The Nasdaq Whale
John Leiper – Chief Investment Officer – 7th September 2020
The ACUMEN Portfolios continue to perform well. As you can see from the table below, performance for the rolling quarter (to the end of August) remains strong relative to the market composite benchmark and the current assigned IA sector, which I understand many advisers use for comparison purposes. ACUMEN Portfolios 3-8 were all in the first quartile and ranked in the top 15 within their category.
Outperformance versus the IA sector is to a large extent driven by our currency overlay strategy which is positioned for a weaker US dollar. However, this does not explain performance relative to the market composite benchmark which is predominantly currency hedged and a higher bar to beat given it excludes fees and trading costs. Instead, this can be largely attributed to four key themes mentioned in prior blogs as well as our Quarterly Perspectives publication: inflation, emerging market equities, ESG and commodities. These themes comprise our longer-term strategic market outlook and asset allocation decisions which we have implemented across the funds via several active risk positions.
The portfolios have also benefited from exposure to US mega-cap stocks, typically referred to as the FAANGs, namely Facebook, Amazon, Apple, Netflix and Alphabet – formerly Google. These companies sit within the technology and consumer discretionary sectors which have rallied back to all-time highs, and then some, even as the remaining sectors of the S&P 500 and indeed the rest of the world excluding the US, remain approximately 7% below prior highs (when measured on an equal weighted basis).
On mobile: review detail in landscape mode
This notable and dramatic divergence in performance can be explained by the FAANGs perceived safe haven status, given high cash levels and a business model that is particularly suited to the coronavirus, and before that to a world of low inflation and low interest rates. Surging liquidity and the fear-of-missing-out further exacerbated this trend.
In The Bigger They Are The Harder They Fall we explained that, despite positive underlying fundamentals, valuations in this space had become extreme. At the time we showed that the top 5 companies in the S&P 500 (the FAANGs) represented over 22% of total market capitalisation which represented the highest market concentration in over 30 years. This concentration, in just a handful of names, is not healthy and points to narrowing market breadth, which has historically been a strong indicator of subsequent market drawdowns. As a result, we booked some profits by bringing our US tech position back to model weight. Later that month we booked additional profits, reducing the position further.
Fast forward to early September and some of our earlier misgivings seem to make sense. In an FT article published Friday, SoftBank has been unmasked as the mysterious ‘Nasdaq whale’ responsible for driving US tech stocks to extreme levels (before the sharp sell-off on Thursday and Friday last week) by buying billions of dollars’ worth of call options – ‘which give the user the right to buy a stock at a pre-agreed price’. The article refers to a number of sources who described SoftBank’s alleged actions as ‘huge’, ‘dangerous’ and ‘the largest ever trading volumes in contracts linked to individual companies’ on record.
Due to the dynamics around options trading, to hedge investment exposure, the counterparts to these trades will have bought stocks in the market. This creates a self-perpetuating feedback loop between Softbank buying call options and dealers buying stocks causing tech stocks to rise in price. This dynamic explains why implied volatility for the Nasdaq 100 had been rising throughout August even as the underlying index also rose in value. Simultaneous increases in both equity and volatility are unusual and can be a cause for concern.
On mobile: review detail in landscape mode
This is shown in the chart below which shows prior instances where volatility and equity index correlations have turned positive (bottom panel) and how this is consistent with periods of risk aversion in the index (white line).
On mobile: review detail in landscape mode
What goes up can come down, and the key risk is that if Softbank starts to unwind these trades, the feedback loop can easily turn negative. This is especially true for crowded trades and to that extent it is somewhat disconcerting to note that ‘long US tech and growth’ remains the most crowded trade, for the fourth consecutive month, according to the latest Bank of America fund manager survey. This is compounded by the rising number of retail investors also participating in the trade via online trading platforms such as Robinhood which offer commission free trading. Historically, when small traders become overly enthusiastic it typically signals a potential market top and impending correction.
One source, referenced in the article, expects SoftBank’s ‘buying to resume’ given the more damaging risk to the strategy from ‘a larger and longer-lasting stock market decline’. This makes sense but give the position is now public knowledge my concern is other players may look to exit as they realise prior gains were not broad based or sustainable in nature but rather short-term speculative market bets. At an extreme, this could also incentivise speculative short selling to try and squeeze SoftBank’s position, as speculators have someone to cover their positions.
Whatever the outcome, valuations have become distorted by the actions of one large player in the derivatives market. The market may well take this news in its stride, but these things rarely end well, and it is likely that US tech stocks could be entering a period of elevated volatility. Having pre-emptively reduced exposure to US technology we think the best strategy is to monitor the situation, remain cautious and continue to exercise our disciplined approach to risk management. If we do see a larger correction, we would view it as a healthy development and a potentially attractive opportunity for re-entry.
Key events impacting risk sentiment this week include ongoing trade negotiations between the UK and European Union, 10 and 30-year US bond auctions, Chinese and US inflation data and Thursday’s policy decision from the ECB.
On mobile: review detail in landscape mode
This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.
Want to know more about the Equity Markets?
Please contact us here:
The following is an abbreviated version of John Leiper’s article ‘Tide may be about to turn’ for Investment Week magazine. Follow the link and read his views on page 23.
Welcome to the Q2-2021 ‘Quarterly Perspectives’ publication.
Tavistock Wealth have come together with MSCI and LSE SU Green Finance Society to discuss Innovation in the ESG Eco System, alongside data analytics with MSCI.
Our Portfolio Manager for ESG, James Peel, was recently invited to provide his valuable insights into “Innovating Towards a Greener Future” as part of the London School of Economics Student’s Union Green Finance Society’s video conference: “Green Finance Summit 2021”.
In Nothing Is More Powerful Than An Idea Whose Time Has Come, published in November, we introduced the idea of a Great Rotation across US equity markets. As shown in the chart below, this rotation is playing out in textbook fashion with value stocks outperforming growth by about 20% since the end of last year.
The Fed’s dual mandate is price stability and maximum employment, but Jerome Powell has been unequivocal that it’s all about the latter.
Welcome to the Q1-2021 ‘Quarterly Perspectives’ publication.
This is the first blog since the holiday break. Whilst travel restrictions meant it wasn’t the holiday that had been planned, we adapted, and enjoyed the opportunity to spend some time together as a family and reflect on the last few months.
In its latest economic outlook, the OECD increased its expectations for global GDP.
Markets are ebullient, and they have every reason to be.
Following on from last week’s blog, the dramatic rotation from growth to value remains in place for now. Early signs of quick snapback into the prior channel have not yet materialised and instead the ratio has consolidated and even shown signs of moving.
On Monday afternoon, global stock markets soared on the news BioNTech and Pfizer had created a coronavirus vaccine which proved 90% effective based on initial trial results.
The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly.
The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board.
With the US election just 8 days away, financial markets are following the polls and pricing in a Biden win. The prospect for a Democratic clean sweep has contributed to the rising ‘Blue Wave’ narrative benefiting those companies that stand to benefit from Democratic party policy.
Welcome to the Q4-2020 ‘Quarterly Perspectives’ publication.
On Tuesday Fed Chairman, Jerome Powell, made a speech at the National Association for Business Economics, during which he implied the government should err on the side of caution and provide too much stimulus rather than too little.
Our Chief Investment Officer, John Leiper, was recently invited to provide his valuable insights as part of ETF Stream’s video conference livestream: “Beyond Beta Europe Digital: Smart beta unwrapped”.
Saturday Night Live has a reputation for expertly parodying presidential election debates. My all-time favourite is Al Gore (Darrell Hammond) versus George Bush (Will Ferrell) and this year didn’t disappoint with expert performances from Donald Trump (Alec Baldwin) and Joe Biden (Jim Carrey).
Our Chief Investment Officer, John Leiper, was recently invited to provide his valuable insights into emerging markets as part of ETF Stream’s video conference livestream: “Big Call: Emerging Markets”.
Last week the FTSE Russell decided to include Chinese government bonds in its flagship World Government Bond Index (WGBI). The decision follows similar moves, from JP Morgan and Bloomberg, and a failed attempt to do so just one year prior which resulted in a number of reforms, to increase accessibility and currency trading options, that ultimately paved the way for benchmark admission.
The following is an abbreviated version of my recent article ‘A Deep Dive Into… UK Equities’ for Investment Week magazine. Follow the link and read my views on page 17.
In last week’s blog we discussed the ‘Nasdaq whale’, Softbank, and the role it played, alongside an army of retail investors, driving tech prices ever higher prior to the recent correction. These short-term ‘technical’ flows are driven by the options market as traders look to hedge their underlying exposure, amplifying moves both lower and higher.
In a speech for the history books, last week Fed chairman Jerome Powell announced a significant change to the way it conducts monetary policy by formally announcing ‘average inflation targeting’.
Despite the fact the coronavirus has plunged many countries into recession, global equity markets are now back at all-time highs, as measured by the Bloomberg World Exchange Market Capitalisation index.
In The Return Of Inflation (5th June 2020) we made the case for a transition from the existing deflationary narrative to one in which markets start to price-in inflation.
Having identified, and benefited from, the 7% fall in the value of the US dollar index since late April, we have now turned tactically cautious.
The US dollar index, which represents the value of the dollar against a basket of developed market peers, fell through key technical support to its lowest level in 2 years.
There are growing signs that the US dollar may finally roll over.
Despite suffering the worst pandemic in over a century, and the sharpest economic contraction since the second world war, global equity and bond markets staged one of the fastest recoveries of all time in Q2.
The 10 year US Treasury yield has remained remarkably steady over the last few months, particularly as inflation expectations have gradually risen.
Those stocks that outperformed during the corona crisis are the same ‘winners’ that outperformed before the crisis.
The recovery in US equity prices, from the corona crisis, has been one of the most rapid in history.
China’s economy has transitioned, from an industrial export-led model, towards services.
Commodities are nothing if not cyclical. They rise and fall in value with remarkable consistency over time.
Quantitative easing, or QE, is where a central bank creates money to buy bonds. The goal is to keep interest rates low and to stimulate the economy during periods of economic stress.
In January 2019 Jerome Powell pivoted from a policy of interest rate increases and balance sheet cuts to interest rate cuts and, later that year, balance sheet expansion.
Over the last decade, the Fed has increasingly resorted to unconventional monetary policy, such as quantitative easing, or QE, to stimulate the economy.
Flying the global economy into the ground from 35,000 feet will go down as one of the most difficult and controversial decisions in the history of mankind.
In response to the corona crisis, global central banks have unleashed a tidal wave of liquidity.
Tavistock Wealth is the investment management arm of Tavistock Investments Plc. The investment team is comprised of 7 highly educated and talented professionals.
One question I get from advisers and clients, more than any other, is why global equity markets have bounced back so far.
In the early stages of the Corona Crisis of 2020, the global economy faced a liquidity crisis.
In an unprecedented day in the history of oil trading the price of the front month contract for West Texas Intermediate (WTI) oil fell below zero to -$37.63.
Earth Day, commemorated each year on 22/04 by more than 1bn people, is the largest annual secular observance in the world.
The global economy has been plunged into a deep recession as government leaders struggled with the difficult question of how to deal with the COVID-19 coronavirus.
As the world’s reserve currency, the US dollar is the go-to currency. It is used to price assets, complete transactions and as a store of value.
The COVID-19 coronavirus is a demand shock on a global scale where the economy slows to a crawl, but the overhang of debt remains.
The coronavirus has brought economic activity to a virtual stand-still and transformed a strong global economy, with lots of debt, to a weak economy… with lots of debt.
Last week, we considered the debt story behind the coronavirus. The fear of a large debt overhang, as the economy slows, led to concern that households and companies could start to default on their debt.
In the past three weeks, global equity markets have fallen almost as much as in the Financial Crisis of 2007-08.
In the past week, global equity markets have fallen again and yields on developed market government bonds have collapsed even further.
Today, global equity markets have fallen again and yields on developed market government bonds have collapsed even further. In my opinion, there are two diametrically opposed events playing out at the same time.
This is a time to remain calm, patient and focused on fundamentals whilst relying on sound risk management practices. Over the last week the number of confirmed cases of COVID-19 has risen to more than 83,000 people across 50 countries.
Ironically, the turning point may have been President Trump’s withdrawal from the Paris Agreement on climate change in 2017 that set the tidal wave of “doing the right thing” in motion.
2019 was the year in which ESG investing joined the mainstream and became the “new normal”.
Environmental, social and governance (ESG), a byword for sustainability, has in recent weeks occupied rarefied real estate on the landing page of several finance industry titans.
Welcome to the Q1-2020 ‘Quarterly Perspectives’ publication, which aims to explain our outlook for financial markets over the rest of the year.
The polls have become notoriously unreliable and nothing can be taken for granted ahead of Thursday’s general election.
Welcome to the Q4-2019 ‘Quarterly Perspectives’ publication, which aims to explain our outlook for financial markets over the rest of the year.