Market Pulse
Monday, September 11, 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:
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.
We view geopolitics as tectonic forces impacting the investing landscape. Just like plate tectonics broke up the supercontinent Pangea, geopolitics is slowly breaking up the established order we’ve become accustomed to over the last few decades.
Last week, reports surfaced that suggested Chinese government officials had ordered their departments not to use Iphones or other foreign devices at work. According to the Bank of America, Apple sells around 50mn Iphones in China and an Iphone ban on government employees could see Apple sell 5mn-10mn less units a year. Investors got spooked by the reports and knocked around $200bn, just over 6%, off Apple's market cap[1].
We were somewhat surprised by the sharp reaction in the share price. This is not the first time China has targeted a foreign brand. Back in 2022, China asked its government agencies and state-backed corporations to replace all foreign PC hardware and operating systems with domestic alternatives[2]. They have also previously targeted Tesla due to concerns that their cameras were collecting sensitive data. In 2022 Tesla cars were banned from entering a Chinese coastal district where the government held their secretive annual leadership conclave[3].
Companies operating in China know all too well that the fate of their Chinese businesses could change overnight. Apple gets around 20% of its revenues from China but there are other tech companies like Intel, Nvidia, and Tesla that have even greater exposure to China. We have seen little evidence of the geopolitical tensions between the US and China easing so we expect this won’t be the last time the Chinese government goes after a US tech company.
The Generative AI boom is well underway and share prices of companies at the forefront, like Nvidia and Microsoft, have done very well so far in 2023. As a result of the sharp rally, many investors are undoubtedly looking for overlooked areas of the economy that might also benefit from the boom in AI related investment. One of these areas might be physical infrastructure, or more specifically the cloud data centres, that have to house all of Nvidia's new chips.
Many institutional investors have large property portfolios but the types of properties they choose to invest in are evolving[4]. Changes in consumer behaviour, like shifts towards e-commerce and remote working, mean institutional investors are increasingly favouring cloud datacenters over more traditional properties like office buildings and shopping malls.
There is another factor at play that is driving increased demand for data centres. A trend towards ‘data sovereignty’ where a growing number of countries are pushing for greater control of the data collected within their borders. This has become especially important in Europe since the introduction of the General Data Protection Regulation (GDPR) in 2018[5].
But the shift to a digital economy and the proliferation of data centres have sustainability implications. Data centres have to be cooled to keep all the high end equipment functioning and, as a result, they use a lot of water and electricity. McKinsey estimates that a large datacenter can use as much electricity as 80,000 households and as much water as 50,000 households[6].
Demand for data centres is expected to more than double between 2022 and 2030 but it's not all sunshine and roses[7]. Regulators and governments are mandating increasingly strict sustainability standards that could impact long-term expected returns.
Historically, the music industry has been an early candidate for technological disruption and as a result had to learn to adapt to stay ahead. The advent of the mp3 format led to a rise in illegal music downloads through sites like Limewire. This put music industry revenues, and artist livelihoods, under great pressure. But then, during the mid to late 2000s, thanks to the launch of streaming services like Spotify and Apple Music, the fortunes of the music industry started changing.
The industry did so well that large asset managers like Blackstone, KKR and Blackrock invested billions into music catalogues where royalty payments from copyrights offer a predictable, recurring and diversified source of return. Streaming helped turn music into an asset class[8].
Streaming services, like Spotify, have a relatively simple business model. They charge a monthly subscription and then distribute about two thirds of that revenue to the owners of the music rights based on their share of listening. But this relatively simple revenue sharing structure can be easily manipulated.
In many current streaming agreements, every audio stream is counted equally as long as someone, or yes, even an algorithm, listens to it for at least 30 seconds. This is like saying a 30 second Youtube video of a dog barking at a bus is the same as an episode of Ted Lasso. JP Morgan analysts estimate that if you uploaded a 30 second recording of your washing machine and set your PC to listen to it on repeat, you could make up to $1,200 of royalties a month! [9]
This very real problem has arguably been made even worse by the advent of AI generated music. In our ideal world, royalties should be paid to real artists for real music, not for recordings of washing machines or fake AI music generated by apps like Boomy. Last week we saw a deal that could take us a step in the right direction.
Universal Music struck a deal with Deezer, a French streaming service, that could reshape music streaming economics. The deal will direct more royalty payments towards professional musicians and away from noise and fake AI streams. The deal doubles royalty payments to artists who generate at least 1,000 listens a month. On top of that, they double royalty payments again if a streaming user searches for a specific artist like Taylor Swift[10].
Deezer is relatively small in the bigger picture and the larger streaming platforms, like Spotify and Apple Music, have not yet committed to any changes to how royalty payments are calculated. If they do, it could have significant implications for the music business and potentially also result in artists taking a bigger share of the revenue pie.
[1] https://www.ft.com/content/a4671dc9-ca76-4dfb-b52c-9f7ab14f735e
[5] https://www.ft.com/content/a2b5cfae-c911-47d8-8fc9-9ef91aef082b
[9] https://www.ft.com/content/b85ab5af-bd03-4da8-971a-316e7c7897dc
[10] https://www.ft.com/content/b28b97ca-a6aa-4e90-8b89-d48ccc940756
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.
Sidekick is not yet regulated but has applied to the FCA for authorisation to operate. Prior to Sidekick becoming fully authorised, none of the information provided is intended as an invitation or inducement to apply for any Sidekick product or service.
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