This week's interesting finds

A few charts worth discussing

“There isn't a lot of data tracking how GLP-1s are impacting consumer behaviour yet, but the survey work is starting to show some persistence in trends like more exercise and more nutritional support.”

- Claire Thornhill

“We’re losing our best and our brightest. Canada needs to find a way to stop the brain drain. Taxes and incentive structures for businesses are levers we should be considering.”

- Frank Mullen

“Fundraising for private alternatives has slowed significantly over the past year as alternative managers have increased their focus on retail investors to fill their funding gaps.”

- Steven Lo

Other charts worth pointing out

Top 10 U.S. companies by decade – % of market concentration over time

Top 10 U.S. companies by decade – market share retention

S&P 500 Index – P/E vs. P/FCF

Historical U.S. IPOs

Short interest by sector – current vs. historical

# of trading days to go from $500 billion to $1 trillion in market value by company

30-day trailing return percentile by factor

Global equity and debt securities outstanding

Global bond market by sector

U.S. equity sector weights since 1790 

Cross-asset total returns by decade

Asset class inflows since 2008

Chip stocks race towards biggest gains since dotcom era on AI demand

A roughly 75 per cent gain since the start of the year has left the Philadelphia Semiconductor Index, which tracks 30 of the world’s biggest US-listed chip manufacturers, on track for its largest annual return since 1999, according to Bloomberg data.

The index has gained more than $5tn in market value over the past two months — about 1.5 times the value of the UK’s flagship FTSE 100 index — on the back of increasingly optimistic bets on chip manufacturers’ future earnings.

Prices for the chips that underpin AI, as well as the manufacturing equipment required to fill new chip factories around the world, have surged as suppliers struggle to match soaring demand from Silicon Valley giants.

Meta, Alphabet, Amazon and Microsoft have together set aside $725bn to spend on the data centres and physical equipment needed to power the AI era this year.

Bank of America strategists this week reiterated their “high conviction in continued AI [infrastructure] strength”, writing in a note to clients that tight supply and “under-appreciated sovereign, enterprise and industrial demand” were likely to propel further growth.

AI labs OpenAI and Anthropic, both of which operate at a loss as they spend heavily on data centres, are expected to fetch valuations in excess of $1tn when they go public later this year.

“It’s gung ho, folks,” JPMorgan chief Jamie Dimon told a conference on Tuesday. “There’s a lot of exuberance out there. Right now it’s good.”

But he noted similar periods of exuberance before the market downturns in 1972, 1986, 2000 and 2007. “That doesn’t give me comfort,” Dimon said.

This year’s rally has been driven by a handful of stocks beyond the Magnificent Seven — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — which accounted for the bulk of the US stock market’s gains in the years after the release of OpenAI’s ChatGPT in 2022.

Nvidia remains the world’s biggest public company, with a market capitalisation of $5.1tn.

Yet a trio of the chip giant’s competitors — Intel, AMD and Arm — have massively outpaced Nvidia’s stock market gains this year. Their performance has been driven in part by the anticipation that the AI infrastructure market is diversifying away from Nvidia’s graphics processing units towards central processing units.

Intel’s shares smashed an all-time high set during the dotcom bubble after it gave a bullish outlook for CPU demand in April’s earnings. Its fortunes reversed after the US government stepped in to take a 10 per cent stake in the company last year, as well as an injection of billions of dollars in investments from Nvidia and SoftBank.

Shares of AMD, Nvidia’s chief competitor, have meanwhile risen more than 120 per cent in the year to date after it struck major chip supply deals with Meta and OpenAI.

SoftBank-backed Arm has surged more than 160 per cent on a bold strategic shift into offering its own chips to compete with Nvidia’s, rather than designing the underpinnings of other vendors’ hardware. Memory chip stocks have also been big beneficiaries, as demand from data centres creates a global shortage. Two high-bandwidth memory chipmakers, Micron and SK Hynix, joined the small group of companies valued above $1tn on successive days this week.

This week’s fun finds

UK’s Oldest Candy Shop Has the Same Bestselling Sweets After Nearly 200 Years

Calling all candy lovers: Have you ever tried pear drops or humbugs? The 1820s-era treats aren’t staples at the average U.S. candy store, but at The Oldest Sweet Shop in Pateley Bridge, England, they’ve been bestsellers for nearly 200 years.

Founded in 1827 and located in a 400-year-old building, the establishment is the size of an average living room, Ben noted. In 2014, it was named the oldest candy store in the world by Guinness World Records, although in 2020 it was dethroned by Japan’s Ichimonjiya Wasuke, which dates back to about AD 1,000.

The shop has remained virtually unchanged since it first opened, boasting large glass jars on dark wooden shelves and the original cash register — which was rescued by the previous owner, Keith Tordof, after he recognized it in an antique store.

This week's interesting finds

Reflecting on the lessons the Investment Team has learned at the 18th annual Cymbria Day

At the 18th annual Cymbria Day, the Investment Team talks about some of the important lessons they’ve learned throughout their career. They discuss why humility matters when investing, the power of consistency, how to have a well-calibrated sense of future regret and why we are continually evolving our investment approach. 

Click here to watch the video

A few charts worth discussing

“Get your popcorn ready – check out the video below.”

- Derek Skomorowski

Masters of The Universe – Official Trailer

“Electronic trading is coming to the bond market. U.S. investment grade electronic trading volume has steadily climbed from a mere 20% in 2018 to almost half today, while 30% of U.S. high yield bonds are now traded electronically.”

- Tracey Chen

“Biopharma equipment/services suppliers have been climbing out of a brutal three-year hangover after customers over-ordered lab equipment and supplies during COVID. The recovery so far has been more of a stabilization than a real rebound.”

- Stas Lopata

Other charts worth pointing out

U.S. stocks vs. 10-year Treasury yields

U.S. household equity holdings as a share of disposable income

Largest IPOs vs. largest companies by current market value

U.S. strategic petroleum reserve

S&P 500 Index – YTD return contributions by sector and company

S&P 500 Index – price vs. market breadth

Historical stock market bubble concentration

S&P 500 Index capex – Information technology vs. total

U.K. growth vs. value – P/E premium and discount

U.K. equity fund flows

European equity fund flows

MSCI U.S. vs. MSCI Europe Indexes – value vs. growth price performance

MSCI U.S. vs. MSCI Europe Indexes – momentum vs. market

Global equity valuations since 2000

JPMorgan looks to offload exposure to $4bn in private equity-linked loans

JPMorgan is seeking to offload risk tied to more than $4bn in loans to private equity funds as the biggest US bank looks to cut its exposure to an industry grappling with a prolonged slowdown.

The New York-based lender is in talks with investors over a transaction that would allow it to transfer risk tied to so-called net asset value loans backed by private equity fund assets.

JPMorgan’s discussions about reducing its exposure to NAV loans come as private equity companies have struggled to exit their investments. Investors and analysts also fear that portfolio companies, particularly in the software sector, will be disrupted by AI.

JPMorgan was working on a risk transfer that would allow it to retain the NAV loans on its balance sheet while shifting a portion of potential losses to investors, the people familiar with the matter said. The pool of assets includes dozens of loans tied to private equity funds across North America, Europe and the Middle East.

Under the deal, JPMorgan would shift the risk of up to 12.5 per cent of an NAV loan pool worth more than $4bn, one of the people said. The structure would offer investors a low-teens return for absorbing the first loss on the NAV loans. The terms were still under discussion and could change, the people said. 

Private equity firms have increasingly turned to NAV loans, which are backed by the market value of existing investments in a fund, to return cash to investors or add more financing for growth. Secondary buyers of PE fund stakes also use NAV loans to amplify their returns.

Many banks rushed to extend NAV loans as they sought to build financing businesses that catered to the world’s biggest private equity managers.

NAV loans are taken by PE firms against an entire fund’s assets and are considered low risk by many lenders because of the diversification of the underlying portfolio. Generally, firms borrow against as much as a quarter of a fund’s assets.

However, the recent lack of exits and fears over technology valuations could put pressure on the returns of PE funds that have relied heavily on such borrowings.

The market for such loans, which sits around $100bn, is expected to grow to $350bn by 2030, according to a May report from AllianceBernstein.

The increased use of NAV loans has come under scrutiny from US and European regulators, which have warned of “leverage over leverage” risks given that the underlying private companies are already carrying heavy debt burdens.

Market participants also worry that using NAV loans to support a fund’s portfolio companies after the formal investment period could artificially inflate its performance.

This week’s fun finds

Nothing says post-Cymbria day/long weekend reset like a steak sandwich lunch. Thanks to Jessica, from the Operations Team for organizing and giving us a chance (and enough protein) to reconnect and recharge.

The circus family gets back on the road

The co-founder of Giffords Circus, Nell Stroud, grew up in Oxford and had a place at the university when she took a gap year to work as a drudge at Circus Flora in St Louis, Missouri; it changed the course of her life. She finished her degree but continued to work at circuses worldwide, including in China and Germany, until she met Toti Gifford, a farmer’s son. They had twins, and a shared dream to create a village green circus. They bought a round white tent from a newspaper small ad; converted a showman’s wagon to live in; and advertised for performers in the Stage.

Since then, Giffords has entertained more than a million people across southern England, showcasing talent from across the world, including France, Hungary, Romania, and Russia. Nell and Toti divorced, but the circus kept going. Nell died of cancer in 2019 and an acrimonious succession battle over the direction of the circus began when former accountant Guy James assumed control as CEO and, against Nell’s stated wishes, blocked the involvement of family and long-term performers in the running of Giffords. The dispute came to a head in May last year when James agreed to step down and Toti Gifford returned to run the show.

This week's interesting finds

 A few charts worth discussing

“Margin debt is close to a 30-year high."

- Jeff Hyrich

“Investors have generally crowded into the semiconductor and software sectors at the same rate. Today, semiconductor crowding is at the 99th percentile, while software is historically low. Semiconductors are in favour due to huge capex and demand for new chips, while investors fear that AI will disrupt existing software companies.”

- Jeff Hyrich

“About 80% of returns this year can be attributed to the AI theme. This is driving one of the biggest momentum-led rallies we’ve ever seen.”

- Sydney Van Vierzen

Other charts worth pointing out

U.S. equity volume by investor trading type

S&P 500 Index – return contribution and AI exposure breakdown

S&P 500 Index vs. financials

S&P 500 Index – performance of stocks by cash spending since 1992

U.S. construction spending by category

U.S. high yield credit spreads

U.S. 18-year-old population

Private client equity holdings as % of AUM

Private client cash holdings as % of AUM

U.S. asset allocation by generation

U.S. net wealth by generation

Ford Extends Rally as Energy Hype Drives Best Gain in Six Years

Ford Motor Co.’s stock surged again on enthusiasm for the automaker’s pivot toward energy storage, the latest sign that investors are eager to embrace companies that stand to benefit from power-hungry data centers.

The shares climbed as much as 10% Thursday in New York, pushing the two-day gain to 25%, the most intraday since March 2020. Wednesday’s gain turned Ford’s stock positive for the year.

Chief Executive Officer Jim Farley said Thursday that the automaker is already seeing strong demand for its energy storage batteries that will go into production late next year.

“We have seen tremendous interest from customers and we’re actually in the contracting phase for our early capacity as we speak with several customers,” Farley told shareholders at the company’s virtual annual meeting.

Ford is investing $2 billion to get into the energy storage business, which includes converting a factory in Kentucky from making batteries for electric vehicle to producing large energy cells for the storage business. US demand for grid batteries is expected to double by 2030 to more than 100 gigawatt-hours, according to Bloomberg NEF.

This week’s fun finds

Sea shanties actually help people work together better

A few years’ back, a viral trend overtook social media that nobody saw coming: ShantyTok. Seemingly overnight, TikTok and Instagram were inundated with posts celebrating the niche world of maritime sea shanties. The fad ostensibly began with the spread of Scottish singer Nathan Evans’ version of “Wellerman,” a New Zealand whaling shanty with historical roots stretching back well over a century.

As newcomers dove into a vast backcatalog of songs, many quickly highlighted just how catchy these tunes really are. But while early sea shanty composers didn’t envision ever reaching the top of the charts, they certainly wrote them to be earworms. The sea shanty is only one variant of a work song—rhythmic melodies designed to help laborers keep pace with one another during repetitive, often backbreaking jobs. Other types of work songs developed over generations among Appalachian coal miners, prison chain gangs, and British textile workers, just to name a few examples.