Last week’s trading frenzy by retail investors offered a stark reminder of how easy it is for equity valuations to become separated from business fundamentals.
Social media-connected retail investor activists poured into amateur trading platforms such as Robinhood to prop up shares of ailing US companies like GameStop, cinema chain AMC and Blackberry. For some, these investments were seen as an act of activism against the big guy hedge funds; for others, it was simply an attempt to make a quick profit.
At certain points, the share prices of Gamestop rose by as much as 1,700%, with its market cap temporarily exceeding that of S&P 500 companies such as Halliburton and Kellogg. And this took place despite no change to its performance or profit outlook. The Cboe Volatility Index saw its biggest spike in two years last Wednesday (27 January). The price of silver also hit an eight-year high of $30 per ounce on Monday (February 1).
Investors in Malaysia followed suit on Friday (29 January). They buttressed shares in rubber glove manufacturer Top Glove – which had fallen on the back of Covid-19 vaccine developments and news of questionable labour practices at its factories. The possibility of further such coordinated tactics, and consequent bubbles, is impossible to ignore.
China is clearly aware of the danger: the central bank withdrew $12 billion from the banking system on Tuesday. Such a move, so close to Chinese New Year, is unusual and suggests the government is concerned about the abundance of liquidity in circulation. A People’s Bank of China executive has also warned about the risk of bubbles.
But with a smaller hedge fund industry, smaller markets, and shorting activities far more regulated in Asia than in the US (Korea’s regulators are contemplating permanently banning such positions), some experts believe that the region is more insulated from the effects of retail activity.
AsianInvestor asked leading investment professions to share their views on whether retail investor-driven momentum could pose a problem for institutional investors in Asia.
The following contributions have been edited for brevity and clarity.
Tai Hui, Asia chief market strategist
JP Morgan Asset Management
In general, institutional investors take into account both overall and retail investor momentum as part of their inputs on tactical allocation. If such market positioning shows high ownership of equities, it may prompt some institutional investors to reduce their tactical equity allocation.
As for the recent wild price swings in selected US stocks prompted by retail investors, Asian institutional investors are generally less engaged in short selling.
Where Asian investors could be impacted is via the broader market volatility generated by these activities such as a US hedge fund needing to cover its short position by selling down other assets.
Another uncertainty is whether regulators, either in the US or in Asia, will respond to such activities. Discussions are underway in South Korea, for example, on whether to ban short selling permanently, which would limit the function of the financial markets.
Liz Young, director of market strategy
BNY Mellon Investment Management
Prospect theory tells us that the pain of losing is twice as powerful as the pleasure of gaining and new investors could be expected to be influenced by this.
Recent market shifts have taught us that the retail investor is now big enough to move markets. The long-term impacts remain to be seen.
There is a risk that some new investors end up losing badly on this and become disenfranchised with the market.All investors have a right to participate in the market and all investors have a right to gain or lose based on their participation in the market. We as an industry need to stay relevant and welcoming to individual investors and institutional investors alike.
Chang Hwan Sung, director of solutions research
Momentum that is driven by retail investors will be less problematic for institutional investors in Asia since shorting activities are more regulated in this region. Shorting is still entirely banned in Korea, and some markets such as Hong Kong maintain a list of shortable securities.
Restrictions on naked short selling are also more strictly enforced in Asia. Meanwhile, because the hedge fund industry is much smaller here, short squeezes that hurt many US hedge funds are less likely.
That said, some stocks with high levels of short interest could experience short squeezes. These tend to be stocks that are hit hard by Covid-19, and with increased levels of vaccination and hopes for a rebound in economic activities, there are growing expectations of a turnaround in company fundamentals.
If this is coupled with retail buying, there could be short squeezes that surprise the market.
Thomas Poullaouec, head of multi-asset solutions Asia Pacific
T. Rowe Price
We remain convinced that a patient focus on company fundamentals remains the best strategy for long term success in the equity markets.
We continue to urge clients to maintain a well-diversified portfolio and not to be misled by tales of spectacular gains in speculative investments. Clearly, social media and zero commission (although not cost-free) trading platforms have introduced a new dynamic into markets, and we suspect the debate over whether or how to regulate them will continue.
The jury is still out on the long-term impact of retail investor flows, which have been more diversified than suggested. Recent price action also seems concentrated in a limited number of US stocks, so Asian institutions should monitor their potential exposures to these specific stocks.
Asian markets have so far been isolated from these effects, as the recent performance of the most shorted stocks in Asia has not experienced the same upswing than was seen in the US.
Andrew San, head of Asean equities
No. As institutional investors, our role is to adapt to the prevailing market conditions in the best way that we can, in order to provide the best outcome for our clients.
Therefore, with the rise of retail participation exacerbating volatility in the markets, we believe that the key to adapting to the current market conditions is to formulate a clear strategy – in other words, to focus on quality companies that are best-placed to navigate through these uncertain times and be disciplined in implementing this strategy.