Market Pulse
Sunday, July 7, 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:
Adrian (Portfolio Manager), 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.
“History is the business of identifying momentous events from the comfort of a high-back chair. With the benefit of time, the historian looks back and points to a date like a grey-haired field marshal pointing to a bend in a river on a map: There it was, he says. The turning point. The decisive factor. The fateful day that fundamentally altered all that was to follow. There.[1]”
When an outcome is widely expected [2], its true significance can often be overlooked. In the case of the recent UK election, financial markets had long predicted a Conservative defeat, viewing it as both deserved and inconsequential. Indeed, if you looked at UK gilts - a proxy for political change - the past week has been anything but special:
That’s because the pivotal moment in recent financial history wasn't this election, but the gilts market crash 21 months ago. At the time, the UK budget was severely strained due to the pandemic. The newly appointed Prime Minister, Liz Truss, attempted to stimulate the economy with unfunded tax cuts. However, the gilts market reacted so negatively that the tax cuts were swiftly reversed, and Truss was forced to resign.
Since then, it has been widely assumed that the Conservatives were doomed, and the resulting chaos would deter Labour from pursuing a similar fiscal expansion. Indeed, despite Labour's historical resentment towards financial markets, history shows that major changes are dictated more by international capital markets than British voters [3].
Labour will take over, having accepted [4] that the bond market won’t let them do anything too expansionary. The constraint complicates their efforts to reignite growth but it also positions Britain as a beacon of stability amidst a sea of political turbulence in the US, France, and Germany.
This current stability, however, is not reflected in the price of UK stocks, which have been pummelled by uncertainty in recent years.
We believe UK-focused companies, particularly FTSE 250 firms, consumer stocks, and homebuilders, could present compelling investment opportunities. Small and mid-cap companies are still trading at post-Brexit discounts despite achieving double-digit earnings growth.
As we are in the business of identifying momentous events before they happen, we spend a lot of time meticulously analysing UK-based stocks, some of which made it into our Flagship strategy this year. We don’t have the benefit of hindsight (nor the comfort of high-back chairs) but history has consistently shown that periods of change often create the most lucrative investment opportunities.
Note: We hold Diageo and Rio Tinto in Flagship.
Phil Knight, the legendary founder of Nike, once declared, "Life is growth, you grow or you die." Ironically, after a stagnant FY24, Nike is now forecasting negative growth for FY25, causing investors to panic and sending the stock plummeting 20% last Friday.
Nike's CEO, John Donahue, faces mounting pressure as the company has lost ground in the running market to innovative rivals like On and Hoka:
Running and walking, the most popular forms of exercise, drive the Sports Footwear category, the largest and fastest-growing segment [5] within the already thriving Sportswear sector.
There is no doubt that Nike has dropped the ball but their product lifecycle management process means that to make room for innovations they have to reduce the distribution of older products. In the short run, that means pressure on revenues.
This primarily affects their digital channel, where most of the older inventory is held, but also extends to retailers. There are indications that retailers are receiving reduced allocations of major Lifestyle franchises due to Nike's decreased production of these lines, according to Bernstein, a broker.
However, despite these short-term challenges, we remain optimistic about Nike’s long-term prospects. The company enjoys a #1 market share in all major markets, strong brand recognition, and robust retail partnerships. Its diverse product portfolio, anchored in performance rather than trend-driven fashion, adds a layer of resilience to its business.
The stock has shifted from being heavily favoured by investors to being under-owned, and its valuation has decreased by a factor of 7 over the past six months, from 30x forward P/E to less than 23x currently.
This could set the stage for a rapid recovery if the brand shows signs of improvement, an example of asymmetric risk-reward that ticks many of Sidekick's investment team boxes.
Note: We initiated a position in Nike on Monday in Flagship.
Amazon is reportedly planning a new section on its website dedicated to low-cost items shipped directly from China, targeting overseas consumers [6]. This move, if confirmed, represents Amazon's boldest response yet to the rising popularity of discount rivals like Temu and Shein.
While increased competition is rarely positive in the e-commerce space, it's unlikely this move will become a central growth strategy for Amazon or significantly impact Temu's global expansion. With the vast US retail market, there's enough room for both companies to thrive by capturing share from offline competitors.
Although competitive pricing and cross-border logistics present challenges, Amazon's vast resources and logistical expertise could potentially streamline these complexities. Additionally, Amazon's strong reputation for quality and compliance could mitigate concerns regarding the UFLPA [7] regulations that Temu and Shein have been subject to lately. This initiative could unlock untapped markets and attract a broader customer base seeking budget-friendly options, thereby expanding Amazon's reach and revenue potential.
But while Amazon's US fulfilment network is strong, questions remain about its effectiveness in China, especially considering the logistical complexities of cross-border shipping. The reported 9 to 11-day fulfilment time suggests reliance on air freight, potentially raising concerns about Amazon's increased use of the “de minimis” [8] provisions.
Our current view is that this is primarily a capability-building exercise for Amazon, allowing them to offer products at competitive price points with the option to scale up if needed. The move could also serve as a hedge against a potential prolonged economic downturn, where consumers may prioritise price over other factors. However, Amazon's core value proposition of selection, price, and fulfilment speed remains a priority, distinct from Temu's emphasis on price alone.
Note: We hold Amazon in Flagship.
[1] Amor Towles, A Gentleman in Moscow
[4] https://labour.org.uk/change/my-plan-for-change/
[5] https://www.grandviewresearch.com/industry-analysis/athletic-footwear-market
[8]https://perfectunion.us/congress-could-close-one-of-amazons-favorite-loopholes/
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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.
