Market Pulse
Tuesday, May 30, 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:
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.
Boeing and Airbus have dominated the commercial aircraft market for the last 30 years but things could be about to change in China. After 16 years in development, China’s homegrown C919 narrowbody passenger jet recently made its maiden commercial flight between Shanghai and Beijing[1].
Boeing and Airbus sell many different types of aircraft, but their bestsellers are narrowbody jets like the Boeing 737 and the Airbus A320. These planes are the workhorses of most carrier fleets around the world. The Chinese C919 was built to compete directly with the Boeing 737 and the Airbus A320.
There are currently around 26,000 commercial aircraft in operation around the world. Boeing expects the in-service fleet could surge to more than 47,000 by the 2040s. Expanding the global fleet and replacing old planes means global demand could exceed 40,000 new aircraft over the next 2 decades. 75% of this demand is expected to be for narrowbody jets like the A320, the Boeing 737 or the Comac C919 and, according to Boeing, 20% of this demand will come from China. Given the strong demand outlook for commercial aircraft from China, it’s no surprise that Chinese aircraft manufacturers want a piece of what is estimated to be a $1.5trn pie. [2].
The C919 was developed by Comac (Commercial Aircraft Corp) with around $70bn in funding support from the Chinese government[3]. For now, the plane still needs to buy critical parts like the engines and flight systems from foreign suppliers but China is undoubtedly working hard towards their stated goal of technological self-reliance.
Outside of China, it could take a long time for Comac to wrestle market share away from the aviation industry giants, Airbus and Boeing. Competition is fierce and it takes an aircraft manufacturer a long time to build a track record of efficiency and reliability. But, at home in China, Comac has some strong advantages that Airbus and Boeing might struggle to compete with.
Comac has backers with very deep pockets and a captive home market. It’s not far fetched to expect the Chinese government might even mandate Chinese airlines to buy C919s. Even if they are less competitive than western alternatives. These advantages could see the C919 increase its domestic market share very quickly.
Given the ongoing trade spat between the US and China things could turn political. Airbus and Boeing can’t be happy about losing market share to a competitor effectively funded by the Chinese government. But for now things for the C919 are looking bright. It just had a successful maiden flight and Comac has already received orders for more than 1,000 C919s[4].
With only a few days left to avoid a potential US default, lawmakers in Washington are making progress towards a deal on the debt ceiling. The likelihood of avoiding a meltdown in the stock market and a US credit rating downgrade is gradually increasing. The final outcome, however, will not be clear for at least another week or so.
The debt ceiling discussions in the US often serve as a strategic tool for extracting concessions from the opposing political party. Some Republicans argue that the Democrats have exercised excessive fiscal liberty during and in the aftermath of the pandemic, leading the US down a fiscally unsustainable path. Nevertheless, more moderate lawmakers from both parties expressed their willingness to back the proposed agreement negotiated between President Biden and Republican House Speaker Kevin McCarthy[5].
While the bond markets appear to have factored in the risk of a potential US default, equity investors have shown more interest in rapid advancements in Artificial Intelligence. Even with the looming threat of a possible US default, the S&P 500 index has reached its highest trading level to date in 2023[6].
If the debt ceiling issue is resolved, it would eliminate a significant risk for the equity market in 2023, potentially enabling investors to shift their focus back to company fundamentals. However, the challenge remains that company fundamentals are deteriorating. The US is currently in a corporate earnings recession, and there is considerable uncertainty about its depth and duration.
Investors may soon have one less thing to worry about in 2023, but they still have to cope with the possibility of even higher interest rates and a recession later in the year.
Last week we got a glimpse of the booming demand for advanced AI chips. Nvidia, a company that produces advanced AI chips used to train large language models like ChatGPT, gave a revenue forecast that completely blew the doors off.
In the investor update, Nvidia CEO Jensen Huang said they are seeing “incredible” orders to retool the world’s data centres to handle AI workloads. Analysts were expecting around $7bn in revenues from data centre clients in the second quarter. So when the company said current order levels suggest revenues closer to $11bn, Nvidia shares skyrocketed[7].
AI related companies have done very well since the launch of ChatGPT. Nvidia, a key supplier of the hardware needed to train the models, was no exception. Before the company gave their revenue forecast, Nvidia shares had already more than doubled since the beginning of the year. But, despite the already stellar performance, the upbeat management guidance sent the shares up more than 20%.
20% might not sound that impressive but for a large company like Nvidia it is. Before the sharp rally, Nvidia was already worth around $750bn. A day after the announcement it was worth closer to $950bn. Thus investors added around $200bn to the market value of Nvidia in a single day. This daily increase is more than the total market value of companies like Netflix or Nike.
It wasn’t only Nvidia that did well. Other companies that stand to benefit from the shift to AI also moved higher. Advantest, a Japanese company that supplies semiconductor testing equipment to Nvidia, rallied more than 10%. TSMC, the company that manufactures most of the high end Nvidia chips, rallied 12%.
We believe that large data centres will look different in the future. At present, data centres mainly use CPUs as the computational workhorse. But CPUs aren’t the best at training AI models. GPUs, like the ones Nvidia supplies, are much better suited to the task. Thus, as time goes by, we believe traditional CPUs could increasingly be replaced by GPUs. This could be positive for GPU manufacturers like Nvidia and negative for traditional CPU manufacturers who aren’t positioning themselves for a shift towards more GPUs in data centres.
The Nvidia CEO called this the ‘iPhone moment’ of the AI computing industry, referring to the 2007 launch of the first iPhone[8]. No wonder market commentators are speculating that Nvidia is on the brink of joining a very elite club of companies like Apple, Amazon, Alphabet and Microsoft valued at more than $1trn.
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[2] https://simpleflying.com/boeing-china-8485-new-planes-2041/
[5] https://www.ft.com/content/1c4bdf98-2be2-40e8-9ab5-5d65e8c296fc
