Power in Numbers

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Global equities fell back 3.5-4% last week, leaving them down slightly year-to-date, although they have recovered some of these losses today. It was a busy week for financial news but the press was very much dominated by just two stories – the vaccine row in Europe and GameStop.

The EU Commission’s desperate and ill-fated attempt to address the vaccine shortfall in Europe was the reason for this story grabbing the headlines. For financial markets, however, it served to highlight how the recovery in Europe is likely to lag that in the US and the UK as a result of the vaccine delay. It also succeeded in drowning out the positive news that two more vaccines, Novavax and Janssen, are effective with one of these also only requiring a single jab.

As for GameStop (a small troubled US games retailer), it was the epicentre of the short squeeze which retail investors in the US managed to inflict on several heavily shorted stocks. It prompted reams of coverage because of the damage John Doe (aka Joe Bloggs) had managed to inflect on short-selling hedge funds and the significant regulatory issues raised by the whole episode. What concerns us here, by contrast, is the implications it has for the market outlook.

The sight of retail investors piling into particular stocks and driving prices up to levels bearing no resemblance to the fundamentals is classic bubble behaviour and brings back bad memories of the tech bubble 20 years ago. Other areas of the US market have also recently shown signs of excess, with a surge in IPOs (initial public offerings). Lastly, equity funds generally have seen a sharp rise in inflows in the last few months.

So how worrying is all this? Certainly, if you’re a fund manager specialising in short-selling, this activity is looking a lot more risky than it was and a couple of hedge funds have already hung up their boots. As for the army of Redditors (as users of the Reddit social media platform used to coordinate these short squeezes are called) there’s no reason to expect them to hang up their boots. Flush with their recent victories and with Biden wanting to hand out to all US individuals another $1400 on the top of the $600 stimulus check they have just received, their resources will only have increased.

More generally, this is all a symptom of the liquidity sloshing around the markets which is unlikely to be withdrawn any time soon. There is still a mountain of cash on the side-lines, potentially available to drive markets higher. Importantly, central banks have no plan to start scaling back their QE programs any time soon. Fed Chair Powell was at pains last week to emphasise that it would tread very cautiously on this front, not least because the economy still badly needs supporting.

We also take comfort in the macro outlook. Last week’s economic data was mixed but rather old news as far as the markets are concerned. Q4 GDP numbers for the US, Germany and France confirmed the Eurozone is seeing a double dip in activity in contrast to the US, where growth slowed substantially but remained positive.

Much more important, a strong global recovery still looks on the cards for later this year. Indeed, the IMF has just revised up its forecast for global growth this year to a strong 5.5%. This in turn should drive corporate earnings growth of as much as 30% this year. The current US reporting season is encouraging in this respect with US companies beating expectations substantially. US earnings in Q4 are now forecast to fall only 1.5% on a year earlier, whereas at the start of reporting, the expectation was for a 10% decline.

In short, while we are far from complacent about the latest signs of bubble-like behaviour, we believe this bull market still has some way to run.

Rupert Thompson

Chief Investment Officer