Please send money … My enemies are after me

07 April 2022

A golden decade for equity investing may well be behind us. If you had invested R100 000 in global equities ten years ago, this investment would be worth over R700 000 at the end of 2021. Compare that to investing on the JSE, where your money would have grown to just over R300 000. While it does pay to stay in the market long term, investors should brace themselves for a bumpy ride this year. One of the reasons for this is that Global Central Banks are shutting the hosepipes that pumped liquidity into capital markets globally. The Global Financial Crisis over a decade ago saw Global Central Banks expand their balance sheets from $7 to $10 trillion – but this pales in comparison to interventions made after the start of the Coronavirus crisis two years ago, when Central Bank balance sheets grew from $22 to $34 trillion. The Federal Reserve and European Central Bank pumped over $10 trillion of liquidity to prop up their financial systems. This led to near zero and even negative interest rates in the developed world, fueling a massive speculative bubble.

Cathie and The Ark

The poster child of the cheap money era is undoubtedly Cathie Wood, who, very early on, was able to identify disruptive companies and invest in them via her $12 billion flagship Ark Innovation Exchange Traded Fund (ETF). Retail investors were able to access a venture-capital like tech portfolio via a transparent exchange traded vehicle and were rewarded with fourfold returns from 2018 to the beginning of 2021.

Valuations did not seem to matter as the hunt for investment opportunities extended to stocks with no earnings – it was all about invest now, grow fast for rewards in the distant future. The Covid gridlock also unleashed a new generation of DIY investors lured by free brokerage accounts from US firms like Robinhood and intent on picking up bargains following the Covid induced bloodbath on financial markets. These retail investors did exceedingly well to pick household names like Amazon, Netflix or Tesla at rock bottom prices two years ago and then gorging on various Crypto names.  The army of retail traders even took on hedge funds by buying up some heavily shorted stocks like Gamestop, forcing the professional investors to run for cover as prices shot up defying any fundamentals.

With the ducks quacking, many entrepreneurs found it opportune to raise capital via Special Purpose Acquisition Companies (SPACs).  These companies were often merely shell companies with a business plan, opportunistically raising capital to acquire real businesses. Even Wework inc. managed to go public through a SPAC, two years after its failed IPO.

An inflation problem

In mid-December, Fed Chair drew a line in the sand by admitting that inflation in the US was more persistent than previously thought and warned that the Federal Reserve would close the liquidity hosepipe by March this year. To add insult to injury, there was a real possibility of rate hikes earlier rather than later.  All this culminated in an extremely volatile first month of the year. The S&P 500 gyrated wildly even plunging 4% intraday post the Federal Open Market Committee (FOMC) meeting only to close in the green. Such dramatic reversals have only been witnessed twice in history. The Nasdaq composite, with its line-up of growth stocks, was down by over 9% last month, the worst month since the Covid crisis.

Nowhere to hide

Global investors could not even find safety in US government bonds with yields (which move inversely to the price of the instruments) surging at the beginning of this year from 1.4% to exceed 1.9%. And the ultra-long Austrian 100-year bond which had surged in value in 2020, has lost more than a third of its value since. The winners of the equity bull run also unraveled with the Ark Innovation ETF halving in the past year.  Gamestop, the darling meme stock, also halved since December and Ethereum, the best performing crypto currency last year, is down by over 20% year to date. More recently, we saw Meta Platform Inc – fresh from its Facebook (as it was previously known) makeover - break the record of the largest daily loss in market cap, $232bn (R3.5 trillion in a day). Netflix also suffered its biggest daily fall in almost a decade as the video-streaming service and Squid game maker warned of a slowdown in subscriber numbers. The years of retail investors relying on bulletin boards to hop on a stock, irrespective of its fundamentals, is likely to end in tears as the liquidity tide goes out.  So be careful if you get a message from someone you don’t recognise, soliciting money and promising astronomical returns. As quantitative tightening grabs hold, much of the excesses of the past decade are being flushed out and investors better brace for impact.