In this week’s market update: surging IPOs carry echoes of the dot.com bubble; shares hold recent gains as Brexit hopes offset Covid gloom; and commodities and emerging markets push ahead as risk appetite rises in the run up to Christmas.
In a year of surprises, 2020 is going out with a bang as a series of explosive stock market flotations highlight renewed investor appetite. For investors with longer memories, the comparisons with the dot.com bubble 20 years ago are striking. Fear of missing out is becoming the primary driving force in markets as investors scramble for a share of the action.
Last week’s IPO highlight was Airbnb. The market debut of the online accommodation booking site saw the value the company rise to match that of Goldman Sachs, the bank that brought it to market, more than $80bn. At the end of day one of trading it was also worth more than Marriott, the world’s biggest hotel chain and so leader of the industry it most obviously threatens.
Having already raised its flotation price range in the days running up to the IPO, Airbnb’s shares more than double in first dealings. It was a remarkable turnaround for a company which earlier in the year had been forced to raise $2bn in emergency funding as it laid off a quarter of its staff.
It’s not surprising that people are harking back to the dot.com bubble. The flotation of Airbnb is not a one-off. In the same week, food delivery service DoorDash had seen its shares rise 86% on its market debut. Other notable surges have been delivered by Zoom and Snowflake, a data analytics company that is valued at more than IBM.
Twenty years ago, the peak of the dot.com mania was marked by the initially similar but quickly doomed flotation of lastminute.com, another company that promised an online travel revolution. Lastminute’s shares also soared in early dealings but fell sharply as the bubble burst in March 2000. Within a month they were trading at 30% of their flotation price. Lastminute became the symbol of the collapse of dot.com.
A key difference between now and then is that many of the companies now floating at ambitious valuations are much more mature businesses. Companies have not rushed to market in the way they did in the late 1990s when fascination with the still young internet meant businesses could tap the markets for money when they were little more than a good idea and an aggressive sales pitch.
Airbnb is an established brand with a clear competitive advantage and already strong revenues.
Another key difference is that the stock market is awash with liquidity at the moment as extraordinary stimulus, both monetary and fiscal, floods the market with cash. Much money has been parked for safety in money market funds and bonds in recent years. If only a portion of that finds its way into the stock market, prices could run a lot further yet before valuations become an impediment to further growth. This is one of the main arguments for continued gains in 2021.
Elsewhere, a key short-term driver of markets this week is the glimmer of hope that has been raised around Brexit negotiations, which looked to have stalled at the end of last week. Having warned us to expect a no-deal exit at the end of the year, the Prime Minister and his counterpart for the EU Ursula von der Leyen decided to leave the door open for one final push in the run up to Christmas. It will be tight to agree and ratify a deal by the New Year, but the political will is clearly there to avoid the reputational, let alone economic, damage of a no deal Brexit.
The pound is the main barometer of Brexit optimism and pessimism, so unsurprisingly it picked up this week, rising 1.5% on Monday to $1.34. That largely reversed last week’s 1.6% fall. UK government bonds, a safe haven asset, came under pressure as yields rose to reflect the greater optimism. The FTSE 100 was only marginally higher as the better sentiment was offset by the depressing impact of a stronger pound on exporters and overseas earners. Other regional markets rose a bit more.
The big hurdles seem to be finding common ground on the issue of fair competition rules for companies on either side of the channel and fishing rights. The EU is determined not to undermine its primary advantage, the integrity of the single market, by allowing a big and geographically close competitor to undercut the regulatory standards governing European companies. But on this crucial matter comments from Michel Barnier, the EU’s chief negotiator, suggested a compromise may be on its way. Perhaps it will all come down to fish but surely such a relatively unimportant industry will not be allowed to derail 30 years of co-operation.
So, the most likely outcome is still an eleventh-hour deal, and probably one that will see Britain complying with Europe’s red lines while simultaneously claiming victory. And why is that most likely? Simply the realpolitik of the two sides’ relative economic and geo-political power. Britain sends 43% of its exports to the EU; the big players in Europe send about 6% each of their exports to Britain. The population of Britain is 67 million; that of the EU is 447 million. Its single market, even excluding Britain, is comparable to those of the US or China. To think that there would be any other result was always unrealistic.
The other big story this week is Covid. While the stock market is focused on the potential for a vaccine to re-open economies around the world, the reality on the ground remains challenging. And the most alarming feature of the pandemic is the speed with which circumstances change. Germany, once the poster child of good virus management, is heading into a lockdown over the whole Christmas period as its infection rate spirals.
Here in the UK, the review after two weeks of the new tiered system that replaced the November national lockdown is almost certain to put London and some other areas back into the most restrictive Tier 3 in the days running up to the holiday season. The Covid blackspots which only a few weeks ago were largely restricted to the North and Midlands (Kent and Bristol excepted) has quickly moved into previously safe areas in the south.
Does this change much from a market perspective? Probably not too much as long as the roll-out of vaccinations which started last week in the UK continues. Jabs are becoming available this week in the US after approvals there. So, as long as Covid can be contained over the holiday period then there is light at the end of the tunnel.
And this in turn goes a long way to justifying the V-shaped market recovery that we have enjoyed in 2020 and which have made it such a memorable year from an investment perspective. This year has been a huge lesson in how to navigate market volatility. The need to hold your nerve in the darkest days when markets have plunged by a third in a matter of weeks. The power of policy stimulus to underpin financial markets and the broader economy. And the difference between bear markets caused by external events, like the pandemic, rather than structural issues like excessive valuations or financial imbalances or cyclical factors like inflation and rising interest rates.
The key question is what happens next year. The bullish case will require a combination of widespread vaccinations, continuing policy support, restored consumer demand after a year of restrictions and a release of animal spirits by investors. It is possible but not a given so one possibility is that 2021 is a better year for the economy and society than it is for investors.
One of the most widely held views about the year ahead is that emerging markets could outperform the US. But that, too, is a narrative that risks running ahead of itself if the performance of the Indian market is any guide. The Nifty 50 index has risen by almost 80% since the March low despite the fact that India has been one of the countries hardest hit by the pandemic with nearly 10 million cases. Its economy is expected to contract by more than 10% this year. As in the US the IPO market is attracting a lot of interest, with the shares of Burger King India this week more than doubling on their market debut.
And in China, too, shares have risen by 27% this year, outpacing even the S&P500 by 13 percentage points. The tech-heavy ChiNext market in Shenzhen is up 59%, beating Nasdaq. Chinese bonds too are in favour as yield hungry investors look beyond Treasuries. China is much further down the post-Covid path. The question is how much of that is in the price.
And investors’ enthusiasm is not restricted to shares and bonds. Commodities, too, have surged recently on the back of optimism about vaccines and the knock-on impact on demand for energy and metals. The broad S&P GSCI commodities index is up 14% just since the beginning of November, with energy leading the way at +24% and industrial metals rising 14%.
The oil price has risen above $50 a barrel this week, more than double its low point earlier in the year as the global economy ground to a halt, people stopped driving and air travel was grounded. Global oil demand fell by nearly 9% in 2020 but has recently bounced back strongly. In industrial metals, prices are flying high. Iron ore has risen by 25% since the start of November to a seven-year high on the back of Chinese demand. Copper is up 16%, also to a seven-year high.
Finally, while it might be quiet on the corporate front as the holidays approach, there is still plenty to watch out for this week on the policy and economic front. Here in the UK, we have inflation, employment market and retail sales figures this week as well as the final Bank of England meeting of the year. In the US, the Fed also meets this week for the last time in 2020. In both cases, no change in policy is expected although the Bank of England remains ready to move if the Brexit situation deteriorates.