Wellesley WeeklyWatch – GameStop saga raises interesting questions about the future of financial markets

02 February 2021

Stock Take

Wall Street vs. Reddit

It’s likely that many of us wouldn’t have heard of US video game retailer GameStop until last week, when it hit headlines for being at the centre of a global financial controversy, with billions of dollars at stake.

Like many recent disruptive events, the tale began in 2020, when an amateur investor shared a theory online that GameStop’s stock price was due a comeback. They posted this on popular online message forum, Reddit – where amateur investors often share stock tips on the ‘r/wallStreetBets’ thread, which has millions of members, many of which invest through low-cost trading apps on their mobile phones.

The investor also went a step further – predicting that if enough of the forum’s investors bought GameStop’s stock, then certain hedge funds that had bet heavily on the stock price’s decline would be forced to cut their losses by buying shares themselves, driving the price even further upwards. Millions of r/wallStreetBets members got on board, rocketing GameStop’s share price from under $20 in early January to over $500 at certain points last week. The price continued to swing wildly as various platforms halted trading for the stock, citing “complications”.

A major debate was soon underway. Many of these small investors, plus a few public figures, were angry that trading had been halted temporarily on the stock. They argued that large investors and platforms were conspiring against the plucky underdogs.

Indeed, the saga raises some interesting questions about the future of financial markets. What further impact could millions of small investors have if they keep acting together? Is there anything that regulators could do to prevent them, and should they even try? Wall Street’s regulator appeared to be siding with the investors towards the end of the week.

Volatility can mean opportunity

The longer-term ripples of the GameStop drama will be interesting to watch. Most immediately, though, the wave of commotion caused a knock-on effect on markets, including those more widely, with plenty of ups and downs.

The VIX index – aptly nicknamed the ‘fear index’ – measures how much volatility the market expects in US stocks over the next month. It unsurprisingly jumped last week – rising the most in one day since markets dropped back in March last year.

While it can be unsettling to read about ups and downs in the market, savvy investors should remember that it’s important to keep an eye locked firmly on the future. We need to find a way to temper our fears and resist the temptations of short-term gains, certainly in the context of our investment strategies. A split second of doubt could see you crystallise a decision you otherwise would not have made, and that decision might have unintended consequences.

What’s more – volatility can create opportunity. These movements allow fund managers to capitalise on valuable openings, says Tye Bousada, Founding Partner, President and Co-CEO at EdgePoint, a fund manager for St. James’s Place. He adds:

“This isn’t the first time that we’ve been through extreme volatility. The cause of this volatility is obviously different, and six months from now we’re going to have another cause. But when these dislocations happen, if you’re in a position of strength, you can take advantage of them.”

The fight against COVID-19 continues

While GameStop led the show last week, the background music of the markets is still the same. The COVID-19 pandemic, and the world’s recovery from it, is the single biggest factor impacting investments.

And, with so much resting on vaccine rollouts, disputes over supplies may be a feature of the year to come. Last week, a row escalated between the European Commission and UK drug-maker AstraZeneca. The company has cut supplies of its vaccine to Europe due to production delays in some of its European production spots. European officials asked the company to make up the shortfall with doses made in the UK. However, the company says its UK contracts prevent it from doing so. The EU suggested it might prevent vaccines entering Northern Ireland in response, although it later backtracked.

Naturally, many people are beginning to look to the future now that the recovery is in sight. Although last week contained both good and bad news regarding vaccines, most market participants are expecting the world to continue recovering this year. In countries that have endured lockdowns, people will resume spending money and driving the economic recovery once they are able to, suggested Artemis, manager of the St. James’s Place UK & International Income fund:

“We have yet to meet (remotely of course) anyone who wants to spend more time at home over the coming months. We have yet to meet anyone whose list of what they want to do doesn’t include travel, eating out, visiting a pub and meeting family and friends.

“We have no foresight as to when this pandemic will end, but when it does, we believe consumers will resume their fondness for socialising and travelling. And, of course, given the significant decline in business, the number of players in these industries has reduced; so those remaining will gain more.”

Wealth Check

Staying at home, frequent hand-washing, mask-wearing and keeping our distance are all measures the public have been adopting to reduce the risk of catching and spreading COVID-19 – but we must also remember the non-physical threats of the virus, from emotional to social.

The pandemic also presents numerous risks to our financial goals – one of which has been highlighted by a recent survey by LV=.1 The UK insurance firm has found that more than 154,000 people aged 55-64 have been pushed into early retirement by COVID-19. This is particularly worrying, as the 50s are critical years for retirement planning, because it’s the period when earnings and pension contributions often peak.

To compound the problem, the survey also showed that 4% of the respondents had been forced to access their pensions savings early to support themselves after seeing their earnings reduced.

The fundamentals of saving for retirement are simple – take full advantage of the tax breaks on offer and invest as much as you can, as soon as you can. It’s also vital to regularly review progress towards your retirement goals. Yet, LV=’s research found that four in five adults had not checked the value of their pension in the last 12 months. Not doing so could be storing up trouble for the future.

The pandemic has provided a tragic illustration of how people’s situations can change in unexpected ways. It has also underlined the importance of putting the right plans in place to achieve financial security. With the end of the tax year nearing, and the uncertainty of what tax changes may be in store in next month’s Budget, there are many reasons to refocus our financial well-being, re-prioritise goals and renew your approach to achieving them.

Tony Clark, Senior Propositions Manager at St. James’s Place, says:

“There is no one-size-fits-all anymore – everyone’s retirement will be different, so everyone needs a plan. As we all have different views and objectives, it can make a huge difference to work with an impartial, expert adviser who can map out a plan with you and help you keep it on track. With the time you’ve got available to save, a little advice will go a long way.”

Sources:

1 LV=, ‘Wealth and Wellbeing Monitor’, survey of 4,000 adults, December 2020

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

In the Picture

How will the future investment landscape be affected by demographic shifts? Michael Power, a strategist at Ninety One, believes that Asian economies will see their influence grow even faster thanks to the pandemic.

The Last Word

“This is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.”

– Democrat Representative Alexandria Ocasio-Cortez demands an answer on the GameStop issue.

The information contained is correct as at the date of the article.

Artemis and EdgePoint are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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