Giles Coghlan, chief currency analyst, HYCM,
Among many other things, 2020 was an unprecedented year for the financial markets. Although such volatility means that some investors saw their portfolios drop in value; seasoned traders know that volatile times present just as many opportunities as obstacles.
Trying to incorporate trades of volatile assets into a broader investment strategy, though, can prove difficult. And now that 2021 has arrived, numerous events that commentators believed could imbue the market with even greater uncertainty (Biden inauguration, Brexit) have all come and gone without too much fuss.
With such immense political developments now behind us, and the world’s numerous vaccine rollouts well underway, we may now be witnessing the petering out of the COVID-19 pandemic.
This means that the uncertainty associated with COVID-19, and the consequential massive market volatility, could also be on the way out. However, there have already been numerous developments this year that may imply that 2021 will be just as eventful for investors as 2020. What interests me particularly, however, is how we could soon be observing a profound transformation of the stock markets via the rise of retail day-traders.
Let me explain what I mean by this below.
With interest rates having been at record lows over the past couple of years, investors in the UK and the US have been seeking new ways of growing their wealth.
This has resulted in an increase in the number of retail stock traders in both jurisdictions. In fact, retail investors now account for one fifth of the entire US stock market’s trading volume.
Furthermore, research by the ETF provider GraniteShares revealed that last year, over one-in-ten UK adults had bought or sold shares during the COVID-19 pandemic. Half of these investors saw big tech stocks as being the most exciting assets to buy in to, helping facilitate said stocks meteoric rise in value throughout the pandemic.
Some could argue that this is not a particularly interesting development. Retail investing has always represented a large portion of the investment community, so why should we be paying particular attention now? The answer, I believe, is two-fold.
Bitcoin, long seen as the archetypal cryptocurrency, recently surpassed the value of $50,000 per coin for the very first time.
This breakthrough has seemingly facilitated a new wave in interest in the asset and cryptocurrencies more generally. The initial rise was fueled by a number of factors, most notably the $1 billion investment into Bitcoin by Elon Musk’s company Tesla; demonstrating the digital currency’s credentials in the eyes of investors. This has, in turn, legitimised the asset in the minds of central banks, who’ve begun slowly accepting the existence of such currencies in their client’s portfolios – though they still argue that they’re many unanswered questions regarding the asset’s lack of regulation.
In fact, research* commissioned by HYCM showed that almost 18% of UK investors were actively planning to purchase cryptocurrency in 2021. In my view, as this 18% gets more and more involved with Bitcoin, there exists a larger responsibility for states and financial systems to accept them.
Rocketing to the moon
After centuries of market manipulation being solely the work of hedge funds and international financial firms; the rise of ‘meme stocks’ may represent an end to this monopoly. During the opening weeks of the year GameStop, a video game retail store that had been shorted by numerous hedge funds due to their inability to operate during a pandemic, saw the value of their stocks rise by an immense 6000%.
While the enthusiasm around this movement has since become slightly depleted, there’s no reason to believe that such a development isn’t on the cards in the future. Regardless of if it does, though, hedge funds have been issued a stern warning that they can no longer be complacent with what stocks they publicly short.
Alongside the above two talking points, there are plenty of other reasons as to why 2021 could be a big year for investors. But regardless of what should transpire, I’m certain that retail investors are set to become a more visible, and vocal, part of the investment community in the coming year.
*About the research
The market research was carried out between 15th and 20th January 2021 among 2,008 UK adults via an online survey by independent market research agency Opinium. Opinium is a member of the Market Research Society (MRS) Company Partner Service, whose code of conduct and quality commitment it strictly adheres to.
Its MRS membership means that it adheres to strict guidelines regarding all phases of research, including research design and data collection; communicating with respondents; conducting fieldwork; analysis and reporting; data storage. The data sample of 2,008 UK adults is fully nationally representative. This means the sample is weighted to ONS criteria so that the gender, age, social grade, region and city of the respondents corresponds to the UK population as a whole.
Within this sample, 975 respondents had investment portfolios worth in excess of £10,000 – this includes all assets from bonds and currencies to commodities and stocks and shares but excludes any property that is used as their primary residency.