Market Pulse
Friday, November 22, 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:
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.
US bank stocks have been on a tear in recent weeks. Since November 1st, the KBE ETF, which tracks an index of American banks, has climbed more than 8%. Bank of America, one of Flagship’s largest holdings, has gained nearly 11% over the same period.
It’s not hard to understand investor enthusiasm for the sector. In the wake of a Republican sweep in the US election, the financial industry is expected to see significant deregulation, offering banks fresh risk-taking capacity. New leadership at the FTC, meanwhile, could lead to a resurgence in M&A deals, boosting fees for banks.
Investor enthusiasm for UK banks, however, remains much more muted. While American banks often have trailing price-to-earnings (PE) ratios of around 15x, that figure is closer to 8x for British banks (for instance, 7.7x for HSBC and 8.1x for Lloyds). In other words, investors value a dollar of earnings from an American bank at nearly twice the rate of a British bank.
Thanks to starkly different regulatory paths, this gap could be set to widen further. While the US is set to loosen regulation, rules in the UK are actually getting tighter. Last week’s landmark ruling on commissions in the motor finance industry, for instance, could expose banks to billions of pounds in unexpected payouts.
While sound financial rules are necessary, the current British regulatory environment may go too far. Overly strict regulation risks disrupting valuable financial services, with banks already warning that the motor finance ruling could result in reduced availability of consumer credit. Similarly, in a previous edition of Market Pulse, we discussed how FCA compliance restrictions can limit investor access to expert education.
The Bank of England’s plan to lower bank capital requirements for lending to small businesses, however, could be a sign that things are moving in the right direction. With US financial regulation set to loosen, the time is right for British regulators to continue exploring pro-growth policies that incentivize saving and investment in the UK.
The continued strength of the American economy depends on consumer spending, with private consumption accounting for about two-thirds of US GDP. This week was a key test for consumer strength, with several major retailers reporting earnings and offering guidance for the holiday season. While results were generally positive, future guidance was more cautious.
Lowe’s, a home improvement retailer, eclipsed both earnings and sales expectations as demand for do-it-yourself projects remained robust. Consumers are still pushing off larger projects due to the cost of financing, however. That helps confirm a trend that competitor Home Depot reported last week.
Walmart, America’s largest retailer, reported strong results, exceeding earnings expectations by more than 8%. Thanks to generally cheaper prices, Walmart has tended to gain from increased price sensitivity from consumers. The company’s CFO said that the holiday season is “off to a good start” and raised guidance for 2025.
TJX, which operates several retail brands, also managed to eclipse expectations, although future guidance was much more muted. Despite strong early holiday spending, the company offered mixed guidance through the end of this year. That lack of enthusiasm was mirrored at Target, where the company pared back its full-year earnings outlook after a flat quarter.
Clearly, the consumer picture is not rosy across the board. However, we’d expect far more disappointing retail results if a US recession was just around the corner. Risks remain, such as the potential for a renewed US port strike in January. But with GDP growth strong, rates falling, and real consumption continuing to climb, there are reasons to be optimistic about the US economy.
Since the US first approved Ozempic in late 2017, prescription weight loss drugs have taken the developed world by storm. More than one in eight Americans have used a GLP-1 medication, a class which includes Eli Lilly’s Mounjaro & Zepbound and Novo Nordisk’s Ozempic & Wegovy. In Europe, surging GLP-1 demand has led to shortages across the continent.
Now, these drugs are expanding their global reach. After Ozempic was launched in China in 2021, the race to roll out other GLP-1s in the country has accelerated, with the higher-strength Wegovy recently receiving government approval. With more than half the country’s population overweight, China represents a significant growth market for both Novo Nordisk and Eli Lilly.
As GLP-1 use increases globally, however, drug firms are under increasing criticism about price discrepancies between borders. In the US, for instance, a Wegovy prescription lists at $1,349 per month. In Denmark and Germany, the same drug sells for a fraction of the price, at $186 and $92 respectively. According to pre-order listings in China, prices for Wegovy are expected to be around $195.
At a recent hearing with Novo Nordisk’s CEO, US policymakers accused the company of treating America like its “cash cow” in response to these price discrepancies. Substantial differences between insurance systems, however, mean that prices are not always directly comparable between borders. In the US, GLP-1 drug costs are generally reimbursable by insurance plans, while Chinese individuals will need to pay out of pocket.
Despite these tensions, the economic benefits of GLP-1 drugs are too substantial for governments to overlook. Poor health outcomes associated with obesity can reduce labour supply by limiting total hours worked. One estimate from Goldman Sachs indicates that widespread use of GLP-1s could help grow the US economy by an extra 1% over the next four years.
As a result, we expect governments worldwide to continue making weight-loss drugs more accessible and affordable for citizens. In the US, for instance, policymakers have already introduced proposed legislation to authorise government programs to cover GLP-1s in a wider range of circumstances. While political pressure may result in adjustments to pricing for manufacturers, this trend should provide an additional tailwind to already robust GLP-1 demand.
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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.
