Market Pulse
Monday, October 2, 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 3 usual stories, and 1 special announcement:
Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.
Cyril (Chief Investment Officerr), 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.
Before we get into the usual three stories of the week, we thought we’d start with a very special announcement…
We’re pleased to announce that on Thursday last week, Sidekick officially received approval from the Financial Conduct Authority (FCA), for our investment management and lending activities. You can check the register here. This is a huge milestone for the business and enables us to now plan for launch very very soon (watch this space!)
We’ll initially be launching to Founding Members, who've helped us shape the product and make it into what it is today. But it’s not too late to join the Community! Simply download the Sidekick app, earn points by completing some of the in-app actions, and unlock your Founding Membership.
For years, footwear companies Nike and Adidas have been in a race to design the best elite running shoe. Back in 2018, star runner Eliud Kipchoge broke the men's marathon world record by more than a minute wearing elite Nike running shoes. Last year he repeated the feat wearing Nike’s latest shoe, the Alphafly 2[1]. But Adidas just planted its own stake in the ground.
Last weekend, Ethiopia’s Tigst Assefa broke the women's marathon world record by more than 2 minutes wearing a new Adidas running shoe, the Pro Evo 1[2]. Two minutes might not sound like a lot to mere mortals like us, but in elite running it is a big margin.
The Pro Evo 1 weighs only 138 grams, 40% less than their previous elite running shoe and is designed to be worn only once. Adidas achieved the weight reduction by using completely new materials and the shoe is so light that when it was first given to some professional runners to try, some didn’t think the shoe could last a full marathon[3].
Adidas quickly sold out their initial batch of over 500 Pro Evo 1s, each priced at an eye-watering $500 for a pair of single use shoes. While the cost may seem exorbitant to someone doing the couch to 5km, one percenters may find the investment worthwhile if it means setting a new personal best.
Adidas went through a tough stretch since late 2019 marked by falling profits and a slide in valuation. But Adidas has rebounded more than 90% from the 2022 lows, outperforming not just Nike but also the broader equity market. The success of the Pro Evo 1 and the recent strong share price performance could be indicative of a larger turnaround for the company.[4]
Bank of America produces a monthly fund manager survey that canvasses the views of more than 200 institutional fund managers who collectively manage more than $500bn of assets. The most recent survey showed a decisive shift in sentiment.
Fund managers are increasingly optimistic on US big tech and bearish on China. In fact, according to the survey, investor optimism around China is worse than it was during the pandemic[5].
Looking back at the survey from December 2022, fund managers were notably underexposed to technology stocks. This came on the heels of a slump during which the valuations of major tech companies receded all the way back to pre-pandemic levels. However, since the start of the current year, fueled by enthusiasm for generative AI, the enterprise value of the Big 7 tech firms (Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla and Meta) has surged by nearly 70%. Now fund managers think the big is the place to be.[6]
What about China? The Chinese real estate sector, which makes up a big part of the Chinese economy, is in trouble and things don’t seem to be getting better. New home sales at China’s largest developers are still down almost 30% compared to last year and so far the Chinese government has refrained from big stimulus[7].
But there seems to be tentative green shoots of recovery in other areas of the Chinese economy. In September, the nation's manufacturing PMI, an index of the prevailing direction of economic trends in the manufacturing and service sectors, rose to 50.2 from August's 49.7, marking the first increase since March. Non-manufacturing sectors also saw growth, rising to 51.7 from 51, driven by consumer spending in dining, travel, and services[8].
It appears that the fund managers surveyed are essentially replicating their December 2022 strategies, doubling down on what has recently yielded results and staying away from underperformers. This type of investment behaviour has the hallmarks of recency bias, a cognitive trap that leads investors to expect the future will resemble the recent past.
Momentum in Big Tech appears to be waning, with the Big 7 experiencing a decline of over 7% since late July[9]. Concurrently, signs are emerging that the Chinese economy may be on the upswing. Will institutional investors repeat their December 2022 missteps? That remains to be seen. To ponder this, consider Warren Buffett's wisdom: "A contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling."
Last week, Amazon announced a deal that makes it clear they are all-in on the AI arms race. Amazon agreed to invest up to $4bn into AI startup Anthropic.
Anthropic, founded in 2021 by the Amodei siblings who both worked at OpenAI, offers an AI assistant called Claude, that competes with ChatGPT. Anthropic claims its competitive edge is a technology that is safer and more reliable than its competitors.
In some ways, the deal is similar to the deal Microsoft struck with Open AI. Amazon will invest $1.25bn immediately with either party having a right to trigger the remaining $2.75bn investment. As part of the deal, Anthropic will use Amazon Web Services data centres to train and deploy its AI models and Amazon has agreed to incorporate Anthropic technology into products across its business[10].
But the deal is also different from the Microsoft OpenAI deal in some very important ways. Just a few months ago, Anthropic said it would use Google cloud and its chips to run its AI models. Now, it has decided to go with Amazon. But the deal with Amazon is not exclusive like the deal between Microsoft and OpenAI. Amazon has made it clear that they don’t believe there will be one AI model to rule them all. Amazon seems to want to remain more neutral, serving a broad variety of customers and giving them as much flexibility as possible[11].
One other interesting difference is that Anthropic will be using custom Amazon designed chips, the Trainium and Inferentia. Amazon states that using AWS Trainium to train AI models will be 50% cheaper than using any other solution on AWS. AWS Inferentia accelerators deliver up to 70% lower cost per inference than comparable Amazon solutions[12].
Amazon entered the generative AI arena a bit later than competitors like Microsoft and Google with a slightly different strategy. Eschewing exclusive partnerships, Amazon is broadening its scope by providing both training and inference services at low cost, thanks to custom in-house silicon. This suggests that Amazon is not only vying for market share with early movers such as Microsoft and Google but is also positioning itself as a contender against GPU manufacturers like Nvidia and AMD.
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.
[1] https://www.wsj.com/business/adidas-running-super-shoe-nike-cfdbd832?mod=Searchresults_pos1&page=1
[2] https://www.wsj.com/business/adidas-running-super-shoe-nike-cfdbd832?mod=Searchresults_pos1&page=1
[3] https://www.wsj.com/business/adidas-running-super-shoe-nike-cfdbd832?mod=Searchresults_pos1&page=1
[4] https://www.adidas-group.com/en/investors/financial-reports/
