The Gamestop Saga
Game on! For those of you who have a keen interest in stock markets, the last few weeks would have been very interesting and exciting! The GameStop saga has captured the attention of market watchers and commentators the world over. GameStop, a struggling brick and mortar retailer of computer and console games, started 2021 with a share price of approximately $20. By 28 January, the shares traded as high as $480, quickly retreating to $190 before ending January at $325!
GameStop’s shares are heavily “shorted” by hedge funds, who believe that the company is on the way to bankruptcy (shorting in simple terms means borrowing a share and selling it in the open market, with the view of buying it back later at a lower price, thus profiting off a decline in the share price). The risk with shorting a share is that if the share price rises (as opposed to falling as expected), one’s potential losses can be significant.
Retail investors, notably the Robinhood traders that we have written about a few months ago (Robinhood is a popular zero cost online trading platform in America), started to aggressively buy GameStop shares at the start of the year, pushing the share price up. As the share price continued to rise on increased buying activity, hedge funds that shorted the share started to incur large losses, forcing them to close out their short positions (by buying the shares they had sold short). This created even more upward pressure on the share price and a vicious circle ensued.
The “short squeeze” also affected other shares that are popular amongst hedge funds, as short targets and a number of shares rose in excess of 100% in just a couple of weeks. There have been significant ramifications as a result of this phenomenon. The Robinhood platform eventually had to halt trading in these shares as the platform started to run into liquidity problems, raising fears of potential systemic risk (systemic risk is when a liquidity shortage impacts the financial system negatively). Several hedge funds lost billions of dollars and had to obtain funding to remain solvent.
The interesting thing about this “short squeeze” is that it was driven by a concerted effort by the Robinhood traders conceived on a social media platform called Reddit (a subgroup called WallStreetBets). There is a large debate surrounding whether the hedge funds had it coming or whether this was market manipulation on the part of the Robinhood traders. Also, questions arise as to the efficiency of market pricing (is it correct for an ostensibly dying company to trade at a value of $1 bn one day and then $ 23 bn a week later?). One thing is for certain, regulators are investigating and new regulations are certain to follow.
The uncertainty caused by the GameStop event and possible liquidity problems in financial markets has also caused increased risk aversion. This can be seen in increased volatility in financial markets. Major global stock markets have given back most of the gains made early in the new year and closed January in the red.
Another observation about markets over the last few months is that big tech companies’ share prices seem to have plateaued, despite releasing exceptional profit announcements during the last week in January. Time will tell how this plays out. We take it as early confirmation of our view that a rotation out of big, megacap tech and growth companies in favour of value and cyclical companies and investments is taking place. We prefer investments in global multinational companies trading at cheap to fair valuations; cyclical companies like banks and retailers; and commodities like gold, copper and silver. These investments have performed well over the last quarter and portfolios are positioned accordingly.
From a Pyxis company news point of view, we are all hard at work – feet below the desk as they say. Watch this space, as next month we will share an exciting development with you!
Last month, we informed you of our money market and banking solution offered in conjunction with Investec Bank. In a low interest rate environment, this is an excellent way of ensuring you earn the best possible interest rate on cash assets or fixed deposits. This month, Savannah Solomons has written a very informative piece on trusts, worth a read. Please do not hesitate to contact us should you need to discuss matters related to trusts or wills.
Until next month,
Bennie.
