Market Pulse | Twitter in chrysalis, UK property prices continue to slide, and choppy waters ahead for global stocks?

Sidekick Money · Market Pulse: Twitter in chrysalis, UK property prices continue to slide, and more

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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:

Twitter in chrysalis. Can Elon Musk pull it off?
UK property prices continue to slide.
Choppy waters ahead for global stocks?

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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.

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1) Twitter in chrysalis. Can Elon Musk pull it off?

While Elon Musk is perhaps better known for founding Tesla and SpaceX, back in the late nineties he was more focussed on digital banking. One of his first companies, X.com, merged with another to eventually become Paypal. Now, Musk plans to transform Twitter into, according to him, “the biggest financial institution in the world”.[1]

Musk’s original vision for X.com was to put the company at the very centre of customers' financial lives and offer much more than just online payments. He was ousted as CEO before he could bring these ideas to life but these old ideas are now being revived.

The reorganisation of Twitter has been chaotic. Musk acquired Twitter for $44bn and the company was recently valued at $20bn, less than half what he paid for it [2]. Revenues fell from $5bn in 2021 to around $3bn last year. To cut overhead costs and potentially avoid bankruptcy, Twitter cut the number of employees from 7,500 to around 2,000.

To incentivise the remaining employees, Elon Musk is awarding them with company stock. He recently told employees that he sees a path to Twitter rising to more than $200bn in market value. This might sound ambitious to some but the last time Elon Musk made such a prediction to employees was back in 2015. He predicted Tesla, then valued at only $25bn, would be worth more than $700bn in a decade's time. At the time many Wall Street analysts thought this prediction was far too ambitious. But Tesla is currently valued at more than $650bn[3].

The ambitious plan for Twitter involves creating a ‘super app’ that combines social media, e-commerce and digital banking. It would include peer-to-peer transactions, savings accounts, debit cards and could eventually also support cryptocurrencies. This is not a completely new idea. Companies like Tencent and Ant Group in China already have apps like WeChat and Alipay that closely resemble some of the product plans Elon Musk has for Twitter 2.0.

There are already some tentative steps in the direction of a new super app. Back in 2017 Elon Musk bought back the domain name ‘X.com’ from Paypal for an undisclosed amount of money.[4] And, more recently, Twitter filed papers with the US Treasury to become a payment processor.

It might prove difficult to create a ‘super app’ in the West. The Apple and Android ecosystems and strict regulations represent significant hurdles. But this is Elon Musk, so it’s a space we should all keep a close eye on in the future and the implications such a super app could have for the financial services market at large.

2) UK house prices continue to slide

The previous UK chancellor, Kwazi Kwarteng, cut stamp duty to support the housing market. The current chancellor, Jeremy Hunt, reversed many of the previous policies but agreed to leave the stamp duty cuts in place until March 2025. But, despite generous government support, UK house prices have now fallen for 7 consecutive months. The fall in March, down 0.8% from February, was twice as bad as some economists expected.[5]

Over the last year, UK house prices are down 3.1%. While this doesn’t sound too bad, it’s the steepest annual decline since 2009. From the peak in August last year, house prices are down almost 5%. But, despite the recent fall, the average UK house price is still almost 20% higher than it was in February 2020, just before the Covid-19 lockdowns started.[6]

Some economists fear that the worst is still to come.[7] They argue that household budgets will more than likely remain under pressure for the rest of 2023. The Bank of England estimates that as many as 2.5 million UK borrowers will have to remortgage fixed-rate deals at a significantly higher rate over the course of 2023. This means an additional £250 added to the average monthly mortgage bill for many people. The Bank of England estimates that more than 100,000 people in the UK are at risk of losing their homes this year.

The Bank of England is still hiking interest rates to curb high inflation and, as long as interest rates remain at this high level, we expect house prices to remain under severe pressure. The longer-term growth outlook for UK residential house prices is also somewhat less rosy than the strong returns the previous generation of homeowners experienced. Since 1992, UK house prices have increased by 5.3% per year. Comfortably ahead of inflation and even the FTSE 100. This was driven, in large part, by persistently falling interest rates. During that period the Bank of England base rate fell from 6.8% to a rock bottom 0.1% in 2021. Unless we get negative interest rates like some countries in Europe, that is pretty close to as good as it gets for cheap mortgages. [8][9]

House prices peaked in August 2022 at levels that many felt were increasingly unaffordable for UK households. While we believe the Bank of England will get inflation under control and they will eventually start cutting interest rates again we believe there is a hard limit to how high UK house prices can go. House prices must obey the rules of financial gravity. Average house prices cannot rise far beyond what the average household can afford.

3) Choppy waters ahead for global stocks?

Global stocks have had two very good quarters. Listed US companies make up more than half of the market value of all listed companies and in the last quarter of 2022, the S&P 500 in the US gained 7%. It then rose another 7% in the first quarter of 2023. These strong returns and apparent market resiliency in the presence of stubbornly high inflation, rising interest rates and, more recently, some high profile bank failures have market participants worried that we could be due a market correction. [10]

Digging into the numbers reveals a concerning trend. A healthy stock market is one where stocks do well on average. When a small group of stocks is responsible for an outsized portion of the overall market performance, it is usually a sign that all is not well in the stock market. We’re in such a situation at the moment.

A small group of stocks including Nvidia, Meta, Tesla and Advanced Micro Devices are responsible for a large portion of S&P 500 performance over the last quarter. According to Ed Yardeni, a respected market commentator, a small group of companies leading the market higher is often seen just before a recession. The latest Bloomberg survey of economists supports this view. They put the probability of a US recession at 65%, well above the 25% average survey probability since 2008. [11]

The market sentiment among institutional investors, or the ‘smart money’ as they’re sometimes called, has been at very low levels since last year.[12] But US retail investors were quite upbeat until last month. In March, net stock purchases by retail investors had fallen to depressed levels last seen in 2020. [13]

Some retail investors have said they are worried about the risk of a US recession. They are selling stocks and opting instead for safer fixed income money market funds yielding more than 4% in some cases. So far in 2023, US retail focussed money market funds have seen the biggest inflows in over a decade. [14]

For most of the last year the S&P 500 has traded in a range between approximately 3,600 and 4,300. After two strong consecutive quarters it’s currently above 4,100. If the stock market loses buying support of both institutional and retail investors, it might struggle to make any significant headway over the coming months.