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.

Today, we’re looking at Trump’s reverse tariffs, private credit’s Meta deal, and how AI is creating divergence in the stock market. 

But first, our number of the week…

4.99%

That was the average UK mortgage rate on Wednesday, marking the first time the figure has fallen below 5% since the Truss moment in 2022. Mortgage rates have declined following the BoE’s decision to cut rates five times in less than a year.

Sidekick Takeaway: While falling mortgage rates should provide some relief to UK borrowers, it’s not clear how long sub-5% rates can last in the current environment. Following growing inflation fears, the BoE looks set to hold off on further cuts, and rising fiscal uncertainty could drive gilt yields higher. 

Only have a minute to read? Here’s the TL;DR:

• The Trump administration unveiled a new trade tool by requiring Nvidia and AMD to pay up to 15% of their China chip sales to the US government. These ‘reverse tariffs’ could be used to encourage domestic sales while raising revenue from high-value US exports.
• Meta's $29 billion private credit deal highlights the asset class's evolution beyond risky lending. While the deal underscores private credit’s advantages, including speed and customisation, the difference between private and public credit is growing blurred.
• As AI creates stock market winners and losers, Bank of America's 'AI Risk Basket' has underperformed the S&P 500 by 22 points since May. While many firms are benefiting from enhanced productivity, companies like Wix and Shutterstock are under threat.

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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Moving Backwards: US Chip Deal Unveils Reverse Tariffs

To date, Donald Trump’s trade war has been fought with fairly conventional tools. These include tariffs, sanctions, and export restrictions.

But this week, a groundbreaking deal unveiled a new tool for the US government to wield – reverse tariffs.

As part of an agreement to sell advanced chips in China, Nvidia and AMD will pay the US government up to 15% of their sales in the country.

Previously, the US had barred such sales, citing national security concerns.

Traditional tariffs require companies to pay a fee on imports to America. In contrast, these reverse tariffs require companies to pay a fee on exports from America.

For now, reverse tariffs are limited to the bespoke chip deal. But the Trump administration could be set to use this tool far more widely.

Reverse tariffs could help Trump achieve trade goals

In theory, reverse tariffs are a powerful tool to help the Trump administration achieve some of its stated trade policy goals:

• Disincentivising exports from the US could help encourage domestic sales, in line with Trump’s America First agenda. 
• Reverse tariffs may also help raise revenue by taxing some of America’s major high-value exports, such as machinery, oil, and electronics.
• Finally, these measures could be used as a threat to extract concessions from US companies that Trump has sparred with, such as Tesla and Apple.

Still, the viability of these reverse tariffs has yet to be proven. And given concerns from US lawmakers on both sides of the aisle, implementing the controversial chip deal could be an uphill battle.

Sidekick Takeaway: Perhaps most concerningly for international partners, reverse tariffs could impede the flow of valuable US goods in a way not covered by existing trade agreements. For instance, the UK imports substantial amounts of transport equipment from the US, goods that could become more expensive under widespread reverse tariffs.

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All Grown Up: Meta Deal Shows Maturing Private Credit Market

In the earliest days of the asset class, private credit was seen as a way to fund deals not suitable for traditional channels.

These included financing leveraged buyouts, volatile industries, and small firms with questionable fundamentals.

But in recent years, private credit has begun to shed this reputation. Leading asset managers have increasingly focused on investment-grade private credit.

This week, that trend was underscored by a massive $29 billion deal to finance Meta’s infrastructure plans, highlighting a maturing private credit asset class.

Meta deal shows private credit’s competitiveness

As one of America’s most profitable firms, Meta has ample access to traditional bank lending and the corporate bond market.

But the firm’s decision to finance its data centre construction through asset managers PIMCO and Blue Owl highlights private credit’s advantages.

Meta was able to negotiate a unique structure for the deal, with financing secured directly by data centre assets.

Meanwhile, the funding closed faster than would likely have been the case through traditional channels.

Following Meta’s example, private credit could become an increasingly popular way for blue-chip firms to access speedy, customised debt capital.

Sidekick Takeaway: While private credit is increasingly encroaching on traditional credit channels, it’s also clear that the lines between the two asset classes are beginning to blur. As private credit becomes increasingly liquid and lends to investment-grade companies, the difference between private and public credit is starting to shrink. 

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Winners and Losers: Shares Diverge as AI Use Deepens

Ever since the current generation of AI models was unveiled, the technology has been widely expected to create corporate winners and losers. 

While many firms will experience productivity gains from AI, others risk seeing their core value proposition diminish.

This trend may take years to play out in practice. But the effects are already being seen in the stock market. 

Bank of America’s ‘AI Risk Basket’ portfolio tracks 26 firms deemed most at risk from the AI revolution.

Since May, that basket has lagged the S&P 500 by about 22 points, signalling the growing threat of AI divergence.

BofA’s basket highlights companies with AI risk

Following ChatGPT’s launch in late 2022, BofA’s risk basket largely kept pace with the broader market.

But as AI deployment deepens and Big Tech continues to pour money into model development, that trend has reversed:

• Some firms in BofA’s basket are expected to be impacted by AI directly. Shares in digital image company Shutterstock are down roughly 40% since last year.
• Others face risks from the economic impact of AI. Reduced demand for human labour is expected to harm staffing firms. 
• But predicting the impact of AI on business profitability isn’t always simple. Language learning app Duolingo was expected to be decimated by AI, but its stock has soared over the past year as the company has embraced the technology. 

Despite surprises like Duolingo, the data is clear – AI is beginning to have a demonstrable share-price impact years ahead of schedule. 

Sidekick Takeaway: As the famous value investing dictum says, the market is a voting machine in the short run and a weighing machine in the long run. While investors may have underestimated the impact of AI following ChatGPT’s release, recent divergence shows that the weighing machine is starting to kick in. 

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Notices

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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.

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