GPU-Backed Loans, Musk’s Trump Gamble, and Rising Inflation Expectations
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. Technical Debt: Inside the GPU-Backed Loan Market
2. Trump Card: Musk’s Gamble Pays Off
3. Breaking Even: Inflation Expectations Climb
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.
We've launched Venture Capital Trusts (VCTs)
This week we started rolling out access to our first two VCTs on the Sidekick platform: Puma VCT 13 and British Smaller Companies VCTs. Venture Capital Trusts (VCTs) really build on our core mission of unlocking the financial advantage of the ultra wealthy.
The 1% use a variety of tax-efficient vehicles to maximise their wealth, combined with wider exposure to private markets. We want to bring this easily and digitally to you. VCTs provide a unique combination of tax savings and opportunities to invest in UK high-growth companies. Sophisticated and high-net worth investors can now apply for these products, starting at just ￡3,000. To get started, check out the VCT page on the Sidekick website to explore how to unlock these investments.
VCTs are high risk investments?and the value of your investment may go down as well as up, and you may not get back the amount you put in.?VCTs are designed to be?long-term investments?as the underlying holdings are illiquid.?Holding them for five full years?is essential to retain your income tax relief. If you want to sell your shares, you may find it difficult to sell in a timely manner, or at a price that reflects the true value of your holding. Tax rules can change, and benefits depend on your individual circumstances.
1) Technical Debt: Inside the GPU-Backed Loan Market
Thanks to the rapid pace of AI development, demand for GPUs, a specialised type of computer chip adept at processing vast amounts of data, has skyrocketed. Despite delays, Nvidia’s next-generation Blackwell GPUs are already sold out for the next 12 months. GPUs are so valuable, in fact, that they’re being used for more than just crunching numbers.
A growing number of tech companies are using their GPUs as collateral to secure loans. Some of the biggest users of GPU-backed debt include “neocloud” companies like CoreWeave and Lambda, which specialise in offering cloud computing power to AI firms. All told, the GPU-backed debt market now amounts to about $11 billion in outstanding loans, with participation from financial firms like Blackstone and Pimco.
Thanks to its novelty, the idea of using GPUs as collateral has drawn some degree of scepticism. One worry is that an AI slowdown could result in significant volatility in GPU prices. Another is that technological improvements will make existing fleets of GPUs less valuable.
While these concerns are valid, lenders can mitigate them with suitable loan-to-value ratios and maturity timelines. In fact, GPU-backed loans are a natural evolution of the type of collateralised debt deals that have long been popular in capital-intensive industries like real estate. Unlike many technology firms, neocloud companies operate an asset-heavy business model, meaning the benefits of freeing up dormant capital are substantial.
Another beneficiary is likely to be Nvidia, whose GPUs appear to be the standardised form of collateral for these deals. As neocloud companies consider which chips to purchase in the future, the ability to access debt financing with Nvidia GPUs should be a substantial benefit. While it remains to be seen how significant GPU-backed debt becomes in unlocking capital for the AI industry, this dynamic should help cement Nvidia’s continued dominance of the chip market.
Note: We hold Nvidia in our Flagship portfolio
2) Trump Card: Musk’s Gamble Pays Off
In the wake of Donald Trump’s election victory, Tesla shares have climbed substantially, notching gains of more than 30% over their pre-election price. While some of this increase no doubt reflects Elon Musk’s close relationship with the president-elect, Trump’s favoured policies also appear to be genuinely good news for Tesla’s business.
One of Tesla’s most significant competitive threats remains low-cost EV companies from China, including firms like BYD and Geely. In fact, BYD recently overtook Tesla in quarterly sales for the first time this year. Trump’s protectionist policies, which include high tariffs on Chinese goods, should help insulate Tesla from international competitors.
In addition, Trump has expressed a desire to eliminate America’s EV tax credit, which was expanded under President Biden. While such a move would likely harm the EV sector as a whole by making vehicles less affordable, Tesla may end up being a net beneficiary of the policy. Unlike many peers, Tesla’s EV business is profitable, meaning that the company is less reliant on mechanisms like tax credits to price its vehicles competitively.
This is not to say that a Trump administration is without risk for Tesla. Prior to securing Musk’s support, the president-elect was a noted critic of EVs, saying that they “don’t work” and hurt American autoworkers. Given the tumultuous relationship between the two billionaires over the years, a fresh falling out could see Trump pursuing anti-EV policy even more aggressively.
Moreover, the legal implications of Musk’s potential role in Trump’s administration are not entirely clear. Trump has tapped Musk to help oversee a newly created Department of Government Efficiency with a wide-ranging mandate. While influence over policies relating to Musk’s businesses would come with obvious conflicts of interest, it seems unlikely that Musk will take the traditional step of putting his holdings into a blind trust during his time in government.
Both politically and financially, backing Trump was a significant gamble for Musk. While we see Trump’s policies as generally favourable to Tesla, Musk needs to manage the relationship carefully to ensure that his gamble keeps paying off.
Note: We hold Tesla in our Flagship portfolio
3) Breaking Even: Inflation Expectations Climb
For a short period this year, it seemed that central bankers had all but conquered inflation. In both the UK and the US, increases in the consumer price index peaked in mid-to-late 2022 before starting a continued and steady decline. Judging by key government bond metrics, however, inflation fears are slowly seeping back into the market.
Traditionally, government bonds pay fixed interest rates. Both the UK and US governments, however, also issue securities with variable interest rates tied to the level of inflation (known as TIPs in the US and Index-linked Gilts in the UK). By comparing the yields on traditional bonds and these inflation-linked bonds, we can get a sense of the future inflation rate that investors expect.
In the US, this so-called “breakeven” inflation rate has climbed markedly. As recently as September, the two-year breakeven rate traded at a mere 1.6%. Since then, it’s climbed by a full point to 2.6%, well above the Federal Reserve’s target rate. In the UK, the two-year breakeven rate has also inched higher to 3.1% (although this figure is not directly comparable to the US due to structurally different inflation measures).
What’s behind this increase in inflation expectations? Unfortunately, it’s challenging to disentangle political factors from purely economic ones. Thanks to the UK budget and the US election, investors have reason to think that government action will lead to elevated inflation. But Wednesday’s US CPI report, which showed core price increases holding steady at 3.3%, demonstrates that central banks have yet to fully tame underlying price pressures.
Whatever the cause of these elevated breakeven rates, they’re a sign that central banks may have to be patient in cutting interest rates too quickly. Since inflation expectations can be self-fulfilling, policymakers could be forced to keep rates higher for longer.
Notices
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