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Global Markets to 29th January 2021

 

Highlights

  • Traders and investors grapple with elevated valuations, mixed news on the vaccine front and corporate earnings figures.
  • Users of Reddit and Robinhood drive the share prices of GameStop and AMC up, sparking a short squeeze on hedge funds.
  • In Davos, President Xi Jinping sets out his vision for a better, safer, more collaborative future, and shares details of China’s Belt and Road Initiative.
  • The UK announces its application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
  • The outlook for global equities remains good, but challenges lie ahead.
  • The budget is currently scheduled for 3 March – time to seize opportunities to get year-end tax planning under way: join our webinar where we answer your most pressing questions on tax, planning and investment opportunities

 

Global Market Summary

Most of January has been a rollercoaster ride for global investors, and its final week was no exception. Traders and investors have been grappling with elevated valuations (global markets have surged since March 2020). Meanwhile, a nuanced investment backdrop has been created by recent negative news about vaccine supplies and infection rates, juxtaposed against positive corporate earnings figures. These have seen Apple surpassing US$100 billion in quarterly revenue for the first time in its history.

 

On top of all of that, the financial markets now have to contend with an extraordinary development that has been masterminded by amateur traders, targeting billionaire hedge fund managers: a coordinated effort by users of online message board Reddit and trading app Robinhood has driven up the share price of US videogame, consumer electronics and gaming merchandise retailer GameStop. The result is a great deal of uncertainty over how this frenzied short-selling tug-of-war between the amateur investor and the professional hedge fund manager will play out.

 

Essentially, “short-selling” is a way of making money by betting that a company’s share price will fall. In this case, hedge fund firm Melvin Capital had done exactly that by shorting GameStop shares. Reddit user group WallStreetBets then bought up shares in a deliberate attack on fund managers such as Melvin Capital.

 

The media is presenting this as an attack staged by millennials on “boomer” money, or as a classic Robin Hood-style tale of wealth being taken from the megarich and redistributed among the not-so-prosperous.

 

Some news sources put short sellers’ losses on GameStop at nearly US$20 billion this month. Meanwhile, GameStop shares have skyrocketed, leaving the company’s recent market cap value as high as US$34 billion and no lower than US$72 million.

 

This has become a dangerous game – a game that Reddit and Robinhood traders are clearly winning at the moment. But given that GameStop shares have registered a trading low of US$2.57 and a high of US$483 over the past 52 weeks, perhaps now is the time for the victors to leave with their spoils before it all goes bad. Gordon Gekko’s “greed is good” approach might not be the best one right now.

 

This short squeeze fad has since targeted a number of other US companies, such as AMC Entertainment. But the practice has not been limited to the US: in the UK, shares in both heavily-shorted Pearson and Cineworld had surged by midweek.

 

This could get messy. While it is fascinating to see an alliance of small investors beating the hedge fund fraternity at its own game, watchdogs on both sides of the Atlantic are monitoring activities carefully and are on the lookout for any evidence of lawbreaking. The middle of a pandemic is no time for another financial crisis.

 

In the UK, Covid infection rates and fatalities remain depressingly high, but some 8.4 million people have already received their first dose of the vaccination. The current dispute between the European Union and AstraZeneca has arisen following the company’s announcement that – because of production problems – it was going to have to cut the number of doses it was going to deliver from 80 million to 30 million. However, AstraZeneca and other vaccine providers are promising increased supplies as we enter the spring and summer months.

 

The news that the Novavax injection has been found in trials to be effective against the Kent variant of the virus is extremely positive. The UK has secured 60 million doses, which will be made in Stockton-on-Tees in north-east England. Meanwhile, Johnson & Johnson said that its phase-three trial results for a single shot of their vaccine would be released very shortly.

 

In the US, Janet Yellen was finally confirmed as the first female Treasury Secretary in history. Yellen served as head of the Federal Reserve Bank between 2014 and 2018 and will now guide the Biden Administration’s economic response to the pandemic.

 

On January 25, Chinese President Xi Jinping gave a speech to the online version of the World Economic Forum’s Davos conference setting out his vision for the future and stressing China’s commitment to the Belt and Road Initiative. He extended an invitation to the US to be part of a more collaborative future. In addition to his offer to join China on a “path of peaceful coexistence”, mutual benefit and win-win cooperation, he expressed his concerns over inequality and his desire to close the divide between developed and developing countries. He wants countries to “come together against global challenges and jointly create a better future for humanity”.

 

President Biden’s response, when he gives it, will undoubtedly be more diplomatic than any that Trump might have given. But human rights violations, the Taiwan situation, intellectual property disputes and many other issues will ensure that relations between the two superpowers remain frosty for some time.

 

The UK’s application to join the free trade area alongside eleven Asia-Pacific nations is good news: doing so will boost future UK exports. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP has a market of around 500 million people and is an agreement between Australia, Canada, Japan, New Zealand, Brunei, Chile, Malaysia, Mexico, Peru, Singapore and Vietnam.

 

Over the next decade or more, the Asia-Pacific basin region will become a vibrant area for growth as its middle classes become more prosperous. This will create excellent opportunities for UK businesses. Admittedly, the initial impact will be modest: the UK already has free trade agreements in place with a number of its members.

 

But the future benefits and rewards look more exciting – particularly if the US agrees to join (as President Biden has hinted). Our membership would also help broker a trade deal with the US and pave the way for a prosperous future outside of the European Union.

 

To conclude, after such a phenomenal rally over the past ten months or so, the financial markets are starting to look a little weary. The first quarter of any year can often be somewhat mixed: the tax management effect can negatively impact stock markets’ trading volumes. And this might be felt even more acutely after such an eventful year.

 

Last week’s short squeezes took the shine off what had otherwise been a good start to the year, leaving the MSCI World Index in negative territory. But in other regions (China, parts of Asia and the emerging markets), positive returns were registered. Small cap indices in the UK and US also recorded small gains, along with the NASDAQ (helped by technology stocks).

 

Overall, the outlook for global equities remains good. But challenges lie ahead over the remaining winter months.


Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us via email. We would love to hear from you.

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