Market Pulse
Friday, July 19, 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.
It’s insensitive, if not cold to talk about financial markets and stock picking when lives are on the line and we’re facing circumstances as disturbing as this past week [1]. Yet, shocking events like global pandemics, wars and yes, attempted assassinations of former presidents are bound to have financial effects, which will matter. And it’s our job to objectively analyse them.
Although Trump’s chances of winning have undeniably improved this week, the race is still far from decided, particularly given the uncertainty about his eventual opponent[2]. A significant portion of the population is still firmly opposed to Trump and will not vote for him under any circumstances. For an election to be significantly impacted by unexpected events, these usually need to happen much closer to the election date. That's why the term "October Surprise" is a staple in political jargon[3].
Nevertheless, even if the betting markets are correct and Trump secures a second term in November, predicting how his policies will impact the economy and the companies we follow remain more art than science. Despite his campaign appearing more organised than last time, his economic wish list is highly contradictory.
The most obvious contradiction is his desire to reduce inflation while simultaneously increasing tariffs, lowering interest rates, and cutting taxes. None of these measures align with the goal of reducing inflation; in fact, they are likely to increase it. Additionally, Trump recently claimed [4] that a strong dollar is the greatest problem facing the U.S., yet his wish for a weaker currency conflicts with his commitment to maintaining the U.S. dollar as the world’s reserve currency[5]. Tariffs and fiscal expansion would likely drive up interest rates too, which would, in turn, strengthen the dollar.
Even so, as global financial markets reopened on Monday, it became clear that the Trump trade is picking up momentum. Some of the policies described above are seen as positive for certain corners of the market, like banks and energy companies. The US domestic small cap companies embodied by the Russell 2000 index had the best week in years[6]. But the broader-market implications are still unclear, given the uncertainty about inflation and the high interest rates that come with it.
What’s certain is that although bond yields reacted higher on Monday, we are still far from a bond market revolt that would imply an end to rate cuts and therefore, a most likely tougher environment for stocks. In fact, the recent movement in Treasuries, tells us that investors think that Trump will get to implement his agenda without spurring inflation.
That is the million dollar question and the decisive factor of a successful Trump presidency. While our base case today is for a Trump second term[7] we are not treating it as a done deal and position our strategies with multiple macro scenarios in mind.
Last week, AT&T revealed details about a data security incident in which hackers accessed records from more than 100 million customers. [8] While AT&T first uncovered the attack in April, the Justice Department requested that the company delay announcing it due to national security risks, fuelling speculation that the attack may have been launched by a state actor.
Whether or not the hack was part of continued cyberespionage efforts from Russia and China, the episode highlights the rising importance of data security in the cloud computing age. [9] With businesses likely to take a closer look at their cybersecurity needs in the wake of the AT&T incident, the hack could help support the industry’s growing bull market. Over the past few months, cybersecurity firms have been a prime acquisition target, as evidenced by several recent mega-deals around the world.
In the U.S., Google parent Alphabet appears to be in the early stages of purchasing cybersecurity startup Wiz for $23 billion, which would be the company’s largest acquisition of all time. [10] That mirrors a similar announcement in the U.K., where private equity giant Thoma Bravo is set to take Darktrace private at around a $5 billion valuation. [11] When it comes to early-stage companies, Crunchbase reports that at least a dozen U.S. cybersecurity firms have raised $100M+ rounds this year, despite the relatively slow deal market overall. [12]
Unlike artificial intelligence or cloud computing, cybersecurity usually only makes the headlines when something goes wrong. But on the back of more attention-grabbing plays, the cybersecurity market has been quietly growing for years - a trend that the AT&T hack is likely to help supplement.
Note: We hold Alphabet in Flagship.
The 2024 Paris Olympics are set to kick off next week, but this edition of the summer games will be more affordable than most.
While the Olympics have a reputation for promoting costly overspending and wasteful construction projects, this year’s games are being delivered on a budget. With Paris already having substantial sports infrastructure, including at least 3 football stadiums with 20,000+ capacity, relatively little new construction was necessary. In addition, the Paris organisers that pitched the city to the International Olympic Committee operated on a budget 96% funded by the private sector. [13]
One of the biggest private sponsors of this year’s Olympics, appropriately enough for Paris, is French luxury giant LVMH. [14] Having spent €150 million to be one of the premium sponsors of the games, LVMH will see their brands like Louis Vuitton and Dior featured prominently in the competition.
In 2022, LVMH founder and CEO Bernard Arnault expressed a desire for Louis Vuitton, the firm’s flagship label, to be seen as a “cultural brand,” not just a fashion brand. [15] With the Olympics drawing billions of television viewers, funding the games should help cement the company’s growing connection with sport, especially on the back of a much-discussed campaign with Roger Federer and Rafael Nadal earlier this year. [16]
Doubtless, Arnault also hopes that the Olympics will help reverse the recent deceleration in LVMH sales following several blockbuster years for the luxury industry. [17] The LVMH branding should inspire a few extra sales to the global tourists descending on Paris for the games – and, with any luck, influence those tourists’ social circles when they return home.
And LVMH isn’t the only one who might profit from these games. If all goes according to plan, Paris might realise a net gain from hosting, potentially the first Olympics to turn a profit since Los Angeles 1984. [18]
Note: We hold LVMH in Flagship.
[1] https://edition.cnn.com/politics/live-news/trump-rally-shooting-07-17-24/index.html
[2] https://apnews.com/article/biden-election-2024-presidency-6fa4b6ff9382d9161d21dfc52838008f
[3]https://en.wikipedia.org/wiki/October_surprise
[4]https://www.bloomberg.com/features/2024-trump-interview-transcript/?cmpid=BBD071824_AUT
[5]https://www.presidency.ucsb.edu/documents/2024-republican-party-platform
[8] https://www.nytimes.com/2024/07/12/business/att-data-breach.html
[12] https://news.crunchbase.com/biggest-us-vc-startup-funding-deals-2023/
[16] https://www.gq.com/story/roger-federer-rafael-nadal-louis-vuitton
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