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Market Pulse
Friday, June 28, 2024

US election drama, payments fraud and UK private equity challenges

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:

  1. Biden v Trump: US election drama
  2. No APP-etite for fraud
  3. UK private equity in the spotlight

Cyril, Lee 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.

1. Biden v Trump: US election drama

The US election is getting closer and last night was the first 2024 presidential debate between the two candidates - current President Joe Biden and ex-president Donald Trump. 

Joe Biden really needed to deliver a good performance to calm voter fears that he doesn’t have the stamina for another 4 years in office. He also needed it to reverse the polling deficit that makes Trump the favourite to win the election. We think his performance was underwhelming and achieved the opposite of what he might have hoped for. We think the likelihood of a Trump presidency has increased. 

But what should we expect if Trump becomes president again? It is of course very difficult to say with any certainty. What candidates say they’re going to do while campaigning are often very different from what they do when they actually get into office. 

Economists at Moody’s Analytics, a US credit rating agency, recently gave their outlook for what to expect if Trump wins. They’re not overly optimistic. In fact, they predict Trump's economic policies could cause the US to drop into a recession by mid-2025 [1]. 

Some of Trump's economic plans include hiking import tariffs to 10%, cutting taxes and taking a much tougher stance on immigration. All moves which Moody’s Analytics says could reignite inflation in the US. Higher inflation means the Fed likely won’t cut interest rates and this could potentially mean a more difficult period for stock markets. 

But all of this is speculation and we’ll have to wait a bit longer to get more clarity. In the very short term we think the Democratic party in the US has an important decision to make. Should Joe Biden stay on the ballot after his most recent performance or is it time to start thinking about a possible replacement?

2. No APP-etite for fraud

The world of payments is a major technological success story - today’s landscape has changed beyond recognition in even the last 5 years, let alone the last 20. It’s now possible to pay almost anyone in any part of the world at the touch of a button within minutes.

But a relatively frictionless payments ecosystem has witnessed a corresponding rise in so-called authorised push payments (or APP) fraud. Although this type of fraud comes in many different guises, the common elements are that an unwitting victim is deceived into making a payment to a previously unknown third party - typically via online channels - who turns out to be a scammer.

The estimates of scale vary but some of the eye-watering stats which caught our eye include these:

  • Fraud accounts for 40% of all crimes in the UK [2]
  • £145 million was lost to APP fraud in the first 6 months of 2024 alone [3]
  • The Financial Ombudsman Service has seen a 20% increase in APP related cases [4]

The investment industry is sadly not immune to its own forms of this type of fraud as well - the FCA has long warned about the dangers of investing based on a cold caller selling the wonders of sustainable forests or holiday developments in far off corners of the globe [5]. We, here at Sidekick, have also experienced our own sense of frustration as we’ve heard horror stories from a few of our customers spending hours on the phone to their banks trying to convince them that their payment to the new kids on the block Sidekick Money is genuine.

So what's to be done?

The payments regulator is proposing tougher rules for reimbursement (due later this year) which many in the industry claim will actually do more harm than good by incentivizing fraudsters as customers are much more likely to be reimbursed by their banks. The Treasury is actually proposing that more time be added to the payments flow in order to assess the circumstances where there is a risk of fraud occurring. All absolutely worthwhile approaches of course.

Our view is that knowledge is power - consumer awareness programmes are essential. We spotted this handy guide online [6] which outlines a few key warning signs that you may be looking at a scam:

  1. An offer is too good to be true
  2. Communication seems strange
  3. You’re feeling pressured
  4. You are being asked to use an unusual payment method
  5. You have been asked for personal information

Take some time out before rushing into something if any of these indicators are present.

3. UK private equity in the spotlight

Helped by record low interest rates, the private equity market has grown significantly over the last decade. Assets under management have quadrupled to more than $8 trillion, almost 3 times as large as the entire UK economy. But thanks to the recent bout of inflation, and much higher interest rates, cracks are appearing in the private equity market. 

If private equity did well in other countries, it was on steroids in the UK. Private equity buyouts weigh more in the overall UK economy than any other advanced market, including the US, where the industry was born. It’s so big that 1 in 10 employees in the UK works for a company supported by private equity. 

Given the size and importance of the private equity industry in the UK, it should come as no surprise that regulators are keeping a close eye on the potential for problems to spill over into the real economy. In their most recent financial stability report the Bank of England warned the industry was facing some big challenges due to higher interest rates. 

According to the Bank of England, defaults on leveraged loans, the kind of loans often extended to companies backed by private equity in the UK, more than tripled, from about 2% in early 2022 to 7%. While it's still well below the 12% we saw back in the previous financial crisis, the speed and direction of travel is concerning [7]. 

The Bank of England seems especially concerned about, what they call, the unconventional approaches private equity funds are taking to come up with cash. They say the rapidly increasing use of net asset value loans are creating additional layers of leverage, adding even more leverage to the underlying assets [8]. 

As long-term investors we are very familiar with the excesses that can build up in a financial system over time. The previous financial crisis was due, in part, to excesses that built up in the US real estate market due to too much leverage. Let's all hope the unprecedented low interest rates over the last decade, as a direct result of the previous crisis, didn’t sow the seeds of the next one.

References

[1] https://thehill.com/business/4731716-moodys-analytics-republican-sweep-inflation/ 

[2] https://www.nationalcrimeagency.gov.uk/what-we-do/crime-threats/fraud-and-economic-crime

[3] https://www.experian.co.uk/consumer/identity/app-fraud.html 

[4] https://www.financial-ombudsman.org.uk/news/financial-ombudsman-service-warns-increase-hybrid-scams

[5] https://www.fca.org.uk/consumers/share-bond-and-boiler-room-scams

[6] https://www.forbes.com/uk/advisor/personal-finance/what-is-app-fraud/

[7] https://www.ft.com/content/680abec2-26a7-4895-a248-0d7c17b9072f 

[8] https://www.ft.com/content/e74d6a4d-9e88-41db-8c25-13e55602a7dc 

Notices

Sidekick Money Ltd is a company registered in England and Wales (No. 13882980). Sidekick Money Ltd is authorised and regulated by the Financial Conduct Authority (FRN 984829). 

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.

Sidekick Money Ltd is a company registered in England and Wales (No. 13882980). Sidekick Money Ltd is authorised and regulated by the Financial Conduct Authority (FRN 984829). Our address is Rivington House, 82 Great Eastern Street, London EC2A 3JF.

Payment and e-money services (Non MIFID related products) are provided by The Currency Cloud Limited. Registered in England No. 06323311. Registered Office: Stewardship Building 1st Floor, 12 Steward Street London E1 6FQ. The Currency Cloud Limited is authorized by the Financial Conduct Authority under the Electronic Money Regulations 2011 for the issuing of electronic money (FRN: 900199)

Sidekick Money Ltd also provides investment management and lending services. These are separate and unrelated to the account and payment services you receive from The Currency Cloud Limited.