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Market Pulse
Saturday, March 16, 2024

Stubborn US inflation, private equity looking for an exit and thousands of new Bitcoin millionaires every day…

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 stories this week are:

  1. US inflation: The last mile could be challenging
  2. Private Equity: Looking for the nearest exit
  3. Bitcoin, Blackrock and a race to reap mining rewards

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.

1) US inflation: The last mile could be challenging

The latest inflation data out of the US suggests the last mile to tame inflation might be the hardest. The numbers showed an unexpected jump in prices for things like used cars, plane tickets and clothes. Because of this, the market is now thinking we might have to wait a bit longer to see cuts in interest rates this year[1].

The Federal Reserve has approached the topic of rate cuts with caution, wanting to avoid acting too hastily. The latest data points seem to support their approach. The Fed has a meeting scheduled for next week to determine the best course of action going forward. Currently, the Fed plans to implement 3 rate cuts this year, while the market is still a bit more optimistic than the Fed, expecting 3-4 cuts[2].

If interest rates do start coming down over the medium term, how might it impact stock markets? We don’t have a crystal ball but we do have some maths skills to dig into historical data. We analysed weekly returns of various investment factors like quality, growth, momentum and smaller companies over the last decade. Our analysis reveals a weak negative correlation between growth and quality stocks and 2-year US bond yields. Thus, historically speaking, higher quality and faster growing companies performed well when interest rates fell.

Source: Bloomberg LLP

In our view, one of the risks to stock markets this year is a potential resurgence in inflation requiring more drastic action from central banks to cool things down. If a newly elected US president enacts pro-growth policies like tax cuts, they may be adding fuel to the fire and reignite inflationary pressures in the US economy. We’re keeping a close eye on things.

2) Private Equity: Looking for the nearest exit

A recent study by Bain & Co threw some light on a big challenge facing private equity groups worldwide. Together, they're sitting on more than 28,000 private companies valued at over $3 trillion. The issue? Well, with a sharp slowdown in dealmaking, these funds are finding it increasingly difficult to sell off assets and get cash back to their investors[3].

Turns out, over 40% of these companies have been in private equity portfolios for at least 4 years, and typically, these investments are sold somewhere between 3 and 5 years. Unsurprisingly, funds that have been successful in returning cash to their investors are having an easier time gathering new capital. In fact, just 20 funds managed to rake in more than half of all the cash raised by private equity in 2023[4].

As for private companies eyeing an exit, going public through initial public offerings (IPOs) could be their ticket out. And it looks like IPOs might be making a comeback, especially in Europe where they've kicked off the year stronger than any time since the pandemic began. European companies have raised more than double what they raised in the same period last year, all thanks to a stable market, the hope of falling interest rates, and listed companies hitting new peaks. This is good news for private equity funds on the lookout for exit opportunities[5].

3) Bitcoin, BlackRock, and a race to reap mining rewards

BlackRock's US Bitcoin ETF launch on January 11th coincided with a slipping price, which continued to fall more than 15% over the next few weeks. Around that time, a Deutsche Bank survey revealed that a third of retail investors believed Bitcoin would drop all the way to $20,000 by year-end. However, the market seems to have other plans[6].

Shortly after the survey's release, Bitcoin's price took off, rising more than 80% and in the process creating over 1,500 new Bitcoin millionaires every day[7]. The BlackRock ETF also made history, reaching $10bn in assets faster than any other ETF in the US, surpassing Invesco's QQQ ETF, which took more than a year to achieve the same milestone[8].

Looking ahead, Bitcoin is set to undergo a halving later in 2024, a process that occurs around every four years, cutting in half the rewards paid to miners for validating transaction blocks. This event has implications for both miners and investors.

Firstly, mining companies may face a significant drop in revenue unless they scale their operations. We are seeing evidence they are doing exactly that. The top miners placed orders for over $1bn in specialised mining rigs over the last year. Investors, on the other hand, are probably more focussed on the halving's impact on Bitcoin's price. This is a topic of heated debate as previous halvings have been followed by significant rallies[9].

As for the UK, while a Bitcoin ETN (exchange traded note) is not yet available, steps are being taken in that direction. The LSE announced it will accept applications from the second quarter of 2024, and the FCA has stated it will ‘not object’ to the creation of Bitcoin and Ethereum ETNs for professional investors. These strike us as important steps in the right direction to turn the UK into a ‘hub for crypto assets’[10].


[1] https://www.ft.com/content/46ca8249-8b81-4f25-a852-4bf9f9852085

[2] https://www.ft.com/content/4c78d236-5af7-40ad-9188-6f37a6223f36

[3] https://www.ft.com/content/e33b0bcb-3ee4-4e11-9c42-f78193f90e04

[4] https://www.bain.com/insights/topics/global-private-equity-report/

[5] https://www.ft.com/content/46b35b4a-1300-435e-88fd-50f9ac8724b0

[6] https://news.bitcoin.com/deutsche-bank-survey-over-one-third-of-respondents-expect-bitcoin-to-fall-below-20000/

[7] https://www.bloomberg.com/news/articles/2024-03-11/bitcoin-rally-creates-around-1-500-new-millionaire-wallets-a-day-kaiko-says

[8] https://www.ft.com/content/1bb8413e-b974-4e05-933e-7ffedec62bdb

[9] https://www.bloomberg.com/news/articles/2024-03-09/bitcoin-miners-are-devouring-energy-at-a-record-pace-during-the-crypto-runup

[10] https://www.bloomberg.com/news/articles/2024-03-11/london-stock-exchange-to-accept-applications-for-bitcoin-ethereum-etns


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