Market Pulse
Monday, August 7, 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 (CIO), 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.
For the first time since the Lehman crisis back in 2008, both the UK and the US now have interest rates higher than 5%. Despite some signs that UK inflation is falling towards target, the Bank of England raised interest rates again last week and said they’ll do it again if they have to. Interest rates play a fundamental part in the economy and, partly thanks to higher rates, we are increasingly seeing things we haven’t seen in a very long time. Let's have a look at a few.
Back in May, while the US debt ceiling debate was raging, Fitch put the US on a downwards credit watch. Last week they pulled the trigger and downgraded the US from an AAA to a AA+. This is the same level as countries like Canada and New Zealand but still two levels higher than the UK’s AA-. As reasons contributing to their decision, Fitch cited the rapidly deteriorating state of US finances but, interestingly, also ‘a steady deterioration in standards of governance’.
Does the credit downgrade make sense? We think so. Thanks to higher interest rates the US government budget deficit, the amount by which expenses are larger than revenues, is expected to increase from 3.7% of GDP last year to 6.3% this year. That's an increase of more than half a trillion dollars[1].
Because of weaker than expected iPhone and iPad sales, Apple reported a third straight quarter of revenue declines and predicted a similar result for next quarter. If next quarter is weak as the company expects, this will be the longest streak of falling quarterly sales for Apple since all the way back to 2000.
Apple’s management said a stronger dollar was partly to blame for the weakness and while this is true there is an ongoing slowdown in demand for smartphones. Shares in Qualcomm, the largest supplier of smartphone processors, recently fell more than 10% when it cut its sales forecast.[2]
It’s not all bad news at Apple though. Revenue from services like Apple TV and Apple Music increased 8% since last year as they added another 150mn subscribers. Apple now has more than 1bn subscribers. This is more than Spotify, Netflix and Disney+ combined.[3]
Rapidly rising mortgage rates are impacting UK home sales and prices. In the April-June period, UK home sales were down 23% compared to last year[4]. Data from Nationwide shows UK prices are down almost 4% compared to the same period last year and close to 5% below the peak in August 2022. This is the biggest annual drop in house prices since 2009.
There are more than 4mn private rented properties in the UK and over 2mn of the landlords have buy-to-let mortgages. Capital Economics estimates that at a 6% remortgage rate, more than 20% of buy-to-let properties will lose landlords money every month. The average 2-year rate for a buy-to-let mortgage is currently 7%[5]. So far, landlords have been increasing rents to keep up with mortgage payments but they might struggle to raise rents much more as 43% of renters are reporting difficulty paying rent[6].
If landlords start selling unprofitable rental properties it could put further downwards pressure on house prices in the UK. Economists expect house prices to register a peak-to-trough fall of around 7-10%[7]. This is in line with comments from the Bank of England who expects values to fall no more than 5% in the second half of 2023[8].
It means all of us have to carefully re-examine our investment portfolios in light of changing market conditions. The sharp increase in yields on ultra safe assets like government bonds means the bar for owning riskier assets such as stocks and real estate is higher than it has been for a long time.
[1] https://www.ft.com/content/a7dfd132-ba8c-481f-aa7a-2f0731751559
[3] https://www.ft.com/content/17d63b45-6005-499d-96ba-d141f732436c
[5] https://www.ft.com/content/9f7e1480-f3c4-469c-a9fb-704a40329ca2
[8] https://www.bankofengland.co.uk/monetary-policy-report/2023/august-2023#chapter-10
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.
Please remember, investing should be viewed as longer term. When we launch, your capital will be at risk — the value of investments can go up and down, and you may get back less than you put in.
