January is a time of reflection. After our new year’s hangovers have worn off, many of us try to take stock of the previous year, in a bid to understand what went wrong and how we could have done better.
To this end, we often engage in the typically futile tradition of setting ourselves new year’s resolutions, in the mistaken belief that this year it will all be different.
For the past few years, January has also been the month when I look back on the results of the FT’s stockpicking contest. It is usually a fun exercise, particularly when auditing which of my colleagues’ confident predictions of corporate trends came utterly undone.
But this year, with the coronavirus pandemic throwing our lives into turmoil in ways many of us previously thought impossible, I tallied up the results in a rather different light. Glancing through some of our FT scribes’ stock choices from a year ago was akin to sifting through relics of a bygone age, from pub companies to cruise liners.
Before we get into our writers’ success and failures, however, a bit of background for the uninitiated.
For the past five years, FT journalists have held a charity stockpicking contest. It gives the know-it-all writers of the pink paper an opportunity to test our mettle against the market, most importantly, in a safe setting where no actual money is wagered. The only potential loss is your pride.
It is frankly difficult for many of us at the FT to invest in single stocks, particularly those of us who write about companies on a daily basis. It is also frankly unwise, given the existence of low-cost index funds.
Yet, just as you can have a crack at prime London real estate investing in Monopoly, you can have a go at being an equity fund manager in the FT contest. For the past couple of years, we’ve also opened it up to our readers (more on that later).
The rules are simple. Contestants have to choose five stocks listed anywhere in the world that they think will achieve the highest percentage return that year. They can take either a long or short position — betting that the shares will either rise, or fall. The portfolios are equally weighted and have no base currency (meaning foreign exchange movements have no effect on the end result) and dividends do not contribute to the returns.
And, in a bid to make our contestants actually take bold bets on the fortunes of companies, ETFs and other listed instruments that provide exposure to a diversified basket of assets are outlawed.
Shadow of the pandemic
One year ago, as FT writers were locking in their choices at the end of January 2020, Covid-19 was already firmly part of the popular lexicon. Yet, to many of us in the FT’s headquarters in London, the brewing pandemic still seemed primarily a problem for Asia.
One FT writer even confidently submitted an “Everyone will have forgotten about coronavirus by December 2020” portfolio. Spoiler alert: he did not go on to win the competition.
The top-performing stockpickers, unsurprisingly, all included bets on online shopping.
Our second-placed journalist, who booked an impressive overall return of 60 per cent, explicitly described his portfolio as a “pro-internet shopping, anti-shopping centre” portfolio.
His bets on warehouse and distribution centre owners — as a proxy for the increased logistics and deliveries that go in hand with an uptick in online retail — held their value well. His short positions on heavily indebted UK mall operators Hammerson and Intu, meanwhile, delivered massive gains.
Yet he was bested to the crown by the FT’s Rome correspondent Miles Johnson, who proved that perhaps he was more the beneficiary of skill than luck by winning the contest for the second year running.
Miles rode through the market turmoil to notch up a frankly bewildering 104 per cent return, propelled to victory by the fivefold increase in the stock price of UK online retailer AO World. Having ordered a new television from AO in the Boxing Day sales, I feel I should take some of the credit for his victory.
These contestants who bet heavily on online shopping companies, or shorted bricks-and-mortar retailers, would be the first to admit they did not eerily predict the lockdowns across the world that shuttered many stores.
But a lesson from our contest, as in markets this year, is that the coronavirus crisis accelerated many secular trends that were already well under way. The shift from physical to online retail had been gathering pace for years, before Covid-related lockdowns gave it even more impetus.
Tallying up the winners and losers in a year unlike any other also served to reinforce just how quickly things change in markets. When share prices around the world were plunging in the dark depths of March, our leading contestant was the particularly maladjusted pessimist who consistently takes five short positions year after year.
By the year’s close, he was sitting on huge losses. This was due in large part to a short position on Tesla, the electric car company whose stock surged to make it by far the most valuable carmaker in the world in 2020.
Still, his losses were not quite as painful as our losing contestant who made the even bigger mistake of betting against Tesla’s Chinese rival Nio, an electric car manufacturer whose stock rose more than 1,200 per cent during the course of our contest.
The age-old risk of short selling — that you can lose more than your initial investment — proved a recurrent one in our writers’ portfolios, in a year when central banks and governments took unprecedented steps to help keep companies afloat.
So how did I perform? Well, last year I decided to get thematic with my investment process. I devised the “Mike Hunter Portfolio”, in tribute to a stalwart of the FT markets desk who had recently departed the paper, reflecting the great man’s loves and pet hates.
Unfortunately, Mike’s fondness for a cheap pint and a hot pastry served my portfolio badly in lockdown Britain, resulting in losses on my exposure to Greggs and Wetherspoons. The longtime Manchester City fan’s hatred for Manchester United served me better, booking profits on a short position on the football club’s New York-listed stock.
Even better was a bet against the stock of GoAhead Group, the bus and rail company that operated the former FT scribe’s commuter train from Kent to London. As the world shifted to working from home in 2020, the company’s stock more than halved.
Mike Hunter had long held the unofficial role of the FT’s “teamaker-in-chief” and it was his love of the quintessentially British beverage that provided the portfolio’s star performer: Tetley-owner Tata Consumer Products, whose stock finished the year up more than 50 per cent.
While I will not try to claim that this portfolio was particularly based on trying to read the tea leaves of markets, it did result in a positive — if not benchmark beating — overall return of 14 per cent.
As our FT writers lock in their choices for this year’s contest, they have some big questions to grapple with: will vaccines deliver us from coronavirus for good? Can anything arrest the rise of Big Tech? How will the end of the Trump presidency shape markets?
I have some informed guesses, although I am keeping my cards close to my chest. I hope you will play along with us.
How to enter this year’s competition
The aim of the FT’s stockpicking competition is to select companies you think will deliver the highest percentage return this year (to be precise, the period from February 1 to December 31) or those whose shares will fall the furthest.
The rules are simple. Contestants must pick five stocks and take either a long or short position on each — betting that the share price will rise, or fall. Perhaps you will stick to five companies that you know well, or you might decide to pick a range of companies from different sectors and operating in different countries to create a more diversified portfolio.
The portfolios are equally weighted and have no base currency (meaning foreign exchange movements have no effect on the end result) and dividends do not contribute to the returns.
The competition entry form is at FT.com/stockpick2021 where you can enter your five picks from today until midnight on January 31. The form lists thousands of stocks from exchanges around the world. Once you start typing, for example the letter “C”, the form will jump to all companies starting with C to make the selection easier.
Entrants must choose five individual companies — investment trusts and funds are not allowed and readers who pick the same company more than once will be disqualified.
The three readers whose portfolios perform the best in 2021 will be invited to the FT’s Bracken House offices when lockdowns and travel restrictions have been lifted.
FT Money readers: the 2020 winners
The winner of FT Money’s 2020 stockpicking competition is Giacomo from Rome, who beat more than 400 readers — and the FT’s in-house experts — to secure the top spot with a portfolio returning 496 per cent, writes Nikou Asgari.
He shot to the top of the leaderboard in the final month of the year after the price of bitcoin surged and caused the share prices of his two cryptocurrency mining companies to rocket.
Bitcoin climbed to record heights in the last few months of 2020, before breaching the $30,000 mark for the first time in early January. Its rapid ascent has led to renewed debates and warnings about the asset’s stability while retail and institutional investors continue to put money into the cryptocurrency.
Giacomo, who did not give permission for his full name to be published, chose Nasdaq-listed bitcoin mining companies Riot Blockchain and Marathon Patent Group. Their share prices rose 1,149 and 924 per cent respectively from February 3 (the start of our competition) to December 31. As the only reader to choose these companies, coupled with his long bets on Tesla and Apple, Giacomo comfortably clinched the top spot.
In second place with a return of 391 per cent is James Bennett, a Manchester-based graduate analyst at BNY Mellon, who judged that coronavirus infections would accelerate and chose his stocks accordingly.
His best performing pick was Nasdaq-listed biotech company Novavax, which has a coronavirus vaccine in late-stage trials and funding from the US government. Novavax’s share price rose 1,537 per cent last year and it was the single best performing company picked by FT readers.
“Back in January I was reading about the virus in China and I saw there being real scope for the need for a vaccine,” says Mr Bennett. He also picked Tesla and several Chinese tech companies which have benefited from increased online activity, including Baidu, China’s leading search engine.
In bronze medal place is Peter Menedis, owner of a medical device company from Florida, who also picked Novavax and Tesla, as well as Amazon. “Novavax was a pure flyer that turned out to be a great hit,” says Mr Menedis.
He adds that Tesla, a favourite among retail investors, was “probably undervalued at the time . . . I looked at it as a tech company rather than a car company and the valuations are different for tech companies.”
The coronavirus crisis battered the US oil sector as consumption and prices collapsed, leading to a surge in bankruptcies. A long bet on US energy company EOG Resources, whose share price fell 30 per cent, meant that Mr Menedis’s total returns of 379 per cent landed him third place.
As a whole, the great majority of FT readers were more comfortable with making optimistic choices at the beginning of 2020: 78 per cent of all stock picks were long, meaning that FT readers bet that the company’s price would rise.
The three winners have been invited to visit the FT offices in central London — when lockdowns and travel restrictions are lifted — where they will tour Bracken House and meet FT journalists.
Saudis agree oil deal with Pakistan to counter Iran influence
Saudi Arabia has agreed to restart oil aid to Pakistan worth at least $1.5bn annually in July, according to officials in Islamabad, as Riyadh works to counter Iran’s influence in the region.
Riyadh demanded that Pakistan repay a $3bn loan last year after Islamabad pressured Saudi Arabia to criticise India’s nullification of Kashmir’s special status.
But the acrimony between the two longtime allies has eased after Imran Khan, the prime minister, met Saudi Crown Prince Mohammed bin Salman in May.
News of the oil deal with Pakistan comes as Saudi Arabia embarks on a diplomatic push with the US and Qatar to build a front against Iran, said analysts. Riyadh lifted a three-year blockade of Qatar in January in what experts said was an attempt to curry favour with the newly elected Joe Biden.
Pakistan had shifted closer to Saudi Arabia’s regional rivals Iran and Turkey, which, along with Malaysia, have sought to establish a Muslim bloc to rival the Saudi-led Organisation of Islamic Cooperation.
Khan has developed a strong rapport with President Recep Tayyip Erdogan, encouraging Pakistanis to watch the Turkish historical television series Dirilis Ertugrul (Ertugrul’s Resurrection) for its depiction of Islamic values.
Ali Shihabi, a Saudi commentator familiar with the leadership’s thinking, said that “bad blood” had accumulated between Riyadh and Islamabad, but recent bilateral meetings had “cleared the air” and reset relations to the extent that oil credit payments would restart soon.
A senior Pakistan government official said: “Our relations with Saudi Arabia have recovered from [a downturn] earlier. Saudi Arabia’s support will come through deferred payments [on oil] and the Saudis are looking to resume their investment plans in Pakistan.”
The Saudi offer is less than half of the previous oil facility of $3.4bn, which was put on hold when ties frayed.
But Fahad Rauf, head of equity research at Ismail Iqbal Securities in Karachi, said: “Any amount of dollars helps because time and again we face a current account crisis. And with these prices north of $70 a barrel anything helps.”
Pakistan’s foreign reserves were more than $16bn in June compared with about $7bn in 2019 before it entered its $6bn IMF programme.
Robin Mills at consultancy Qamar Energy said: “Saudi Arabia and Pakistan are allies, but their relationship has always been rocky. And the Pakistan-Iran relationship is better than you might think.”
Mills said that the timing of the Saudi gesture was “interesting” given that Iran was preparing to step up oil exports with the US considering easing sanctions.
“The Saudis are on a bridge-building mission more generally. They have sought to mend fences with the US and there is also the resumption of relations with Qatar,” he said.
Ahmed Rashid, an author of books on Afghanistan, Pakistan and the Taliban, said that there were a variety of factors that might have spurred Riyadh to restart the oil facility.
It may be “partially linked to the American need for bases” to launch counter-terrorism attacks in Afghanistan from Pakistan, he said, but added that its priority was probably to prevent Islamabad from falling under Tehran’s influence.
Rashid pointed out that Pakistan was caught between China, which has invested billions of dollars in infrastructure projects, and the US.
“Pakistan has to play it carefully, it is dependent on China for the Belt and Road, dependent on the west for loans,” said Rashi. “This is a very complex game.”
Anjli Raval in London and Simeon Kerr in Dubai
Digital euro will protect consumer privacy, ECB executive pledges
The introduction of a digital euro would boost consumers’ privacy and protect the eurozone from the “threat” of competing cryptocurrencies that could undermine the bloc’s monetary sovereignty, according to the central banker overseeing its development.
Fabio Panetta, an executive board member at the European Central Bank, told the Financial Times that one of the project’s key aims was to combat the spread of digital coins created by other nations and companies.
“If the central bank gets involved in digital payments, privacy is going to be better protected . . . because we are not like private companies,” he said. “We have no commercial interest in storing, managing, let alone abusing, data of users.”
“Of course there is the potential threat that could come from others issuing a digital means of payment . . . If people do want to pay digitally and we do not offer them a digital means of payment, somebody [else] would do that.”
He contrasted the digital euro — an electronic version of cash issued by the central bank — with “unstable coins” such as Diem, Facebook’s planned digital currency which would let users send money as easily as text messages.
The ECB’s recent consultation on a digital euro found that people’s greatest concern was that it would erode their privacy. But Panetta said the central bank had tested ways to separate people’s identities from their payment details. “The payment will go through, but nobody in the payment chain would have access to all the information,” he said.
The central bank has also tested “offline payments for small amounts, in which no data is recorded outside the wallets of payer and payee”, he said; transfers of up to €70 or €100 could be done using a Bluetooth link between devices.
“For very small amounts, we could permit really anonymous payments, but in general, confidentiality and privacy are different from anonymity,” Panetta said, adding that some checks would be needed on most transactions to avoid money laundering, terrorism finance or tax evasion.
“A payment can be reconstructed [after the event] if the police want to assess whether there’s been any illicit activity,” he said.
Nearly two-thirds of the world’s central banks are running practical experiments on whether to launch digital currencies, according to the Bank for International Settlements.
But commercial banks worry that central bank digital currencies could erode their deposits, especially in a crisis. Morgan Stanley estimated as much as €837bn, or 8 per cent of eurozone bank deposits, could switch to digital euros.
It could also crowd out cash, some critics have argued; more than half of German households surveyed recently by the Bundesbank expressed scepticism about a digital euro and frequent cash users were the most dubious.
Panetta said a digital euro would lead to “a fundamental change in the way in which payments, the financial system and society at large will function”, for example by being “programmable” to allow automated payments, such as road tolls or in a cinema.
But he said the ECB was determined to make sure the digital euro did not undermine the commercial banking system, replace cash, crowd out innovation or become a shadow currency in smaller countries.
To achieve this, it is planning to either cap the amount anyone can hold at €3,000 each or impose “disincentivising remuneration” above that threshold, Panetta said.
The ECB’s governing council will meet next month to decide whether to push ahead with the preparations and Panetta said it could be ready for use in about five years’ time.
The central bank will also complete its new oversight framework for private digital currencies and crypto asset providers by the end of this year, he said.
Crypto assets such as bitcoin are “very dangerous animals” that are “largely used for criminal activities” and consume “a huge amount of energy”, Panetta warned.
So-called stablecoins such as Diem are meant to be safer as they are backed by fiat currency reserves, but Panetta said the potential volatility of those reserves created “an inherent instability in the function of these coins — and for this reason they are still unstable coins”.
Regulating and supervising crypto assets is hard “because there is no responsible legal entity,” he said. “It is decentralised. They could be in China. They could be in Switzerland or in South America . . . But to the extent that intermediaries are involved in the supply of those crypto assets, then we would have regulation and oversight in place.”
The digital euro should be made available in limited amounts for tourists visiting Europe, Panetta said, but the ECB would “have to reflect very carefully on access, and up to which limit, for foreign users”.
Major central banks are in talks to ensure their digital currencies are kept “interoperable”, Panetta said, as this would help to “make cross-border payments more efficient and much cheaper”.
SEC aims to stop insiders dumping stock before the bad news hits
It seems the great trading edge enjoyed by corporate insiders is knowing when to sell. That makes sense. There are many brokers and business-TV guests with stock buying tips, but few who will urge you to sell now, before the bad news comes out.
But we are probably coming to the end of a great couple of decades for legalised insider trading in America. This boom really started with a 2002 “reform”, the Securities and Exchange Commission’s adoption of Rule 10b5-1. This provided a means for senior executives or board members to sell their shares without making themselves vulnerable to charges of acting on “material non public information”.
New SEC chief Gary Gensler has called for reform of the rule, telling a Wall Street Journal conference that it led to “real cracks in our insider-trading regime”.
The rule was issued, as is customary with major reforms, in the wake of a series of giant corporate scandals — in this case those that came to light after the dotcom crash of 2000-2001. You know, pump earnings, goose the stock, dump your shares. Never again.
To qualify for protection under 10b5-1, covered insiders could no longer sell their companies’ shares at will. They have to enter into a (non-binding) contract, or plan, that instructs a third party to execute trades on their behalf according to a written plan, based on value, timing, number of shares, and so on. The stock sales under these plans would then be disclosed to the SEC and then the general public.
At the time, this seemed like a reasonable way to ensure market transparency while allowing insiders to sell shares to make tax payments, buy houses, or cover school tuition. Plans + disclosure + aligned interests = good.
In practice, Rule 10b5-1 has turned out to be a “get out of jail free” card for opportunistic timing of stock sales using insider information. It is also probably a good object lesson for why $4,000/hour lawyers are a better value than $400/hour lawyers.
To begin with, you, the insider, must follow a plan, detailed in a SEC Form 144, which you adopt at a time when you are not in possession of material non-public information. That would include, for example, certain knowledge that the next earnings announcement will be disappointing for the public shareholders.
Ah, but while you have to establish the plan with, say, your broker or family lawyer, you can modify or cancel the plan at will, in private. And you are not required to inform the SEC or the public that the plan is in place. Even better, there is no minimum number of transactions, so you can use it to make one big sale.
And you can file your plan (when you are ready) on a paper form, rather than in an easily accessed online filing. Until the pandemic, the 10b5-1s were only available for a limited time in the SEC’s Reading Room. It is possible, even likely, that an insider’s pre-filed plan might become general knowledge only after their stock sale has already been executed by his broker.
Mostly the insiders appear to be getting out before bad news is disclosed.
Daniel Taylor, a Wharton School associate professor and director of the Wharton Forensic Analytics Lab, has co-authored a series of studies on data combed from the 10b5-1 filings. He says “the sellers’ outperformance (in timing trades) comes from avoidance of risk”.
According to one of his studies, sales executed in the first 30 days of plan adoption are associated with the stocks underperforming others in their industry by 2.5 percentage points over the following six months.
Sales made 30 to 60 days after a plan adoption foreshadow 1.5 points of underperformance by the insiders’ companies. The sell-off effect was consistent over the 2016-2020 period covered by the study. The insider advantage disappears if sales are made under plans that are at least 60 days old.
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As Taylor (and others) see it, the policy lesson is clear: insiders should be required to wait for at least two months after filing their plans publicly before their stock sales can be executed. Oh, and those plans should be filed in easily accessible electronic form, so insiders’ lessened commitment to their companies becomes obvious before the bad news.
The odds favour the SEC’s adoption of such changes.
The next frontier, Taylor says, is to limit insiders’ use of privileged information about competitors, suppliers, customers and the like. That “shadow trading” is probably a bigger rip-off than insider selling.
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