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Market Pulse
Tuesday, May 2, 2023

US tech, better than expected (ish). One US bank fails, another gets even bigger. And the taste of climate change

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:

  1. US tech, better than expected, but not great
  2. One US bank fails and another gets even bigger
  3. The taste of climate change

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 tech, better than expected, but not great.

Global equities rose last week thanks in part to better than expected quarterly earnings results at some large technology companies. More than half of the companies in the S&P 500 have reported so far and nearly 80% have beaten the general expectations of market analysts[1]

According to the latest Bank of America survey, many fund managers are increasingly worried that high interest rates and stubborn inflation could push developed economies into a recession later in 2023[2]. As a result they are paying very close attention to corporate profits for clues about what the future might hold. So far it seems stock market analysts have been too pessimistic. 

Large tech companies buoyed the stock market over the last week. Better than expected results from companies like Meta, Alphabet and Microsoft resulted in one of the best days for the S&P 500 so far this year[3]

But while trends in cloud computing growth were better than feared, both Microsoft and Amazon still posted their slowest growth ever. Microsoft posted 27% growth in its cloud business compared to 16% at Amazon. It’s clear that customers are reigning in their cloud spending. 

While some large US tech companies have reported better than expected results, there are still a few big tech firms that have to report numbers. The biggest of them all, Apple, reports their quarterly results later this week. Global smartphone sales have been falling for the last seven consecutive quarters and, as a result, the consensus of investment analysts calls for Apple sales and earnings-per-share to fall 5% compared to last year[4]

Despite better than expected performance at big tech, economic growth appears to be slowing down and it would be premature to conclude that we are out of the woods here. US GDP decelerated sharply in the January to March quarter and, at 1.1% annualised growth, came in far below expectations of 2%[5]. While US corporate earnings results have generally been better than expected, it seems we’re in the grip of a global economic slowdown [6]

2) One bank fails and another gets even bigger. 

First Republic Bank has been on the brink of collapse since the failure of Silicon Valley Bank (SVB) and Signature Bank. This weekend, US regulators took control of First Republic Bank and struck a deal to sell the beleaguered bank to JPMorgan, the biggest bank in the US.

First Republic Bank was bigger than SVB so the failure ranks as the second biggest US bank failure of all time[7]. The last couple of months have been very volatile for the US banking industry as it saw three of the four biggest bank failures in US history. 

First Republic Bank had a unique business model. In the 1980s, Jim Herbert started making massive loans to wealthy individuals in Silicon Valley to help them buy property. The loans tended to be interest only which typically meant borrowers didn’t have to repay principal for up to a decade. 

During the pandemic, demand for this type of loan ballooned and First Republic more than doubled their assets over the space of four years[8]. As interest rates rose, the value of the First Republic loan book declined and losses on their bond portfolio expanded. When SVB collapsed, depositors quickly withdrew their money from vulnerable regional banks, including First Republic, and this contributed to the bank's collapse over the weekend[9]

JPMorgan agreed to buy First Republic Bank and to take over the loans and deposits of existing First Republic customers so they will not be materially impacted by the collapse. Shareholders in First Republic Bank won’t be so lucky however. They have been completely wiped out by the bank's collapse[10]

We believe that the recent spate of US regional bank failures could result in regulators scrutinising the more lenient rules for smaller banks compared to their larger peers[11]. Stricter regulation could be on the horizon for regional US banks. The fall of First Republic Bank hopefully means the worst of the regional banking crisis in the US is behind us but only time will tell.

3) The taste of climate change. 

Over the last 20 years investing in fine wines returned 7.6% per year, just shy of the 7.7% return from the FTSE 100 over the same period [12][13]. But, just like the rest of the global economy, the wine industry is increasingly being impacted by climate change and this could have long-term investment implications. 

Thanks to changes in temperature and other environmental factors, every year produces distinct wines that are different from the previous year’s vintage. This ability to reflect slight variations in the environment is part of the appeal. Vines are considered some of the most weather sensitive of all agricultural crops and steadily rising temperatures are causing problems. Eight of the warmest years on record were within the last 10 years[14]

Warmer temperatures means the entire growing cycle of wine accelerates. This often results in higher alcohol content, lower acidity and less refined tannins. But it's not just warmer summers that causes problems. Milder winters make vines increasingly vulnerable to late winter frost. Severe frost in France in 2021 resulted in the worst wine harvest since the second world war[15]

It’s not just temperature that affects wines though. The increase in global wildfires and resulting clouds of smoke can destroy entire harvests[16]. The smoke gets absorbed by the grapes and can result in the dreaded ‘smoke taint’. 

The wine industry is taking emerging problems seriously and introducing new grape varieties to regions to mitigate some of the impact. In order to protect the traditional Bordeaux flavours, Bordeaux introduced 6 new grape varieties in the last few years. The idea is that blending in new grape varieties with distinct characteristics can help adjust the Bordeaux flavour profile and offset the impact from a changing environment. Some of the new varieties were included as they are more resistant to drought and higher temperatures[17]. This was an extraordinary step that shows how the industry is adapting to climate change. 

Over the next few decades climate change and our efforts to build a more sustainable global economy will have far reaching implications for the investment landscape. The global wine industry will be no different and will have to innovate and adapt to survive in a warmer world.


[1] https://www.ft.com/content/d796d5ee-6088-47e2-a34c-52f83dae2328 

[2] https://www.investmentweek.co.uk/news/4086977/bofa-recession-fears-pick-march-markets-grapple-banking-turmoil 

[3]  https://www.ft.com/content/e56ec148-c69b-47d9-b4c6-1ce9c2ef9c24 

[4] https://www.wsj.com/market-data/quotes/AAPL/research-ratings 

[5] https://www.ft.com/content/3f222f39-f40d-4a6f-92c8-a74a022e11e3 

[6] https://www.imf.org/en/Blogs/Articles/2023/04/11/global-economic-recovery-endures-but-the-road-is-getting-rocky 

[7] https://www.wsj.com/podcasts/whats-news/first-republic-bank-is-seized-and-sold-to-jpmorgan/aed893fa-4531-46b0-9cc8-4a4cbf92815a?mod=Searchresults_pos2&page=1 

[8] https://news.bloomberglaw.com/banking-law/first-republics-jumbo-mortgages-brought-on-banks-failure-1 

[9] https://www.wsj.com/podcasts/whats-news/first-republic-bank-is-seized-and-sold-to-jpmorgan/aed893fa-4531-46b0-9cc8-4a4cbf92815a?mod=Searchresults_pos2&page=1 

[10] https://www.ft.com/content/0c61a540-e6be-4bca-8054-841d9983756b 

[11] https://www.reuters.com/markets/us/white-house-pushes-stronger-regional-bank-rules-without-congress-2023-03-30/ 

[12] https://www.liv-ex.com/2023/03/liv-ex-1000-index-falls-fourth-month-row/ 

[13] https://www.londonstockexchange.com/indices/ftse-100 

[14] https://worldoffinewine.com/news-features/climate-change-wine-industry 

[15] https://worldoffinewine.com/news-features/climate-change-wine-industry 

[16] https://public.wmo.int/en/media/news/number-of-wildfires-forecast-rise-50-2100 

[17] https://www.foodandwine.com/news/bordeaux-region-france-new-grapes-approved

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