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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 stories this week:

Surprising US jobs data and the rebalancing premium
Private Credit: The new kings of finance
Pininfarina: Speed meets Style

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Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.

Cyril (Chief Investment Officer), 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.

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1) Surprising US jobs data and the rebalancing premium

Last week we got the latest US employment numbers and hiring in September surged far beyond expectations. The US economy added 336,000 new jobs, almost double the 170,000 economists expected[1]. The surprisingly strong reading suggests the medicine the central bank is dispensing, higher interest rates, is not having the intended effect. The market is now pricing a higher likelihood of another interest rate hike in the US and this could spell more bad news for global bond portfolios.

The steep rise in interest rates since the pandemic have caused a historic decline in bond portfolios. To put the decline into context, Bank of America analysed data going all the way back to 1787. What they found was this is the most extended period of bond losses in over 230 years[2].

Bonds are usually a safe haven during uncertain times but this time is different and investors on both sides of the Atlantic seem to have lost confidence in bonds. Funds network Calastone showed UK retail investors reduced their bond holdings in both August and September.

According to Calastone, retail investors are putting their money into money market funds instead. Over the last decade investors have gotten used to getting virtually no return on cash and, given the turmoil in bond markets, investors are increasingly opting for around 5% per year from money market funds[3].

But, historically speaking, selling an asset class after a period of bad performance is not the best approach. According to Schroders, having analysed asset class returns data all the way back to 1928, the optimal historical approach, if you wanted to maximise risk adjusted returns, was to rebalance your asset allocations back to target weights periodically. The additional return you got historically from rebalancing uncorrelated asset classes is called the rebalancing premium[4].

Of course history is never a perfect guide to the future and things can and do change. We don’t know if the rebalancing premium will persist for the next century but we know things in the market often change quickly and without much warning.

2) Private Credit: The new kings of finance

Higher interest rates are shaking up the corporate loan world and a new type of lender has emerged, private credit fund managers. A regulatory crackdown after the 2008/2009 financial crisis meant banks had to cope with much stricter capital requirements. Private non-bank lenders, like hedge funds and private equity funds, quickly stepped in to fill the void.

The trend in private lending isn’t new but the recent jump in interest rates have sharply accelerated it. In 2018, private credit assets under management were around $700bn. It has more than doubled since then, reaching an eye watering $1.5trn in 2022[5].

Historically private loans have generally been about 5% more expensive than comparable bank loans but for many companies they are often the only option as banks won't lend to them[6]. This means the corporate borrowers that have to resort to more expensive loans from private credit funds could be more likely to default. To mitigate default risk, private credit funds often have security over the borrower's assets, strict covenants, and restrictions on additional borrowing.

The big private equity groups like Apollo, Blackstone and Ares, are starting to look more and more like banks. But less regulated. Those 3 firms, the biggest in the industry, have more than $700bn in private credit assets under management[7]. This is more than the total commercial loans outstanding at the biggest bank in the world, JP Morgan. Jamie Dimon, CEO of JP Morgan, conceded that certain types of credit are more efficiently done by a non-bank but he also warned of the potential consequences of material lending outside of the regulatory system[8].

But, despite 2023 bankruptcies at large US companies currently 45% higher than the 2005-2022 average, private credit lenders remain optimistic. Blackstone founder, Steve Schwarzman, recently said: “If you are living in a no-growth economy and somebody can give you 12, 13 per cent with almost no prospect of loss, that’s about the best thing you can do.”[9] Given the sheer size of relatively lightly regulated private market lending, we hope Steve is right about ‘almost no prospect of loss’.

3) Pininfarina: Speed Meets Style

Unless you’re a die hard supercar fan you might never have heard of Pininfarina. Pininfarina is an Italian car design firm founded by Batista Farina back in the 1930s. In 1951 they started working with Ferrari and between 1951 and 2017 they designed some of the most iconic Ferraris together[10].

But Peninfarina doesn’t just design cars for other companies. In 2019 they unveiled their first Pininfarina branded car. And what a car it is. It is a fully electric hypercar, called the Batista, that can accelerate to 60 miles per hour in under 2 seconds. That’s faster than a modern day F1 race car. This hand-built Italian hypercar sells for $2.5mn and only 150 will be made[11].

In 2008, Peninfarina entered the luxury watch market and began working with Bovet, a high end, but traditional, Swiss watchmaker. More recently they expanded their ambitions and started working with another company, Globics, to create a new series of watches. A traditional, beautifully designed hybrid smartwatch, the Senso Pininfarina[12].

The hybrid smartwatch contains sensors to monitor a wearer's vital signs and also has other smartwatch functions like messaging alerts. It sells for about £400 and Pininfarina hopes that the hybrid smartwatch could be a stepping stone to their luxury watches.

Other watchmakers have tried to combine the appeal of a traditional high end artisanal timepiece with new smartwatch technology but so far consumers seem unconvinced. Apple launched a gold cased Apple watch for more that $15,000 but they quickly discontinued the product[13]. At £400, Pininfarina is going for a product that is more accessible to the mass market. Lets see if their skill at making and selling watches is as impressive as their skill making hypercars.

Notices

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.