The indices are multiplying: the stock market rise begins to weaken. The “big hands” are preparing their exit … while individual investors will only have to book their losses.
The year 2020 was the year of all oppositions.
Authoritarian governments have taken decisions diametrically opposed to those of the liberals, opting for security over freedom. Cautious citizens have lived a totally different year from that of their light-minded compatriots, preferring cautious confinement to the “one has to live well” of optimists.
The same dichotomy manifested itself at the stock market level. Some investors, seeing the world stop turning, liquidated their positions without going back on the securities they had abandoned in March. Conversely, floods of capital have poured into stocks supposed to benefit from the “next world”, forgetting any notion of prudence, return on investment or even profitability.
The performance gap is glaring between values deemed to be “good father” and the new darlings of investors. The meteoric increases in Tesla, Apple and Bitcoin are the most obvious illustration of this. What might just be a manifestation of the classic bullish versus bearish showdown is starting to look like a barrage about to let go.
The first creaks begin to be felt and the question arises more strongly than ever:
How long will the prudent virtue of investors hold out against the insolent success of speculators?
The big post-Covid gap
Global indices plunged in concert in March 2020, when it became evident that the SARS-CoV-2 epidemic, initially Chinese, was becoming a pandemic with significant and lasting effects on the economy.
The rebound, on the other hand, was most skewed.
Classic industrial stocks, yield and “good father” stocks (industry, energy, etc.) remained almost glued to their spring 2020 lows. Conversely, technology stocks like Zoom (+ 380% over the year), Tesla (+ 600%), or even Apple (+ 76%) have experienced an unprecedented rebound – not to mention biotech, whose course was naturally carried by the news.
Grace has touched, directly or indirectly, all technological stocks. Even the sulphurous Bitcoin offered + 290% between January 1 and December 31, while cryptocurrency payments did not experience a significant boom in 2020.
In general, cautious investors, keen not to pay more for their securities than their intrinsic value, remained paralyzed, while speculators had their hearts contented.
Over the year, the iShares Value ETF lost 5% while the NASDAQ offered + 40%.
The performance differential is more than maintaining itself: it has been increasing since the summer. This situation poses an immense risk on the markets: that of seeing individuals and big hands give in to FOMO (” fear of missing out “, the fear of missing the boat) and refer to the big winners of 2020 even if their prize defies belief.
Dangers of capitulation
This column would not be enough to list all of the investment vehicles that experienced a rise disconnected from fundamentals last year. Their common point is to present a dematerialized activity and to be, from near or far, positively correlated to the changes in habits taken during the Covid-19 crisis.
It does not matter whether the bursts of activity are in essence temporary (biotechs, teleworking sector), quite relative (cryptocurrencies), or even that companies are frankly in deficit (Snowflake, Palantir): capital flows have been massively transferred to a few fetish values.
However, it would be abusive to blame Covid alone for this selective myopia: the decorrelation between technological stocks and the rest of the economy dates from several years ago. According to a synthesis made by Les Echos, the GAFAM have grown five times faster than the market over the past decade – and yet they are not among the most outlier increases of the past 12 months.
As such, the year 2020 was only the last manic phase of a phenomenon that began several years ago – and many safeguards are starting to jump, which raises fears that the trend will accelerate.
Recently, the Hong Kong Stock Exchange (HKSE) backtracked from its guiding principle of refusing to list companies that offer investors on the stock exchange shares with reduced voting rights compared to those held by the founders. This principle of fairness, which is quite laudable for offering minority shareholders a weight at least proportional to the capital held, has been abandoned. Now, companies that lock out voting rights for the sole benefit of first-time investors and management can be listed on the HKSE.
The United States, the so-called land of liberalism and equal opportunity, is doing no better. The S&P 500 had until now equivalent protections which had led to exclude Zillow, Airbnb and other Tesla.
The rise in these securities outside the flagship indices got the better of the main principles: Tesla joined the S&P 500 last year despite all doubts hanging over the company. It was simply no longer possible for the benchmark to miss the rise of Elon Musk’s firm. Tesla therefore joined the index, continued its rise disconnected from fundamentals, and reinforced the vicious circle which maintains the confusion between stock market rise and enterprise value.
At the start of 2021, the risk of a reversal is major. When big, cautious hands and good fathers have capitulated and built these stocks into their portfolios out of weariness of missing out on easy gains, the bull cycle will have run out of fuel.
Big hands will be able to slip out quietly before the prices collapse. The latest entrants will then end up with worthless titles on their hands. They will not have had the increase, but they will have the decrease.
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