19% of UK GDP in 2023, that is a tremendous figure that highlights the amount of cash sitting on the sidelines in UK markets.
There are certainly some ‘demand-side’ reasons that individuals may be holding greater excess cash savings these days. Higher interest rates and increased economic uncertainty both make a bigger emergency fund relatively more attractive. ‘Supply-side’ reasons related to a lack of investment knowledge, though, are arguably even more important.
While holding excess cash and missing out on higher returns is generally a poor tradeoff, many individuals aren’t confident enough in their financial acumen to invest their savings. In fact, according to the Barclays report, a fifth of surveyed individuals felt they had insufficient investment knowledge. A quarter also agreed that investing was too complicated.
Underinvestment also has implications beyond individual financial goals. Currently, UK stocks are trading at valuation levels significantly below many developed markets, most notably the US. One reason for these bargain prices could be poor domestic investment levels from British savers.
Unfortunately, the Financial Conduct Authority’s current regulatory framework makes it challenging for many financial institutions to facilitate knowledge and education. Constraints like declarations, documentation, and liability concerns make it expensive for firms to offer advice.
The FCA has discussed implementing an updated framework to make it easier for firms to offer guidance to everyday investors. Unfortunately, though, finalised rules have been long delayed. Measures that make expert financial education more accessible are better for everyone. As the Barclays report makes clear, the current rules are far from optimal – and British companies, markets, and savers are paying the price.
As alternative investments and public markets increasingly go mainstream, competition is heating up to offer these asset classes to a wider audience. While investments like private equity, hedge funds, and venture capital were once the realm of institutions and the ultra-wealthy, that exclusivity is rapidly fading.
This past week, BNY, the world’s largest custody bank, announced plans to offer financial advisers a comprehensive alternatives platform featuring options like private equity and private credit. That comes on the heels of a similar platform rollout from Blackrock and Partners Group. Apollo and State Street, meanwhile, are teaming up to launch a private credit ETF that uses an innovative liquidity solution to satisfy regulatory requirements.
The attractiveness of alternative investments is twofold. First, while alternative asset classes are idiosyncratic and data is often spotty, there is evidence that alternatives offer attractive risk-adjusted returns. This shouldn’t be too surprising, as illiquidity premiums and the greater potential for alpha generation in inefficient markets should boost returns.
But even if alternatives don’t offer superior returns, they can at least offer uncorrelated ones. Generally speaking, the factors that drive returns in areas like venture capital or private equity are quite different from those that drive returns in public equities. As a result, alternative investments can offer a compelling capacity for diversification.
We don’t expect alternatives to replace traditional strategies entirely. Because alternatives introduce novel risks, they’re not suited for every investor. In addition, lack of liquidity can make them poorly suited for some investment strategies. But as these asset classes become more accessible, we do anticipate individual investors using them to create more varied portfolios, much like institutions have been doing for decades.
While our Flagship portfolio will remain focused on public equities, Sidekick is excited to be building out our own suite of alternative opportunities. In the coming months, we’ll have more information on how Sidekick investors can access asset classes like private equity, private credit, and venture capital through our platform.
These products will be high-risk investments and you are unlikely to be protected if something goes wrong. Don’t invest unless you’re prepared to lose all the money you invest.
Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.
Sidekick Money Ltd is a company registered in England and Wales (No. 13882980). Sidekick Money Ltd is authorised and regulated by the Financial Conduct Authority (FRN 984829). Our address is 21-33 Great Eastern St, London, EC2A 3EJ.
