Market Pulse
Friday, September 13, 2024
Hi,
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. The ‘Cool’ Factor: Apple’s True Moat
2. Upgrading Europe: Draghi’s $900 Billion Plan
3. UK Equities: The Risks of Safety
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.
Apple’s Glowtime event kicked off on Monday, with the company announcing upgrades to some of its best-selling product lines. In addition to the new iPhone 16, Apple also unveiled updated Apple Watch and AirPods models. The core focus of the event, though, was undeniably AI.
Apple’s approach to AI (dubbed ‘Apple Intelligence’ by the company) is centred on an upgraded model of the Siri assistant capable of using contextual information to help with a wider range of tasks. Though Apple has fallen somewhat behind peers when it comes to AI, an enhanced ’neural’ processor chip and a recently announced partnership with OpenAI show that the company is quickly making up lost ground. Notably, however, many AI features won’t be available for at least a month after the iPhone 16 releases.
The lack of any real surprises at the event could be a point of concern, possibly indicating that Apple is struggling to come up with meaningful product innovation. Still, we are excited about Apple’s ability to effectively improve and monetize their service offerings, which have become an integral revenue driver for the company.
One announcement at the event, though, is more important than it might appear. As part of Apple’s bid to become more central to health and wellness, the newest AirPods models will be capable of serving as over-the-counter hearing aids. While AirPods won’t be able to match the level of prescription hearing aids, they could help the more than 1 billion people globally that live with mild or moderate hearing loss.
This strategy helps showcase Apple’s true moat in the tech space. While genuine product innovation may be lagging lately, Apple has a unique ability to take existing technology and make it ‘cool’ via branding, design, and ease of use. So long as the company retains this ability, they can do without revolutionary tech upgrades at every event.
It’s no secret that Apple is facing substantial regulatory risk at the moment, much like the rest of Big Tech. Just one day after the Glowtime event, Apple lost a significant tax case in Europe while continuing to navigate an antitrust case in the US. Overall, however, we remain optimistic about the company’s abilities to drive earnings growth in both products and services, even in a more challenging operating environment.
Note: We hold Apple in our Flagship portfolio
A year ago, the European Commission tasked Mario Draghi with delivering a report on the state of European economic competitiveness in the global environment. On Monday, Draghi, the former head of the European Central Bank and one-time prime minister of Italy, delivered his final assessment. In a sprawling report stretching nearly 400 pages, Draghi lays bare the risks facing Europe, calling for a drastic increase in investment to close the widening economic gap between the continent and its competitors.
Most intriguing for investors is the scale of additional investment funding the report calls for. At nearly $900 billion per year, Draghi’s recommendation amounts to 5% of Europe’s GDP, significantly higher than the 1-2% of GDP used to rebuild Europe after World War II under the Marshall Plan. If the EU acts on the recommendations, European companies (especially those in energy and technology) could be eligible for an unprecedented level of government funding to enable growth.
Draghi’s recommendations for rethinking the EU’s regulatory environment also have the potential to unlock substantial dynamism in Europe’s economy. Notably, the report describes how the EU’s current approach to approving mergers may stifle technological innovation.
The report’s policy proposals face significant hurdles when it comes to implementation. The scale of funding needed almost certainly requires jointly backed EU debt, a proposal that German policymakers have expressed strong opposition to. Moreover, Draghi’s advocacy for a rethinking of the EU’s decision-making process could face significant institutional resistance.
We are hopeful, however, that Draghi’s report can serve as a wake-up call for the EU to address Europe’s lagging growth when compared to regions like the US. At the moment, our Flagship portfolio’s exposure to European companies is around just 15%. Among other factors, that figure reflects relatively fewer compelling investment opportunities on this side of the Atlantic.
There is no fundamental reason that this needs to be the case, however. As Draghi put it, “[t]he problem is not that Europe lacks ideas or ambition.” With a new competitive framework and increased public support for investment, we believe that Europe can better unlock those ideas and ambition to become more globally competitive – and, in doing so, offer new opportunities for growth-focused investors.
In a recent edition of Sidekick Market Pulse, we noted that UK equity markets are now the most preferred among European peers based on a survey of fund managers. Surprisingly, however, a recent report from think-tank New Financial indicates that UK pension schemes actually have relatively low levels of exposure to UK stocks.
UK pension schemes hold just 4.4% of assets in domestic equities, compared with a 10.1% global average among other pension funds. In fact, only pension funds in Canada, Norway, and the Netherlands posted figures below the UK. That 4.4% number is also quite close to Flagship’s own UK equity exposure, which sits at 4%.
Arguably, one reason for these figures is that UK equities have become perceived as too safe. More predictable governance, a robust economic outlook, and less tech dominance in British indexes have led to relatively lower volatility levels in UK markets.
While it might seem odd to shun a market for not being risky enough, reduced risk exposure in public markets can also indicate reduced reward potential. If volatility is generally undesirable, investors may have to pay a growth premium for avoiding it. This could be a particular concern for pension funds, which need to generate investment growth in order to pay for future liabilities.
The report comes at a time when UK pension schemes are under scrutiny for not doing enough to fuel domestic economic growth. Under Chancellor Rachel Reeves, the Treasury is undertaking a pensions investment review designed in part to understand if the government should incentivise (or even mandate) increased domestic investments.
While the merits of such regulation are a matter of debate, we note the potential opportunities that allocation rules could unlock for unconstrained managers such as Sidekick. Allocation mandates would impact market prices without altering the underlying risk/reward structures. As a result, we could see a greater number of undervalued opportunities in the UK for fundamentally focused, unconstrained managers to access.
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.
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