Market Pulse
Friday, December 6, 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. CHIPS Are Down: Intel CEO Resigns
2. Dollar Dilemma: Trump Threatens BRICS Tariffs
3. Stalling Out: UK’s Lukewarm Commitment to EVs
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.
After a brief but choppy tenure, Intel chief executive Pat Gelsinger has resigned from the company. The move is not a huge surprise, given that Intel shares have fallen by more than half this year amidst the company’s extended crisis. While Gelsinger’s departure adds to Intel’s uncertainty in the near term, it could significantly expand the company’s options in the future.
Gelsinger was named Intel chief in 2021, announcing a five-year turnaround plan for the company to rival chipmaking giant TSMC. Less than four years into his tenure, however, support for Gelsinger’s vision has dried up thanks to record quarterly losses. According to Bloomberg sources, Gelsinger’s resignation this week followed an ultimatum from Intel’s board to either quit or be fired.
Notably, Gelsinger was strongly opposed to splitting up Intel into separate divisions, a strategy we discussed back in September. With a new CEO, the time could be right to revive spinoff discussions. Possibilities include splitting Intel’s foundry and design divisions or spinning off the company’s valuable Altera unit. Crucially, however, conditions in Intel’s recently secured funding under the CHIPS Act could limit the company’s flexibility to sell its foundry division.
While we believe that Intel can provide the most value to shareholders as a standalone firm, acquisition talks could also be back on the table. In the past, companies like Qualcomm and Broadcom have both shown interest in a deal. It is imperative, however, that any acquisition values Intel in line with its true potential, rather than its depressed market price.
In the immediate aftermath of Gelsinger’s departure, Intel shares jumped about 5%, although they have since fallen back to their previous levels. For now, Intel has named two interim co-CEOs while the board searches for a new chief. Depending on Intel’s spinoff plans, however, the board may need to find two permanent CEOs to run separate divisions of the company independently.
Note: We hold Intel in our Flagship portfolio
In a preview of the likely tone of Trump’s diplomacy, the US president-elect last week threatened the BRICS alliance with 100% tariffs should they try and replace the dollar as the world’s reserve currency. BRICS, a group of nine countries including China and Russia, has taken small but significant steps toward trading in an alternative currency. Trump’s threats, however, represent a profound misunderstanding of why the dollar is so dominant.
The dollar currently accounts for 58% of foreign central bank reserves and 88% of foreign exchange transactions, well ahead of any other currency. In practical terms, this means that international trade (particularly for commodities) is nearly always denominated in dollars, even if neither side of the transaction uses dollars as their home currency.
The US accrues significant benefits from this dynamic. Foreign countries with huge dollar stockpiles typically recycle those dollars into US Treasuries, which are considered default-free. As a result, about 30% of outstanding US government debt is held by foreign investors. This structural demand for Treasuries allows the US to borrow at lower rates than would otherwise be the case.
But the dollar’s status as global reserve currency is not unassailable. In fact, one of the reasons that the dollar is a natural reserve currency is that the US has the largest trade deficit in the world. This translates into huge volumes of dollars flowing out of the US each year to foreign exporters, ensuring that ample dollars are available internationally for trade.
As a result, Trump’s stated economic goals are in conflict with each other. Although Trump wants to secure the dollar’s status as reserve currency, his love of tariffs and desire to balance America’s trade deficit only makes this status harder to maintain. In fact, assessing tariffs on BRICS for adopting an alternative currency may only speed the dollar’s downfall.
Finally, we note that disruption of the dollar’s dominance could also result in significant non-economic impacts. America’s control of the dollar system has enabled the country to disrupt flows of terrorist financing and effectively implement sanctions on countries like Iran and North Korea. Careful stewardship of the dollar is necessary to avoid significant unintended consequences.
In a blow to the region’s economy, automotive company Stellantis last week announced plans to shutter a van-making factory in Luton. Far from an isolated event, however, this move is indicative of the UK auto industry’s struggles amidst the EV transition. Ford also recently cut jobs in the UK, with Nissan hinting that it will do the same soon.
According to executives, the industry is struggling with regulatory mandates to sell zero-emission vehicles paired with insufficient government support to make that transition economical. By 2035, all new vehicles in the UK must be zero-emission. Despite this, the UK ranks well behind European peers in terms of consumer incentives for EVs.
With slowing global EV demand and rising competition from low-cost manufacturers abroad, these issues are coming to a head. Amidst industry pushback, government officials have indicated that they may end up walking back such strict EV mandates. In the first ten months of this year, just over 18% of new cars sold in the UK were electric.
This mixed signalling, however, risks further confusing the industry’s investment decisions. Ultimately, the UK government must decide whether or not the country is truly committed to the EV transition. The Labour government’s recent budget, for instance, included both increased funding for battery charging stations as well as a tax on high-priced cars that could punish luxury EV makers.
The UK is far from the only European country navigating EV transition challenges. Plant closures have also occurred in both Germany and France, for instance. But compared to peers, the UK appears far more lukewarm about actually committing to the transition with sufficient incentives and industry support.
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.
