By the looks of it, the virus-induced stock market crash of 2020 never happened. In aggregate, we value companies pretty much as we did before the world went into lockdown. What was billed the biggest economic crash in history seemed to have had little significance for investors.
A closer look reveals a more nuanced picture. Some companies, the undisputed losers of the lockdown, are still struggling to gain favour with market participants. Airlines, hotels and restaurants, for instance. Yet even those businesses, now helplessly indebted and facing a very uncertain future, still illicit bullish bets.
The share price of bankrupt car-rental company Hertz is a case in point. Hertz’s stock almost tripled since the company went under, while its bonds, valued at a quarter of its face value, indicate – rightly – a complete wipe-out.
Investors seem to contradict each other in unusual ways. All over the world governments raise debt in unprecedented volumes, yet the cost of borrowing is low as never before. Massive injections of monetary and fiscal stimuli should raise fears of inflation, but bond prices go up regardless. As do the valuations for inflation-protected bonds, yet another contradiction. Shares rise, but bonds rise too, while we always thought of them to wander in opposite directions.
With interest rates of most sovereign borrowers close to zero, exchange rates should balance trade and current accounts of the world’s biggest economies. Yet currencies stay calm.
The total of such contradictions is not a new path but rather the loss of direction. For the moment, we circle a roundabout and it is uncertain which exit we will take. It could be another crash, anaemic stagflation, fast growth or a diversion back to the roundabout. If we go in circles for long enough even outlandish bets may succeed.
What may have triggered panic in the past is now shrugged off. The massive cost of Brexit, caused by shrinking access to world markets, new red tape and absent foreign labour looks now insignificant when compared to the financial damage of COVID-19. Trade war with China? Possible destabilising effects of exchange-traded funds or speed trading? The latent risks of shadow banking? China’s ever growing debt bubble? The centrifugal forces of the eurozone? Climate change? It is all dwarfed by the crash now, which so far has left only small scars on the skins of investors and households.
We seem to believe that having survived the crash unscathed proves our invincibility. Warning signs that typically precede a crash, like large-scale corporate fraud, are taken lightly.
Payment company Wirecard, darling of German stock investors and seemingly at the vanguard of high-tech-money-transfer systems, was built on a pile of invented earnings, forging bank statements to the tune of €1.9 billion. This fraud went undetected for years. Neither the auditing companies, which happily approved Wirecard’s accounts, nor market regulators were bothered to probe a thinly veiled ruse. Quite the opposite: doubters were vilified and harassed.
If one of the largest German companies can pull this off with such ease, does this not mean that many of our assumptions of corporate financial probity are highly fictitious?
Shares are not priced by discounting future earnings anymore, but according to narratives of a game-changing future
The list of baffling phenomena is long and many of the observed absurdities could be explained by central banks underwriting their sovereigns’ debt and all asset markets seemingly indefinitely. While over-indebtedness was a curse in the past we have healed it now by a debt binge as never before. If this worked in China, despite all its misallocation of funds, theft and graft, it should work in market-based economies too.
But it all goes swimmingly because consumers have saved more than they ever have before. Other than our governments, they have perhaps more realistic expectations of the all-saving vaccines to arrive anytime soon.
We know that flu shots are hit and miss. As long as people don’t shop with abandon and companies are hesitant to invest, inflation is hibernating on the dark side of the moon, together with growth.
Yet not all bullish sentiment can be attributed to unprecedented governmental and central banks’ largess. I’d like to argue that shares are not priced by discounting future earnings anymore, but according to narratives of a game-changing future.
Nio is a Chinese start-up promising to produce electrical cars better and cheaper than Tesla. It plans to tackle range anxiety by building a garage infrastructure for battery swaps, thereby avoiding lengthy charging times. Its shares are listed in New York too, priced $11.09 at the time of writing. Only eight months ago the shares stood at $1.19. From this low point to its peak in June, when shares traded for $16.44, the stock has gained 1,281 per cent.
Nio has a profit margin of -123 per cent, or -$10.13 per share – roughly the cost of today’s share price. Yet investors think the company is worth $13.3 billion.
Nikola, a US company planning to build battery and hydrogen-powered vehicles, operates a small hydrogen fuel infrastructure.
It has a market value of $17 billion, down by half from its peak in June, when shares gained 826 per cent in only three months. It makes no profit and has not sold a single car so far.
When it comes to sales figures, even Tesla is a minnow. It sold less than 400,000 cars last year. At the same time, Toyota and Volkswagen sold 10 million cars each and General Motors almost eight million cars. Yet Tesla’s market value in June eclipsed all three companies combined.
Even today, as its shares have retreated a little, it is worth $280 billion – more than Toyota, the biggest car company on earth. At $1,500.84 per share the company’s value has tripled since March.
I do not wish to belittle investors with strong convictions. Enthusiasm for Tesla has returned a staggering 780 per cent since August last year. And I do appreciate the technical lead of Tesla, which has built a car from scratch, more advanced than anything the big car companies have come up with so far. To think the company is a data platform, not a car company as many claim, I find farfetched though.
Tesla is worth now 9,500 times last year’s earnings. To justify an investment at such valuations, the company would need to sell more cars than Daimler over the next 10 years, just 100 times more profitably, starting now.
Such is the stock market faithful. Every time it takes another leap at the turnaround I pray for the right exit.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com
Andreas Weitzer, independent journalist based in Malta