Revenge of the Retail Traders
Commission-free trading has reignited a wave of individual investing in the U.S., but what about their foreign counterparts?
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Last Week Briefing:
Israel, the U.A.E., Bahrain, and the United States signed a historic peace agreement, ushering in a new era of Middle Eastern diplomacy. Israel seeks to secure roughly half a billion dollars in new, bilateral trade deals with their new Middle Eastern contemporaries. — Financial Times
Yoshihide Suga, the former chief cabinet secretary under Shinzo Abe, has been chosen as the next Prime Minister of Japan. Suga is expected to continue his predecessor’s legacy of “Abenomics”, which seeks to kickstart the dormant Japanese economy through fiscal and monetary easing. — Foreign Policy
“People are sick of the fact that if the Covid-19 doesn’t kill them, the government will.” Said a Colombian activist in response to the protests taking place across the country. Thousands of Colombians have poured out into the streets after a viral video depicted two police officers tazing, then shooting and killing an unarmed civilian. — The Guardian
Facebook has announced plans to open their second office in Lagos, Nigeria. The office is expected to be operational by the end of 2021 and will host a plethora of Facebook employees, ranging from engineering to sales. — Quartz Africa
Revenge of the Retail (Robinhood) Traders
Fidelity Investments advertisement, last aired 10/25/19
Remember this? That’s right, not too long ago, you had to actually pay for stock trades — How antiquated! What if I told you it’s only been a year since “free” stock trading has become the norm?
Surprisingly, it’s true. Next month would mark the one-year anniversary of proliferated, commission-free stock trades. Years ago, brokers’ commission fees could range as high as 1% for just one trade. That may not seem like a lot, but when you’re docked $50-$100 for every $10,000 trade, it adds up quickly. That commission-based trading model would be ultimately supplanted by the “online discount broker” model, in which blue chip brokerages like Charles Schwab or Fidelity Investments (pictured above) would charge a small, flat fee per trade. That model, albeit extremely successful and popular, would eventually be challenged by Robinhood’s revolutionary free trading app. Robinhood, the app that seeks to “democratize finance”, has become synonymous with some of the absurd retail trading activity we’ve seen in the U.S. equity markets.
The standardization of commission-less trading has — and I say this with a hint of hyperbole — effectively democratized personal finance. People, particularly younger individuals, care significantly more about fiscal hygiene and personal finance than they did a decade ago. What’s more, individuals from minority backgrounds have exponentially increased their involvement in the stock market. Trading volumes are up, which narrows spreads (the difference between what buyers and sellers think an asset is worth) and helps reduce costs in favor of the investor. Across the realm of investments, there are seemingly countless, cost-efficient methods that enable retail investors to gain secular or broad exposure to the stock market. As of 2017, there are more exchange traded funds (ETFs) than publicly traded stocks in the U.S.. Nonetheless, all of these new features of the market instill me the belief that there has never been a better time to be an ordinary, retail investor than right now.
This “retail trading frenzy” if you will, has come with plenty of unintended consequences. For starters, we’ve seen some unworldly price action out of some otherwise neglected names. In May, shares of Hertz Global Holdings unexpectedly skyrocketed after they declared bankruptcy. Similarly, investors were perplexed by the respective rallies in Apple and Tesla stock after they announced a stock split, which has no material impact on the profitability of the company. Lastly, thematic trends in remote work, electric vehicles, and artificial meat have driven nascent (and often unprofitable) companies to sky-high valuations. You know that Zoom app you’ve been spending all day on? It’s now worth nearly 3x the value of General Motors.
I could drone on about the ripple effects of a “democratized market” all day long. I don’t want to bore you though. There are certainly no shortage of self-pitying money managers publicly lamenting their lackluster performance compared to the amateurs found on internet forums like R/WallStreetBets. That said, I find it exceptionally fascinating that this market behavior is not limited to the United States. In fact, while the U.S. equity markets have been the main stage of this phenomenon, stock exchanges across the globe have seen a huge uptick in retail trading activity, attributed to government stimulus checks, prolonged periods of lockdown, or both! Major bourses such as the Shanghai Composite, National Stock Exchange of India, and the Bursa Malaysia have seen ordinary companies spike to extraordinary valuations, an indicator of the manic trading consuming global equity markets.
Top 5, Top 5: What are the top five largest stock exchanges in the world by market capitalization? Answer at the bottom.
“Dumb Money is Winning at the Moment”
India has had a tumultuous year, to say the least. The country’s first quarter GDP dropped a record 24%, stemming from their corona-induced economic shutdown. At its peak, India saw nearly ten straight days of over ninety thousand new coronavirus cases. Just two weeks back, the country passed Brazil for the second highest number of recorded cases in the world. All of this goes without mentioning their ongoing border conflict with China, in which 20 soldiers were killed in a small, yet violent firefight in June. There is little reason to believe that China will not continue to impede upon the sovereignty of India’s Himalayan border.
Royal Challengers Bangalore, who won by ten runs last Sunday
All that said, there are reasons to rejoice in India! For one, the Indian Premiere League started over the weekend, the world’s most popular professional cricket league. Continuing the theme of this letter, India’s SENSEX is only down 5% on the year, despite the largest quarterly economic contraction in history. The SENSEX has shown resilience, falling 35% from January to the March lows, only to rebound 46% to all time highs. This volatile price action can be attributed to — you guessed it, a huge influx of retail trading volume. The National Stock Exchange of India reported that 4.5 million new accounts were created through the end of July, up from under 3 million through all of 2020. In addition, institutional brokers estimate that retail trading now composes nearly 50% of total trading activity, up from 33% the year before.
Zerodha, the second largest trading platform in India, claims 3 million users, 65% of which are first time investors. Zerodha initially held the title as the premiere discount broker until Paytm, the multifaceted personal finance app backed by Jack Ma, would undercut the industry’s fees by 50%. Funny enough, Paytm, now the largest trading platform in India with over 6.5 million users, shares Robinhood’s core objective of “democratizing finance”. The company claims that 70% of their users are “first time traders” and 60% of them hail from small or rural towns.
These new investors, however, are not piling into the stalwart names of the Nifty Fifty (India’s 50 Most Valuable Companies). They, like their manic counter-parties in the States, are piling into small, speculative names, such as Transglobe Foods (+4,300%) and Shree Precoated Steels (+1,300%). Neither of the aforementioned companies have recorded a sale. This boom in small cap stocks has driven the BSE small cap index up 69% percent from their March lows and up over 7% YTD.
All of that said, there are some technical reasons to remain bullish on India’s small caps. Starting in February of next year, India’s multi-cap mutual funds, who have traditionally eschewed small caps for the enticing large caps, are now legally required to reduce their exposure in India’s large cap stocks in favor of small cap names. This new regulation is expected to distribute over 400 billion rupees ($5.4 billion) throughout the broader Indian marketplace.
Feeling Nifty: Can you name the top 5 most valuable companies included in India’s Nifty Fifty? Answer below.
Party like it’s 2015
I don’t think I need to walk you through what’s happened in China this year. You should (hopefully) already know. What China wants you to know, however, is that they’re back. Their economy is open and ready for business. This state-led economic recovery, coupled with a restriction on short selling, has driven the SZSE Component, the Chinese equivalent of the S&P 500, up 26% on the year. Trailing that index is the Shanghai Composite, which aims to capture the broader Chinese equity markets. That index is also up a healthy 7.5% this year.
Similar to the U.S., investors are wondering whether the Chinese market is detached from the reality of the economy. Chinese consumption is far from a full recovery and other economic indicators, such as subway traffic and carbon emissions, are nowhere close to 2019 levels. In July of this year, China saw the highest number of new investors since 2015, a 57% increase from the month before. In the same month, trading volumes hit a five-year high at 1.7 trillion yuan (~$250 billion). Chinese investors are growing fearful of this market’s resemblance to 2015, in which China’s largest stock indices quickly swelled to near all-time highs only to shed $5 trillion from a vicious selloff.
This behavior naturally begs the question: Is this rally fundamentally driven? Or is this just another case of retail trading mania?
While the performance of the SZSE and the Shanghai Composite have been nothing to scoff at, the main stage of China’s stock euphoria can be found in the IPO markets, conventionally listed on the ChiNext Index or STAR Market. The ChiNext has advanced 42% this year, sextupling the return of the Shanghai Composite and reaching a sky-high price-to-earnings multiple of 77. Companies who have listed on the ChiNext have seen riotous debuts, including Contec Medical Systems Co. which was bid up as high as 3,000% on the first day of trading. Similarly, companies that listed on the Shanghai Composite’s STAR Market have seen an average gain of 214% on their first day of trading. IPO volumes are the highest they’ve been since 2010 — but could you really blame them?
It should be clarified, however, that the number of new traders is not concerning on its own. Rather, it is the exuberant, risk-taking behavior that terrifies China’s legislators and institutional investors. Retail investors collectively have taken on an enormous amount of leverage in their trading accounts, estimated to be north of 1 trillion yuan (~$145 billion). Some platforms, despite a dire warning from the Chinese Securities Regulatory Commission (CSRC), have enabled retail investors to lever up, or borrow, 10x the value of a single stock. The 2015 Chinese stock crisis was characterized by this same phenomenon: Retail investors who had borrowed money to buy stocks were forced to sell their stocks in order to pay their lenders. This, in effect, created an avalanche of selling which sent the whole Chinese equity market tumbling. Investors frantically sought to cut their losses and pay off debts owed to these shady lenders. In July of this year, the Chinese Securities Regulatory Commission blacklisted over 250 lenders who had previously issued extensive margin loans to unassuming retail investors.
Will it end differently this time? They certainly don’t want another repeat of 2015. Last time a bubble like this popped, Chinese investors congregated outside the CRSC with signs accusing the agency of enabling fraud. That said, Chinese regulators are confident that the People’s Bank of China has corralled both liquidity and euphoria in the Chinese marketplace.
“Money to Play With”
Fun fact: Malaysia used to comprise nearly one third of MSCI’s Emerging Markets index. Fast forward to today, and that share is a mere 1.6%. I’ll talk about Malaysia’s marketplace in a future letter, but in the meantime I wanted to round out this week’s letter talking about how the 21st largest stock market by capitalization was home to some of the craziest price behavior in 2020. The Bursa Malaysia is currently the best performing stock index amongst Southeast-Asian exchanges — But that really isn’t saying much, unfortunately.
FYI: The Hang Seng is also down 15%, YTD.
So what gives? What makes Malaysia’s stock market so much more resilient than their Asian neighbors? Quite simply, the combination of their stimulus package, inflow of retail traders, and their glove manufacturers.
In the first quarter of this year, Malaysia saw their sharpest economic contraction since the Asian Financial Crisis of 1997. When Malaysia entered lockdown in March, their government sprung to issue over $70 billion in fiscal stimulus, or roughly 20% of their GDP. 11 billion ringgit, or $2.66 billion, was distributed via cash payments to one-third of Malaysia’s populace while another 10 billion ringgit was allocated towards a low-interest loan facility. In addition, the government induced a six-month moratorium on debt payments, estimated to have saved borrowers over 100 billion ringgit, or $24 billion, collectively.
So what did Malaysians do with their newly acquired cash? As we’ve come to expect in this kind of quarantined environment, those cash payments (along with the savings realized from no debt payments) went straight into the Bursa Malaysia, the nation’s largest stock operator. The Bursa Malaysia Top 100 hit a record high in trading volume as quarantined investors, ranging from retirees to real estate junkies quickly scooped up battered names in airlines, hotels, and malls. Similarly, prices of Malaysian glove manufacturers soared in tandem with the global demand for personal protective equipment, for obvious reasons. This parabolic price action naturally lured investors into a state of “FOMO” as these companies seemingly couldn’t go down. As a matter of fact, Top Glove Corp, the world’s largest glove manufacturer, outperformed Tesla Motors by over 100% at its peak. This price action can obviously be traced back to the heightened global demand for rubber gloves, although retail trading certainly added to the frenzy.
Retail trading participation rose to over 40% from 33% the year prior. The Bursa Malaysia reported net purchases of nearly 6.5 billion ringgit, or $1.5 billion, through the first six months of 2020.In contrast, international investors actually pulled money ($3.79 billion, to be exact) out over the same exact period. This kind of volume is pretty absurd. For context, retail volume for the first six months of 2019 only reached $218 million.
As I write this, we are approaching the end of September. That means — sadly — debt has to get paid again. This looming deadline rings bearish for the Bursa Malaysia, as volumes have plummeted and the benchmark is over 6% off its all time highs. In addition, Top Glove Corp shares have fallen over 60% over the last month, extinguishing most of the mania surrounding glove makers. Malaysia’s government has worked diligently to curb further speculation in their market as to avoid any undesired outcomes. On July 27th, the Edge Malaysia Weekly, a markets-focused magazine, published a cover that read: “No rush to bring zero free trading to Malaysia.” For now, it appears the fun is over.
Magazine Cover — The Edge Malaysia
Banished: The Malaysian government censored which popular American comedy film? Answer below:
Top 5, Top 5:
1) NYSE — $21 Tr
2) Nasdaq — $15.7 Tr
3) Shanghai Stock Exchange — $6 Tr
4) Japan Exchange Group — $5.5 Tr
5) Hong Kong Exchanges and Clearing — $5.2 Tr
1) Reliance Industries
2) Tata Consultancy Services
3) HDFC Bank
4) Hindustan Unilever
5) Infosys Ltd.
Zoolander was banned from Malaysia following its premiere in 2001 as the film depicted Ben Stiller’s character assassinating the Prime Minister of Malaysia.
The Global Capitalist
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