Finimize - 🔥 Prepare for a fire sale

What’s going on here?

Global stock markets had a nasty surprise this month.

What does this mean?

Stock markets around the world kicked off the year with a boom, as the newfound allure of AI and sunny expectations for interest rate peaks jazzed up share prices. But as the months rolled on, the music changed. A string of strong US economic updates and Europe’s stubborn core inflation made investors rethink interest rate trajectories. Add mounting evidence of China’s economic slowdown to the mix too, and you’ve got a recipe for market jitters. In just the first three weeks of this month, heavyweights like the US’s S&P 500, Europe’s Stoxx 600, and China’s CSI 300 collectively lost a whopping $3 trillion in value – equivalent to the value of the UK’s entire FTSE 100.

Why should I care?

Zooming in: Maleficent seven.

Over in the US, tech giants are feeling the heat. This month the “magnificent seven” – Amazon, Alphabet, Apple, Microsoft, Meta, Nvidia, and Tesla – all suffered their first three-week-long losing streak of 2023. So, with AI being the talk of the town, all eyes are on AI darling Nvidia as it gears up to announce its results. Analysts have set the bar high, upping their price targets just last week. But if the firm doesn’t measure up to those lofty heights, it might just further dent the wider market.

For markets: Beware of the bear.

Markets, like life, have their highs and lows – and some see this downswing as a sign the market’s healthy. But there is a lot of caution around right now: after all, the ratio of bearish put options to bullish call options purchased is nearing a two-year high, showing investors are getting pretty defensive. And with recent lackluster economic data from the eurozone and the UK, it might be wise to avoid chucking heaps of cash into markets anywhere right now.

What’s going on here?

Higher interest rates have pushed private equity firms into some very hot water.

What does this mean?

Private equity firms are like house flippers, but for businesses. They pool money, borrow some more, buy a company, and then spruce it up – all in the hope of selling it for a profit down the line. But lately that whole “borrow some more” bit has caused trouble, and a number of the biggest players, including KKR and Bain Capital, are feeling the pinch. See, increased interest rates have made borrowing much more expensive recently. Case in point: inflation-adjusted Treasury bonds – a key measure of borrowing costs – have surged to a 14-year peak. The result is that firms are having to hand over their portfolio companies to creditors, and face seeing their investment share and returns in the firms wiped out.

Why should I care?

For markets: A shame for shareholders.

The days of easy money are gone. No one’s immune to higher interest rates, from everyday mortgage holders to private firms and even public companies. And if you’ve invested in a debt-laden firm, well, you might find yourself at the back of the queue for a payout. See, common stockholders win when shares climb – but when companies can’t repay their loans, they’re often the last ones to recover their money. So as more companies wrestle with their mounting debts, don’t be surprised if valuations for those with sturdy financial foundations pop – while debt-heavy firms languish.

The bigger picture: Cash is king.

Lenders aren’t actually too thrilled about taking over these assets. After all, their business model is simple: lend money for interest in return. So if they end up receiving assets in lieu of cash, it won’t be long before we see a fire sale of unwanted holdings. For cash-rich firms, that’ll mean it’s open season for a good old-fashioned bargain hunt.