Article written by Stephen Bennie, Castle Point – 2021

It is clearly a disappointment that 2021 has started in a more volatile fashion than 2020 did. It wasn’t actually until Mid-March that 2020 saw volatility, although clearly it was extremely volatile from that point onwards. Since the very start of this year though, 2021 has seen a series of events that has volatility on the march once again. A deadly insurrectionist riot at the United States Capitol on 6th January in Washington shocked the world and created one of those iconic, “you’ll always remember where you were when you first saw the pictures” moments. The United Kingdom was forced into yet another hard lockdown, a reminder that, despite the vaccine roll out, the virus is currently exacting a very high toll on citizens and economies around the world. Meanwhile, Facebook has grown so powerful that it is now prepared to play hard ball with whole nations and face down governments such as Australia.

In more share market centric news, there was the remarkable showdown between professional shorters, mainly hedge funds, individual investors and Robinhood traders. The rather mundane and probably overpriced gaming and software retailer, Gamestop, became “game on” as smaller investors sought to force the shorters into capitulating by relentless buying that forced the share price ever higher. Short squeezes have happened since the creation of the share market, but this was as violent and extreme as any; the Gamestop share price rose 2,630% in two weeks, as individuals bought to ramp and shorters bought to close their positions. Effectively clambering over each other in a perverse game of musical chairs with very few chairs left. A very humbling event for professional investors as individuals demonstrated the relatively new and immense buying power of Robinhood style investors.

New Zealand investors also bore witness to the effects of immense buying power in January, as the buying of the iShares Clean Energy ETF reached its peak. Investors around the world use this ETF as a proxy for the renewable energy trade, which is highly popular right now, indeed the Google trend score for “Global Clean Energy’ hit the maximum value of one hundred in January. This resulted in massive buying of that ETF which flowed through into the ETF buying large quantities of Meridian and Contact, both members of the index it tracks. This created a supply versus demand imbalance resulting in both companies share price spiking higher in the month of January. Then in February it was announced that Contact and Meridian would be down-weighted in the index the Global Clean Energy ETF tracks, meaning it would be a large seller of Meridian and Contact. Both share prices promptly collapsed back to where they were before, all quite bewildering for a fundamental investor.

Another dramatic mover in early 2021 has been bitcoin, which has effectively doubled in price since the beginning of the year, the Bitcoin/USD exchange rate closed 2020 at 28,587 and has recently traded as high as 57,065, up 99.6%. We certainly do not profess to be experts in currencies, never mind the newbie crypto currency that is bitcoin, but we believe that part of this significant repricing is likely a mix of rising interest rates and the enormous $1.9 trillion stimulus package that Biden has reiterated is a major part of his first 100 days in office action plan.

This is largely due to another major geopolitical event of this fledgling year, with the Democrats winning both seats in the January Georgia run-off election, they now control the Senate courtesy of Vice-President Kamala Harris casting the deciding vote. This means that they now control Congress, the Senate, and the White House, allowing the Biden administration to push ahead with the $1.9 trillion stimulus, increasing the minimum wage, significant investment in renewable energy and several other fiscal projects.

This is all positive for economic growth, but it meaningfully boosts the money supply and increases the chances of entering a rising interest rate environment. This does appear to be what markets are signalling with the current combination of strong share markets, on the back of improving economic prospects, and rising interest rates, with even the emerging possibility of central banks finally having to consider the prospect of tightening rates to manage economic expansion.

Closer to home the current companies’ results season has already thrown up some interesting comments regarding rising interest rates. Take Auckland International Airport for example, at the results briefing, management were queried about the level of interest rate hedging they had in place, essentially had they been able to lock in borrowing at the current low interest rates. The answer was that they had interest rate hedging in place for 60% of borrowing locked in, but this was the highest level that their treasury guidelines would allow. As a result, they were going through an internal process which, if approved, would allow the interest rate hedging limit to be raised closer to 100%. Management believed this was appropriate given they were seeing some “green shoots” of inflation coming through.

If anecdotes such as this recent Auckland International Airport one, become the more widespread and a trend establishes and extends through 2021, it would represent a very significant regime change that will present investors with issues that they have not experienced for decades. Or it could be a flash in the pan, but an abundance of caution is merited, and we will continue to watch this space closely as safely navigating rising rates and tightening central bank policies will be a significant challenge for investors, and perhaps 2021 is the start of that challenge.

Kind regards
 
The Castle Point Team