In this month’s blog, Investment Specialist Kirsty Clark reviews market performance in January and reflects on the challenges for financial market participants and regulators as online platforms aim to ‘democratise finance for all’.
Despite rallying in the first three weeks of the year, global equities lost momentum as we headed into the final week of January, and finished the month in negative territory. The MSCI AC World Index was down 0.4% in US dollar terms.
Ongoing vaccine roll outs, and expectations of robust earnings recovery in 2021, drove investor optimism in January before concerns of a speculative bubble crept in, dampening investor risk appetite.
Small caps outperformed their large cap counterparts in January. Asia ex Japan and emerging markets were the strongest regional performers, delivering positive returns. In the US, the tech-heavy NASDAQ Index also logged gains, while the S&P 500 Index finished the month down. Eurozone equities were the relative laggards.
In fixed income, US, German and Italian 10-year government bonds lost ground as risk appetite ticked up.
In commodities, Brent crude continued to climb in January – up nearly 8%, finishing the month above US$55 per barrel. The wider CRB Commodities Index also rallied, with corn among the strongest gainers on the back of strong Chinese demand. Gold was the outlier, down nearly 3% as the US dollar strengthened against a basket of currencies.
Energy stocks tracked the oil price higher, logging the strongest global sector gains in January. Healthcare also outperformed. In consumer discretionary, media and entertainment stocks benefited from strong performance among Chinese names in particular and, within technology, semiconductor stocks continued to lead the gains. Laggards included developed market consumer staples and industrials stocks.
US President Joe Biden signed over 30 executive orders and other memoranda during his first month in office, covering measures to tackle the COVID-19 pandemic, provide near-term economic relief, and address inequalities and immigration reform.
The European Commission announced measures to implement export controls on coronavirus vaccines produced in the EU, as setbacks in the delivery of ordered vaccines led to severe supply shortfalls and prompted authorities in Spain, France and Germany to scale back vaccination programs. As part of the measures, the European Commission also briefly invoked Article 16 of the Northern Ireland protocol, which forms part of the UK/EU Brexit agreement. This is an ‘override’ clause allowing EU countries to block the shipment of vaccines from the EU into Northern Ireland. However, the EU’s executive branch back-tracked after being accused by UK and Irish authorities of acting in bad faith.
In Italy, Prime Minister Giuseppe Conte resigned after losing a parliamentary majority. Just before this blog was released, former ECB President Mario Draghi accepted a request from Italy’s president Sergio Mattarella to attempt to form a new unity government, after efforts to revive a coalition led by Giuseppe Conte collapsed.
The UK announced its plans to apply for membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trading group of 11 countries including Japan, Australia, New Zealand, Canada, Mexico, Malaysia and Vietnam, as the UK government looks to build alternative trading agreements in the wake of the UK’s exit from the EU – the world’s largest trading bloc.
In Asia, China’s economy continued to bounce back with fourth-quarter GDP growth in 2020 coming in at 6.5%, fuelled by strong industrial production.
Chart of the month: ‘Reddit’ here
In the final week of January, individual investors gathered on social media platforms and online forums such as Reddit and collectively targeted heavily-shorted stocks, including GameStop and AMC Entertainment, creating a ‘short squeeze’ on these stocks. Bricks and mortar video game retailer GameStop was the poster child for this touted ‘War on Wall Street’ as retail investors took on large short-sellers – many of whom were hedge funds forced to cover their short positions, potentially driving the share price higher. Whatever the individual motivations of those investors ramping up the share price, the repercussions were borne out in the markets (at least for a few days). Shares in GameStop soared to lofty heights before plummeting after some online trading platforms restricted buying, and trading volumes petered out.
Online trading platform Robinhood felt the backlash from participating retail traders after it introduced curbs on trading in GameStop, AMC Entertainment and other stocks whose share prices were embroiled in the volatility; citing “unprecedented times” and the need to raise cash to cover the increasing volume of trades as reasons taking the action.
While some retail investors may have made a tidy profit on the back of this collective action, many may now be saddled with shares in companies whose share prices have run ahead of the company’s underlying fundamentals. For sellers looking for a quick gain, a profit can only be realised if they can find a willing buyer. If buyers are thin on the ground, the risks from here could be skewed to the downside.
Still, retail investors have proved that ‘en masse’ they have the power to move the dial, at least in the short term. This may not be the last we see of, what could be viewed as ‘populist’, attempts by some to tackle financial inequality and redistribute global wealth.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.