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Analysis

Central bankers to retail punters: who shaped markets in 2020

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In an eventful year for global markets, some individuals (and one company) stand out. Here, the FT’s markets team picks out the notable protagonists, and the key person to watch in 2021.

Jay Powell, Federal Reserve chairman

Jay Powell earned himself the title of the “maestro” of central bankers © AP

When the financial system began to creak at the start of March, the US central bank acted quickly to stave off a much more pronounced crisis.

The Fed slashed policy rates to zero, pledged to buy an unlimited quantity of government debt and announced new lending facilities in rapid succession that forever changed its role in financial markets during periods of stress.

In moving decisively, Mr Powell earned himself the title of the “maestro” of central bankers, according to Nick Maroutsos, head of global bonds at Janus Henderson.

What comes next may prove more challenging. The Fed is facing tough questions about encouraging undue risk-taking and potentially adding fuel to risky asset bubbles. Colby Smith

Christine Lagarde, European Central Bank president

Christine Lagarde’s ill-chosen words poured fuel on a sell-off in bond markets © Thomas Lohnes/Getty

Christine Lagarde found out the hard way in 2020 how sensitive markets are to every utterance by central bankers. When the then new ECB chief said in March that she was not there to “close the spreads” — or prevent big gaps opening between the borrowing costs of the eurozone’s stronger and weaker members — her words poured fuel on a sell-off in the region’s bond markets.

Italy’s bonds dropped sharply, sending yields on their biggest ever one-day surge. Investors began to question whether the promise of Ms Lagarde’s predecessor Mario Draghi to do “whatever it takes” to keep the euro together still held. 

The ECB boss swiftly apologised and spent the rest of the year repairing the damage — with considerable success. Later in March, the central bank launched an €750bn emergency bond-buying effort, which has since been scaled up to €1.85tn. Spreads in the eurozone have collapsed. “It’s been a very steep learning curve, no question about that,” Ms Lagarde told the Financial Times in July. Tommy Stubbington

Angela Merkel, German chancellor

Angela Merkel was one of the driving forces behind the €750bn EU recovery fund © Michael Kappeler/dpa

Angela Merkel emerged in 2020 as an unlikely champion of joint borrowing by eurozone members. As one of the driving forces behind the €750bn EU recovery fund agreed in July, she was breaking with years of resistance to burden sharing between members of the currency bloc.

For investors, the establishment of the fund was a powerful statement of solidarity, which along with the ECB’s stimulus efforts bolstered a recovery in riskier assets after March’s dramatic rout. It also ushered in a remaking of Europe’s bond markets, with the EU itself for the first time set to become one of the region’s largest borrowers. 

The existence of a pan-European safe asset could help bolster the euro’s role as a reserve currency. Ms Merkel’s conversion during the Covid crisis has taken the EU one step closer to fiscal integration. Tommy Stubbington

Masayoshi Son, SoftBank founder

Masayoshi Son’s SoftBank earned itself the title of “Nasdaq whale” © Kiyoshi Ota/Bloomberg

SoftBank’s heavy-handed foray into US equity options in mid-2020 forced investors to see the conglomerate’s role in global markets in a new light.

In early September, the FT revealed that SoftBank had snapped up billions of dollars’ worth of derivatives linked to individual US tech stocks, earning it the title of “Nasdaq whale”.

Under the direction of Mr Son, the conglomerate was buying options on such a large scale that it helped to drive up the entire underlying market, as banks selling the options were forced to buy stocks to hedge themselves, in what was described as a “tail wags the dog feedback loop”. SoftBank shareholders recoiled, and the unpredictable Japanese group later abandoned its bets.

SoftBank is best known for punchy bets on privately held start-ups; investors now keep a closer eye on its activities in public markets. Katie Martin

Bill Ackman, Pershing Square manager

Bill Ackman made a quick $2.6bn in the spring with a bet on a rout in the credit markets © Christopher Goodney/Bloomberg

Hedge fund manager Bill Ackman has attracted plenty of attention in recent years, often for losing money. But in 2020 he scored one of the standout trades of the year, making a quick $2.6bn this spring with a bet on a rout in the credit markets.

Mr Ackman, who had been growing increasingly worried in February about the effects of coronavirus, spent $27m buying credit default swap insurance on tens of billions of dollars of US and European corporate bonds, the first time he had placed bets using CDS since the financial crisis.

As the pandemic began to hammer credit and equity markets, the value of these contracts soared. By the time Mr Ackman made an emotional appearance on CNBC on March 18, around the nadir of the market slump, he had already sold half his position.

In the now-famous interview, Mr Ackman warned that “hell is coming” and that as many as 1m Americans could die if the government did not act, explaining that he had grown super-bearish after waking from a nightmare about the virus’s rapid spread. But in the same interview he also said he was aggressively buying stocks — another bet that was later vindicated — because he expected the Trump administration to tackle the economic fallout from the virus.

Mr Ackman is enjoying a big turnround in his fortunes after four consecutive years of losses that included bad bets on pharmaceuticals group Valeant and a bet against nutritional supplement seller Herbalife. His gain of around 65 per cent this year makes his Pershing Square fund one of the world’s top-performing hedge funds. Laurence Fletcher

Carnival Corporation, cruise operator

Carnival was one of the earliest corporate casualties of the coronavirus crisis. © Kazuhiro Nogi/AFP/Getty

When surging coronavirus cases forced the Diamond Princess cruise ship into quarantine in February, it provided one of the first clear signs that Covid-19 was a problem beyond China’s borders. Carnival Corporation, the vessel’s owner, soon became one of the earliest corporate casualties of the coronavirus crisis.

And yet just two months later, Carnival raised more than $6.5bn in debt and equity, demonstrating just how much the Federal Reserve had underpinned capital markets. A $4bn bond backed by the company’s cruise ships set a template that corporate America soon followed: pledging prized assets to unlock funding.

Carnival encapsulated a year in which companies facing near-complete collapses in revenue could still raise billions of dollars in financing. It was at the forefront of many capital markets trends, from convertible bonds to post-vaccine announcement equity raises. And by November Carnival could once again borrow without pledging its assets, capping off a year in which it raised more than $16bn from debt and equity markets. Robert Smith

Prince Abdulaziz bin Salman, Saudi Arabia energy minister

Prince Abdulaziz bin Salman led Saudi Arabia in launching an all-out price war that hammered the oil market © REUTERS

The role of the Saudi Arabian energy minister is generally pretty straightforward: corral Opec and allies like Russia to assist you in managing oil supplies, keeping prices just high enough without overheating.

But when diplomacy fails, what option do you have to respond?

In March Prince Abdulaziz bin Salman, the half-brother of Crown Prince Mohammed bin Salman, decided to show allies and rivals alike. When Russia baulked at further production cuts in the early stages of the pandemic, Prince Abdulaziz led Saudi Arabia in launching an all-out price war that hammered the oil market even before lockdowns really started to slash oil demand.

Brent crude did not so much fall as implode, losing 24 per cent in just one session and continuing to slide for the next six weeks.

It ultimately took an intervention from US president Donald Trump, fearing for the future of the US oil industry, to get Prince Abdulaziz to change course. In April a deal was agreed for the largest ever production cut. But was Prince Abdulaziz’s price war a sign of things to come? David Sheppard

Berat Albayrak, former Turkey finance minister

Berat Albayrak’s two-year tenure saw Turkey’s lira lose 46 per cent of its value © Mucahid Yapici/AP

Turkey’s lira lost 46 per cent of its value during the two-year watch of Berat Albayrak, who quit as finance minister in November. Much of the blame belongs to his father-in-law, president Recep Tayyip Erdogan, whose obsession with credit-fuelled growth and deep aversion to higher interest rates has for years put strain on the currency. 

But Mr Albayrak, 42, was the driving force behind a disastrous attempt to hold the lira steady. Turkey’s central bank spent tens of billions of dollars on a failed intervention that left a deep hole in the country’s foreign-currency reserves. After Mr Albayrak’s resignation in November, the lira enjoyed its biggest one-day rise in two years. Laura Pitel 

Dave Portnoy, stock market trader

Dave Portnoy embodied a new generation of have-a-go traders © Dave Portnoy/Twitter

Amateur stock traders had a blowout year in 2020, particularly in the US, where bored sports betters branched out into markets in droves. Leading the pack was Dave Portnoy.

With bravado, boisterous humour, a foul mouth and millions of social media followers, Mr Portnoy embodied a new generation of have-a-go traders, noisily and frequently reminding his fans that “stocks only go up”. From the end of March 2020, to the intense frustration of more cautious institutional fund managers, he was right.

Aside from a few niche bets, Mr Portnoy and his acolytes are simply too small a force to move global markets. But this vibrant community has ridden the wave in stocks up to new record highs, and shows no sign of backing down. Katie Martin

Key figure of 2021: Janet Yellen

Janet Yellen will assume the Treasury secretary role at a pivotal moment for the US economy © Andrew Harnik/AP

If confirmed by the Senate as the next Treasury secretary early in 2021, Janet Yellen will become not only the first woman to hold the country’s top economic job but also the first person to have served at the helm of the Treasury, Federal Reserve and the Council of Economic Advisors. 

She will assume the role at a pivotal moment for the US economy. The recovery has begun to stall, the Fed has stretched monetary policy close to its limit and the coronavirus crisis continues to rage on.

One focal point will be the fate of several lending facilities deployed jointly by the Treasury and Fed earlier this year. Outgoing Treasury secretary Steven Mnuchin refused to extend five programmes beyond their December 31 expiration date, despite pleas from investors. Mr Powell has also indicated his support to keep these facilities operational in case the volatility that roiled markets earlier this year returns. 

Investors expect Ms Yellen to work closely with Mr Powell to try to overcome resistance and get these back online in short order. Colby Smith



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Analysis

Square’s $29bn bet on Afterpay heralds future for ‘buy now, pay later’ trend

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Jack Dorsey’s biggest gamble to date has sent ripples around the fintech and banking world, with investors betting that Square’s $29bn all-stock deal to acquire Afterpay signals the “buy now, pay later” trend has staying power.

BNPL relies on an emerging thesis that millennials and Gen Z consumers distrust traditional credit, but still want to borrow money to buy goods. Afterpay allows shoppers to split the cost of goods into four instalments with no interest — but a late fee if payments are missed.

“We think we’re in the early days of the opportunity facing us,” said Square’s chief financial officer Amrita Ahuja, speaking to the Financial Times. “From a buy now, pay later perspective, we see, with online payments alone, a large and growing opportunity representing $10tn in payments volume by 2024.”

The deal sees Square join an increasingly crowded space, alongside big players such as Sweden’s Klarna, Silicon Valley-based Affirm and PayPal, with Apple also exploring the market. The sector also faces a brewing regulatory battle, as legislators question an industry that lends money in an instant, often without a traditional credit check to ensure a consumer will be able to pay off their debt.

“This decade is going to be the upheaval of the banking industry,” Klarna’s chief executive Sebastian Siemiatkowski, said on CNBC on Monday. “I’m a little bit surprised to see consolidation happening this early, at this level, but at the same point in time I think this is directionally what we’re going to see.”

Column chart of By downloads (% of total) showing Top US mobile payment solution apps

BNPL has exploded in popularity over the past year thanks to the coronavirus pandemic-driven boom in online shopping, but industry executives said it had shown strong growth well before the pandemic, alongside a broader trend for more flexible financing among traditional lenders.

Leading into 2020, banks including JPMorgan Chase, American Express and Citigroup each launched flexible payment options tied to existing credit cards as an answer to point-of-sale financing.

The past 18 months have seen a meaningful uptick in the number of retailers willing to adopt the extra financing option. “There’s a little bit of FOMO setting in,” said Brendan Coughlin from Citizens Financial Group.

Afterpay was among the pioneers in BNPL. It was founded by Sydney neighbours Nick Molnar and Anthony Eisen in 2014, and today facilitates global annual sales of $15.6bn.

The company went public on the Australian Securities Exchange in 2016 at a valuation of A$165m (US$122m). In May 2020, Chinese tech giant Tencent paid about A$300m for a 5 per cent stake in the Australian group, which was by then worth about A$8bn.

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The Afterpay tie-up will enable Square to offer BNPL services to its millions of merchants, who processed payments worth $38.8bn in its most recent quarter, while also tapping into Afterpay’s clients, which include Amazon and Target.

The company will also integrate Afterpay into its Cash App, which has about 70m users and is slowly being built out as a one-stop financial services shop for payments, cryptocurrency, saving and investing.

“All of a sudden, you’ve got probably the most compelling super app outside of China,” said DA Davidson’s Chris Brendler, who is an investor in both companies.

Square’s gross payment volume

Investors appear convinced. Despite the deal coming at a 30 per cent premium to Afterpay’s most recent stock price, the news sent Square’s share price up 10 per cent by Monday’s close.

“This is certainly a bull market deal,” said Andrew Atherton, managing director at Union Square Advisors. “People are rewarding Jack Dorsey for being bold and for making a big bet.”

Square’s entry into BNPL comes as the sector is becoming increasingly competitive.

Klarna increased its valuation from $11bn in September 2020 to $46bn in June of this year, making it the most valuable standalone company in the industry.

Shares in Affirm, the US online lender led by PayPal co-founder Max Levchin, rose 15 per cent on Monday following news of the Afterpay deal. Affirm, which went public in January and is now valued at $17bn, recently expanded its partnership with Shopify to offer BNPL services to the ecommerce platform’s US merchants.

PayPal first moved into BNPL back in 2008 when its then-parent eBay bought Bill Me Later. A year ago, PayPal launched Pay in 4, a six-week instalment offering that is free for both consumers and merchants, alongside its longer-term PayPal Credit service.

Earlier this year, Apple was recruiting staff for its payments division with experience in BNPL, as it looks to expand Apple Pay and its Wallet app. Bloomberg reported last month that the iPhone maker was working with Goldman Sachs to develop an Apple Pay Later service.

Industry executives warn, however, that the more crowded market could erode the businesses’ margins, while flustered consumers may also be put off by the rapidly growing number of checkout options.

“The current state of affairs, where you have seven buttons when you go to checkout, I don’t think is a sustainable state of affairs,” said one consumer finance executive at a top US bank. “I think we are in an interim period.”

A bigger threat still is the sector’s immature and inconsistent regulatory environment.

“It’s what everyone is calling the Wild West,” said Alyson Clarke, an analyst at Forrester. “There is no onus on them to make sure that you are of financial health to be able to repay that loan.”

Some companies do a “soft” credit check that briefly examines a person’s position but “not as much as they should be doing if they are lending you money”, Clarke said. “Afterpay doesn’t do any of that.”

A survey of Australian consumers, compiled by the country’s financial regulator in 2020, suggested 21 per cent of BNPL users missed a payment in the previous 12 months. Almost half of them were aged 18 to 29. Morgan Stanley analysts have estimated Afterpay makes about $70m a year on late fees.

The UK’s financial regulator has said BNPL players should be forced to adhere to its credit rules as a “matter of urgency”. In the US, a government consumer protection agency issued guidance urging caution around “tempting” BNPL deals.

In a hint at further possible tensions, Capital One in December became the first major credit card company to block its customers from using its cards to pay off BNPL purchases, calling the practice “risky for customers and the banks that serve them”, according to Reuters.

Afterpay board member Dana Stalder said the company welcomed regulation. “Buy now, pay later is just a friendlier consumer product,” he said. “Consumers understand that, they’re not dumb. This is why they are voting with their feet.”

Additional reporting by Richard Milne



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Analysis

UK pushes floating wind farms in drive to meet climate targets

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In waters 15km south-east of Aberdeen, renewable energy companies are preparing to celebrate yet another landmark in the drive to end Britain’s reliance on fossil fuels.

Five wind turbines, each taller than the Gherkin building in the City of London, fixed to 3,000-tonne buoyant platforms have been towed to the UK North Sea from Rotterdam where they will form part of the Kincardine array, the world’s biggest “floating” offshore wind farm.

Wind farm developers have dabbled since the 2000s with floating technology to overcome the limitations of conventional offshore turbines. These are mounted on structures fixed to the seabed and are difficult to install beyond depths of 60m, which makes them unsuitable for waters further from shore where wind speeds are higher.

Floating projects, which are anchored to the seabed by mooring lines, are rapidly moving from the fringes to the mainstream as countries turn to the technology to help meet challenging climate targets.

Britain was the first country to install a floating offshore wind farm off the coast of Peterhead, Scotland in 2017. But existing floating projects are modest in size. The Kincardine array has an electricity generation capacity of 50MW compared to 3.6GW for the world’s largest conventional offshore wind farm.

Map showing the location of Kincardine offshore floating wind farm, offshore from Aberdeen on Scotland's east coast

Now the bigger wind developers are stepping up a gear with plans to build more schemes on a larger scale.

Denmark’s Orsted, Germany’s RWE, Norway’s Equinor along with the UK’s ScottishPower and Royal Dutch Shell are some of companies on a long list of bidders vying to build floating schemes in an auction of seabed rights for about 10GW of offshore wind projects in Scottish waters. The bidding round closed in mid-July with the winners expected to be announced in early 2022.

The UK is separately examining an auction exclusively for floating wind in the Celtic Sea, the area of the Atlantic Ocean west of the Bristol Channel and the approaches to the English Channel and south of the Republic of Ireland.

Developers expect the costs of floating projects to fall rapidly as more projects are deployed. In 2018 floating wind costs were estimated at more than €200 per megawatt hour, nearly double the cost of nuclear power in the UK.

The Offshore Renewable Energy Catapult, a UK technology and research centre, is hopeful developers will be able to build “subsidy free” floating projects at prices below forecast wholesale electricity costs in auctions as early as 2029. Conventional offshore wind developers reached this inflection point in a UK government auction in 2019.

A Norwegian flag flies from a boat near the assembly site of offshore floating wind turbines in the Hywind pilot park, operated by Equinor
Norway’s Equinor is among the companies competing to build floating turbines in Scottish waters © Carina Johansen/Bloomberg

UK prime minister Boris Johnson, who is hosting the UN’s COP26 climate summit later this year, has set a 1GW floating target out of a total 40GW offshore wind goal by 2030. He has underlined the importance of accessing the “windiest parts of our seas” as part of the UK’s goal to cut carbon emissions to net zero by 2050. 

Other countries including France, Norway, Spain, the US and Japan are pursuing the technology, which experts said would particularly appeal to countries with limited access to shallow waters, or where the geology of the seabed makes it impossible to install conventional “fixed-bottom” turbines.

WindEurope, an industry body, predicts one-third of all offshore wind turbines installed in Europe by 2050 could be floating.

Countries pursuing floating wind are interested in it “not just as an opportunity to deliver net-zero targets. It has a real potential to be a driver of economic growth as well,” said Ralph Torr, a programme manager at the Offshore Renewable Energy Catapult.

Much like how the UK supply chain has lost out to foreign companies in the construction of conventional wind offshore farms — despite Britain having more than anywhere else in the world — there are concerns the mistakes will be repeated for floating technology. Manufacturing work for the Kincardine project was carried out in Spain and Portugal and the turbines and foundations assembled in Rotterdam.

An offshore wind turbine off the coast of Fukushima, Japan
A wind turbine off the coast of the town of Naraha in Japan’s Fukushima prefecture. Japan is one of the countries pursuing floating technology © Yoshikazu Tsuno/AFP/Getty Images

Competition with other markets was already high as they all tried to gain a “first-mover advantage”, said Torr, who warned the UK government’s 1GW floating wind target by 2030 was not “going to unlock huge investment in the supply chain or infrastructure because it’s [just] a handful of projects”.

The Offshore Renewable Energy Catapult and developers are urging the government to commit to a second target in 2040 for floating wind, which they believe would provide confidence to industry to invest in the necessary facilities in Britain.

“Because floating [wind] becomes economic in the 2030s, it’d be much better to understand what the longer term pipeline is,” said Tom Glover, UK country chair at RWE. He added that in the Scottish seabed rights auction, developers had to “provide a commitment and an ambition for Scottish content”, which should benefit the local supply chain.

Wind developers are conscious that UK suppliers need time to gear up. Christoph Harwood, director of policy and strategy at Simply Blue Energy, which is developing a 96MW floating scheme off the coast of Pembroke in Wales, said projects that were larger than the earliest floating schemes but were not yet at a full commercial scale would be important in that process.

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“If the UK supply chain is to benefit from floating wind, don’t rush into 1GW projects, take some stepping stones towards them,” he said.

Tim Cornelius, chief executive of the Global Energy Group, which carries out offshore wind assembly work at the Port of Nigg on the Cromarty Firth in north-east Scotland, said the size of floating wind turbines offered opportunities to UK suppliers. 

The floating turbines are much bigger than their conventional offshore counterparts so need to be built closer to their point of installation, which precludes using the lowest cost manufacturers in China and the Middle East.

The floating turbines require “an astonishing amount” of deepwater quayside space at ports, Cornelius explained. His company is looking at creating an artificial island for quaysides in the Cromarty Firth in Scotland, which he says would require a “material investment but is entirely justifiable as long as developers are prepared to commit”.

But he warned that “as it currently stands, the [UK] supply chain isn’t in a position to be able to support the aspirations of the [floating offshore wind] industry”.

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Analysis

China tech crackdown claims ETF victims

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Exchange traded funds updates

Beijing’s regulatory crackdown on some of its biggest companies in technology and education has delivered a bruising blow to highly specialised China-focused exchange traded funds.

Broad-based tech ETFs have sailed through virtually unscathed, but some narrowly focused thematic instruments have taken a beating. Among those most affected, the KraneShares CSI China Internet ETF (KWEB) has nearly halved in value since its peak in February.

Some ETF buyers are hunting specifically for targeted strategies, despite the risks. But Kenneth Lamont, senior fund analyst at Morningstar, said this highlights the potential drawbacks of tracking a narrow theme without the flexibility to shift tactics.

“The [passive thematic] strategy has no way to quickly react to bad news and will hold the stock until the next rebalance. The small number of fund holdings also means that overall returns can be influenced by the performance of handful of stocks,” Lamont said.

Line chart of Total returns, year to date (rebased) showing Narrow vs broad tech ETF

He noted that for the KraneShares ETF, one Chinese education group alone — TAL Education Group — was responsible for knocking 2.8 percentage points off performance from the end of June.

Global X Education ETF (EDUT), which has a large exposure to the Chinese online education sector, was also badly affected.

Actively managed ETFs, such as Ark Invest’s ARKK flagship Innovation fund, can react more quickly. After voicing her optimism for the prospects for China’s tech disrupters earlier this year, Cathie Wood, Ark’s chief executive, shed millions of dollars worth of shares in four China-domiciled companies.

Line chart of Number of shares held (millions) showing ARKK has been selling Chinese technology holdings

Investors in ARKK have not been rewarded as well as those who simply put their money in broadest based funds such as the Vanguard Total World Stock Index Fund ETF (VT), but they have still managed to ride out the China tech storm far better than more exposed counterparts.

Line chart of Returns, year to date (rebased) showing ARKK vs Vanguard Total World Stock ETF (VT)

Some investors insist Chinese investments can bounce back. Mark Martyrossian, chief executive of UK-based Aubrey Capital Management, said he believed many of the affected tech companies would maintain their market leadership.

“The gravy train may have slowed but you disembark at your peril,’ Martyrossian said.

Lamont said badly hit funds had suffered such losses because they were doing exactly what they had promised to do — provide narrow exposure.

More nimble active investment strategies also face their own challenges, said Elisabeth Kashner, director of global fund analytics at FactSet. “Active managers may successfully anticipate market reversals, but they can also miss them, sometimes seriously tanking returns,” she said. “Some people can be skilful and some people can be lucky and if you’re lucky and skilful in one period you might be lucky and skilful in the next, but you might not.”

Additional reporting by Steve Johnson

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