News & Analysis

The beast in the cage: Opportunist euphoria drives huge market surge, but for how long?

Andrew Saks, Wednesday, 14 April 2021

Primitive instinct applies to us human beings just as equally as it does to four legged mammals.

Perhaps the most marked difference between us and the furry beasts of the wild is that we are capable of rational thought rather than just acting in accordance with learned patterns or innate wits.

Without appearing to emulate the musings of a bearded academic sporting a brown jacket that radiates a whiff of mothballs, pontificating about the behavioral patterns of animals - human or otherwise - in captivity compared to their natural environment is very much relevant when looking at today's market movements.

Western European countries, along with Australia, New Zealand and Canada, have been subjected to brutal lockdowns whose respective governments had hoodwinked the populations into believing that these were somehow in the interests of public health, and were very temporary.

Here we are a year later, and the governments of said regions are showing absolutely no sign of returning personal and economic liberty back to the very people who voted them in.

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As a result, the browbeaten public have become accustomed to curtailments to the extent that even a very minor restoration of a small part of previously taken for granted freedom has brought out a similar response to a wild animal in captivity having been released into its former habitat.

In essence, when Britain's government allowed certain retail shops to open and for people to stand in the freezing cold outside bars and cafes under a thinly veiled disguise of freedom, people have subconsciously embraced these tiny tidbits of what they were able to do just over a year previously and literally taken as much advantage as possible, likely because the signs point to the government closing it all down again soon.

This has led to a very interesting day for FTSE250 listed stocks, many of whose values have rocketed, resulting in the entire FTSE250 index having reached an all time high yesterday.

The FTSE250 is an index of the publicly listed stock of the 250 largest companies listed on the London Stock Exchange.

That is a simple overview, however, and looking at things from a more analytical perspective makes matters even more interesting.

Entertainment stocks are up - Chinese bids on the way?

As would be expected, the biggest climbers this year include Cineworld (up 60%), virtual bingo titan Gamesys which is not at all surprising given the compliancy with draconian stay at home orders by the furloughed (up 60%) and services company Mitie (up 55%).

What is odd is that Cineworld gained so much, despite its venues being closed for over a year. Perhaps a drop is coming, especially if the government renews the full lockdown which has been predictable all along, especially given many countries on the European mainland having been returned to full lockdown recently.

Mitie is a very intriguing one. Very few offices are open, so how is their revenue so high? A mystery indeed.

Rather unsurprisingly, Royal Mail had been in the doldrums in 2019, however, despite the monopolistic aspirations of Amazon which has become an intrinsic part of the lives of almost every Westerner over the past year, and the company's resent-generating ultra-efficiency, Royal Mail stock has rocketed in just one year and is up by an astonishing 246% over the previous 12 month period.

Cineworld was almost bankrupt in 2019. Cinemas were unpopular even before the lockdowns.

Just like The Buggles sung in 1979 "Video killed the radio star", today's equivalent is perhaps Netflix, Apple TV and Amazon Prime along with around 1,000 special interest channels killed the cinema star.

Thus, why the sudden upshift in stock price of what was an obsolete model even when men were free to roam?

The answer is that Chinese investment is on its way. Lockdowns have decimated Western national economies and state run Chinese entities are now interested in mopping the brands up.

I say brands, because that is what they will be used for. The astute and effective Chinese investors which never make mistakes do not want to buy obsolete businesses with flagging fortunes. They want the brand. The brand and registration of these companies will allow their new owners to mould them into what they want them to offer, and give the investors an easy inroad to Western markets, with established corporate structure and a ready client base.

Clever.

The fund managers are looking at these companies through a microscope too, demonstrating that there is absolute weight to the speculation that they are going places, hence the upward movement despite flagging real world value and potential relegation to legacy status in their current forms.

Look at London as the intrinsic investment ground for large Chinese corporations. The LEVC taxi, Ballymore and EcoWorld, significant commercial office spaces across the City.

Therein lies the potential reason for such investor interest. Lockdown-related? You bet.

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