PATRICE RASSOU: Hold on for dear life as the liquidity tide goes out

A golden decade for equity investing may well be behind us. If you had invested R100,000 in global equities 10 years ago, this investment would be worth more than R700,000 at the end of 2021. Compare that to investing on the JSE, where your money would have grown to just over R300,000.

While it does pay to stay in the market long term, investors should brace themselves for a bumpy ride in 2022. One of the reasons for this is that global central banks are closing the taps on the pipes that pumped liquidity into capital markets globally.

The global financial crisis over a decade ago saw central banks expand their balance sheets from $7-trillion to $10-trillion, but this pales in comparison to interventions made after the start of the coronavirus crisis two years ago, when central bank balance sheets grew from $22-trillion to $34-trillion.

The US Federal Reserve and European Central Bank pumped more than $10-trillion of liquidity to prop up their financial systems. This led to near zero and even negative interest rates in the developed world, fuelling an enormous speculative bubble.

Cathie and the Ark

The poster child of the cheap money era is undoubtedly Cathie Wood, who very early on was able to identify disruptive companies and invest in them via her $12bn flagship Ark Innovation exchange traded fund (ETF). Retail investors were able to access a venture-capital like tech portfolio via a transparent exchange-traded vehicle, and were rewarded with fourfold returns from 2018 to the beginning of 2021. 

Valuations did not seem to matter as the hunt for investment opportunities extended to stocks with no earnings — it was all about invest now and grow fast for rewards in the distant future. The Covid gridlock also unleashed a new generation of DIY investors lured by free brokerage accounts from US firms such as Robinhood and intent on picking up bargains following the Covid-induced bloodbath on financial markets.

These retail investors did exceedingly well to pick household names such as Amazon, Netflix or Tesla at rock-bottom prices two years ago and then gorge on various crypto names. The army of retail traders even took on hedge funds by buying up heavily shorted stocks like GameStop, forcing the professional investors to run for cover as prices shot up, defying any fundamentals. 

With the ducks quacking, many entrepreneurs found it opportune to raise capital via special purpose acquisition companies (Spacs). These companies were often merely shell companies with a business plan, opportunistically raising capital to acquire real businesses. Even WeWork managed to go public through a Spac two years after its failed initial public offering.

An inflation problem

In mid-December the Fed drew a line in the sand by admitting that inflation in the US was more persistent than previously thought and warning that it would close the liquidity hosepipe by March this year. To add insult to injury, there was a real possibility of rate hikes earlier rather than later.

All of this culminated in an extremely volatile first month of the year. The S&P 500 gyrated wildly, even plunging 4% intraday post the Federal open market committee meeting, only to close in the green. Such dramatic reversals have only been witnessed twice in history. The Nasdaq composite, with its line-up of growth stocks, was down by more than 9% last month, the worst month since the Covid crisis. 

Nowhere to hide

Global investors could not even find safety in US government bonds, with yields (which move inversely to the price of the instruments) surging at the beginning of this year from 1.4% to over 1.9%. And the ultra-long Austrian 100-year bond, which had surged in value in 2020, has lost more than a third of its value since.

The winners of the equity bull run also unravelled, with the Ark Innovation ETF halving in the past year. GameStop, the darling meme stock, also halved since December and ethereum, the best-performing cryptocurrency last year, is down by over 20% year to date.

More recently we saw Meta Platform, fresh from its Facebook (as it was previously known) makeover, break the record of the largest daily loss in market cap: $232bn in a day. Netflix also suffered its biggest daily fall in almost a decade as the video-streaming service and Squid Game maker warned of a slowdown in subscriber numbers.

The years of retail investors relying on bulletin boards to hop on a stock, irrespective of its fundamentals, are likely to end in tears as the liquidity tide goes out.

So be careful if you get a message from someone you don’t recognise, soliciting money and promising astronomical returns. As quantitative tightening grabs hold, many of the excesses of the past decade are being flushed out. Investors had better brace for the impact.

• Rassou is chief investment officer at Ashburton Investments.