Following the lockdown and collapse of financial markets last March, for several months we have been witnessing an almost uninterrupted increase (good that, from our point of view, surprising as the fundamentals seem to be ignored). The increased interventionism of central banks and the continued rise of “tech” stocks were the first reasons given by financial experts to justify this improvement.. We remain doubtful about these explanatory elements and we will try to analyze other reasons which, potentially, could justify this increase
By Marion Hovannessian, Head of business development
In the first place, we observe the increasingly significant share of private investments in the financial markets and especially in the US markets.
On the stock markets, on observe que 20% transactions are carried out by private investors.
On derivative markets, since mid-July 2020, transactions of 10 contracts or less have progressed to reach more than 60% purchasing options, a historically high observed. These irrational purchases on derivative markets can have perverse effects. First of all, obviously, for the portfolios of retail investors who have little or no knowledge of how derivatives markets work and can quickly become surprised by margin calls or expirations. Ensuite, massive movements in call purchases create an upward movement on the stock markets in general, market-makers having to cover derivative purchases with stock purchases. It is therefore easy to understand that these market increases are not based on analyzes of the balance sheets of listed companies..
These new investments are made possible by the emergence of online brokerage companies such as Robinhood which offer to invest in financial markets, and this without commissions. The number of Robinhood customers increased by 3 million between May and June 2020, to move on to more 13 million customers, with an average age of 31 years only. We can then imagine that many of these stock traders are either young American students who hope to finance their studies (often more than 200 000 dollars) in this way, or millions of novices, armed with their state aid checks and replacing closed casinos with open financial markets.
Robinhood maintained this movement of enthusiasm through influencers on social networks and through their Robintrack site which offered, until August 2020, to know the stocks most purchased by their clients, generating a “shepherd” effect and leading millions of apprentice investors to acquire shares without any notion of the risk involved or financial analysis.
But what you need to know is that instead of receiving fees initially in the form of commissions, Robinhood is making money behind the scenes, by selling the trades to “market makers”, i.e. large, sophisticated quantitative trading firms like Citadel Securities, Two Sigma Securities, Susquehanna International Group et Virtu Financial. These, by having knowledge of the entire Robinhood order book degrade execution conditions by doing front running on these order flows.
This way, in the first trimester 2020, 91 of the 130 Millions of dollars in Robinhood's revenue came from selling its order flow. In the second trimester, these revenues doubled to reach 180 millions of dollars!
The rate war
Another subject on which we are not going to dwell on because everything has already been said and retold: it seems that rates will remain in negative territory for a long time. This state policy also pushes investors to turn to the stock markets to hope for a return.. Until when? and how long will States be able to maintain this strategy without impoverishing countries??
Are you more active or passive?
Another factor pushes, according to our understanding, stock markets up : the growing share of passive management compared to active management. In the USA, 45% of the market is done through passive management. And since the beginning of October, there are more ETFs than listed companies in circulation on the NYSE and Nasdaq.
The impacts are diverse. On the one hand, certain companies are favored and massively purchased by passively managed ETFs, like Tesla or the FAANG (Facebook, Amazon, Apple, Netflix and Google and Tesla). The valuations of these companies have therefore been pushed upwards and now represent 25% American indices S&P 500 et Nasdaq, formulated differently 495 companies only weigh 75% in the evolution of these same indices.
On the other side, certain sectors and therefore companies are penalized by passive management. For example, the oil sector has moved away from ESG management and a company like Exxon is at an all-time low despite consistent and substantial dividends.
In conclusion, you would have understood it, la tendance haussière que nous voyons depuis le plus bas du 23 mars 2020 s’explique par des facteurs auxquels nous ne croyons pas. Nous pensons plus que jamais qu’il faut analyser la situation macro-économique et décider de ses investissements de manière rationnelle. Ou alors de payer quelques bips supplémentaires à un gérant actif prenant les bonnes orientations au bon moment!