Weekly View - David vs Goliath
Last week was an eventful one for hedge-fund managers whose bets against certain companies were targeted by an army of retail investors using leverage and options to pile into the opposite end of hedge funds’ trades. Long-short managers suffered their biggest day’s loss in alpha. Retail investing skyrocketed last year as companies like Robinhood sought to liberalise financial markets through smart-phone apps at the same time as covid confined much of the world to their homes. Has the Occupy Wall Street movement migrated to the exchanges? It certainly looks like another case of our revenge of the losers theme for 2021. We prefer event-driven and macro strategies in the hedge-fund space.
After five months of falling prices, German inflation rose at its fastest pace in years. While several one-off factors were behind the uptick, it will be a key metric to watch. In the US, the Federal Reserve confirmed its stance, leaving monetary policy supportive of markets until the economy reopens. For now, we remain underweight government bonds. Encouragingly, new covid cases globally have declined at the fastest rate ever over the last two weeks. US pharmaceuticals giant Johnson & Johnson (J&J) released the results of its vaccine, which at 66%, is not as effective as the Pfizer and Moderna vaccines. However, it is 85% effective at protecting against severe cases and 100% at avoiding hospitalisations. Moreover, its transport and storage logistics are less complex. J&J will seek a fast-tracked approval and can produce 2bn doses in 2021. This is a long-term positive as it could free up hospital capacity and allow economies to gradually reopen. Even if vaccine rollouts are slower than hoped, the daily number of shots administered continues to accelerate. However, economic recovery could be delayed by the slow, initial rollout and the risk new strains prove resistant to vaccines.
We are now heading into the busiest stretch of Q4 earnings season. Although only a minority of companies have already reported, the proportion that have beat expectations is impressive. In both the US and Europe, nearly 80% of companies across the board have exceeded earnings-per-share forecasts. One of the companies that benefitted from pandemic lockdowns and the migration to working from home was Microsoft, whose revenue growth sent its share price to a record high. We continue to like structural growers, those companies that show growth irrespective of the current economic cycle.