How to read into the IPO suspension and US elections

How to read into the IPO suspension and US elections

Dear friend of AQUMON,

With record-breaking COVID-19 spikes across the United States and Europe, markets sold off for the 2nd week again last week to wrap up October. The US’ S&P 500 index was -5.64% last week and +1.21% year to date while the EuroStoxx 50 was -7.52% last week and -21.01% in 2020. Local markets did not fare much better with the Hang Seng index -3.26% last week.

AQUMON’s diversified ETF portfolios were -0.05% (defensive) to -4.28% (aggressive) last week and +2.27% (defensive) to +1.27% (aggressive) year to date. AQUMON’s SmartGlobal HK ETF portfolio, with more regional exposure to Hong Kong/China, was +1.08% (defensive) to +5.36% (aggressive) year to date. All asset classes in general sold off with US technology stocks (-5.51%), emerging market stocks (-3.42%), high yield bonds (-1.17%) and gold (-1.22%). 

Investors this week have wanted to know how to view Ant Financial’s last minute initial public offering (IPO) suspension and the nail biting outcome of the US election. Although investors will likely need to wait, we have highlighted a few points on how investors should read into these events:

Ant Group’s last minute IPO suspension is a temporary setback

On the eve of the largest global IPO ever, regulators stepped in Tuesday to halt the projected US$34.5 billion (~HK$267 billion) raise due to regulatory changes in the financial technology space and a need to protect market stability. This came as a shock to many investors who had placed bids of over US$3 trillion (~HK$23 trillion) worth for Ant shares in Shanghai and Hong Kong.

How should investors read into this?

1) The suspension is likely temporary

We don’t believe this suspension will be indefinite but there will be details that both Chinese regulators and Ant Financial need to work out behind closed doors before this can proceed. According to the latest report by the Financial Times on Friday morning, the delay could be more than 6 months mainly due to the need for Ant Group to submit a new IPO prospectus and respond to regulators demands.

Why is there such a need? As technology giants become more bank-like, the big question is that should these technology giants be regulated like a bank or like a technology firm? The pushback by traditional banking players and regulators is they believe they should all be regulated in the same manner to ensure a fair play. 

The main area of contention is with Ant Group’s microlending business; the new proposal by regulators would impose a great limit on lending amounts to individual borrowers as well as the amount they can leverage. Furthermore, Ant Group will potentially need to shoulder more default risk for acting as an intermediary between the banks.

2) Ant Group’s future IPO pricing will take a haircut

With this unfortunate setback and also anticipating future investor appetite dampened, the logical result is when Ant Group finally lists, the initial pricing of HK$80/share (for its listing in Hong Kong) will also likely need to be scaled back. This is not a bad thing for investors looking to get in on the IPO and buy into the long term prospects of Ant Group.

Although this is a painful experience, we do not believe this worsens the outlook for Ant Group. Our feeling is quite the opposite. The quicker traditional regulators/ financial institutions and newer technology/ fintech players can find a way to cooperate together, the better it is for the outlook of the financial industry along with the improved solutions it will offer to investors. Investors should not be surprised more isolated incidents like this going forward as financial regulators figure out how to partner with non-traditional players.

We continue to believe that the upcoming Ant Group IPO will provide a positive catalyst for Hong Kong and China markets. However, investors should take all risks into consideration before taking advance of this IPO. A good portion of investors who took advantage of the low cost leverage unfortunately received the news after that they will still need to pay the borrowing costs after this IPO suspension. As we mentioned before, a smart investor should assess all types of risk beyond just market risk.

We may have to wait multiple weeks (or longer) for the final US presidential election results

As much as we are glued to all forms of media trying to learn of who is the final candidate elected the 59th president of the United States, the reality is we likely will not know the finalized US election results until weeks (maybe more) later. 

With the current prospects leaning in favor of the Democratic party candidate, Joe Biden, US president Donald Trump made it clear that he plans to contest in key swing states like Wisconsin where he will be defeated 49.6% versus 48.9% (a 0.7% difference). This is completely within any presidential candidate’s right to contest and suggest a recount when the winning margin is less than 1%. 

Even though the current contested election situation may be unique, investors need to look no further than the 2000's US presidential election between George Bush and Al Gore for reference. The election in 2000 was also a closely contested election -- from election day (November 7th) until the US Supreme Court stopped the recount in Florida (December 12th) and essentially declared Bush as the winner took 35 days. Investors should expect a similar, if not longer, path to the final result this year.

As we know, markets are forward looking and do not ‘wait’ for results. What we can see is that the S&P 500 post election day performance this year is by far the best performance we have seen (+4.19% 2 days after the election). We’ve analyzed below how the S&P 500 performed 10 days after each US election in the past 20 years: 

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Why are markets reacting so positively? Is it because they feel Biden or Trump will win? The short answer is “no”. In fact, the positive reaction by Wall Street is a result of investors betting that the Republican party will hold onto majority control of the US Senate which will result in a split government. 

This is important because analysts anticipated a ‘Blue Wave’ (Democrats holding all 3 branches of government) would result in tighter regulations and taxes for US corporations; with a split government, such moves could be blocked. Even though this may not be the best for the American public, investors believe this scenario will benefit US corporations and US markets have rallied strongly as a result.

The main beneficiaries post election have been US technology firms which earlier were under heavy antitrust pressure along with communication firms: 

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For investors who think they are late to take advantage of this rally, we think there are still buying opportunities ahead. Given the uncertainty with multiple market risks and the anticipated back-and-forth in media headlines, volatility will remain elevated for investors. As mentioned on multiple occasions, investors should carefully accumulate during this period since we expect market clarity on key uncertainties such as COVID-19, the economic recovery, additional stimulus to ‘unlock’ one by one as we enter 2021. 

If you have any questions, please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON. Stay safe outside and happy investing!

Ken


About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC. AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

 

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