When a company loses more than half its value before lunch, the blame game begins.
Blame the computers: high-frequency trading bots with black box algorithms. Blame the rise of passive investing: trillions of dollars of brainless exchange traded funds that exacerbate market swings. Blame regulations: European legislation known as Mifid II that has left smaller companies with less analyst coverage, leaving their shares vulnerable to sudden moves.
All real factors — but all trivial compared with the decisions of human fund managers choosing to deliver a drubbing to companies.
Take Tullow Oil, the Africa-focused oil explorer, which suffered a 72 per cent share price fall on Monday, wiping more than £1bn from its market value. The company shattered investor confidence when it slashed production forecasts. Coming just a month after Tullow revealed that the crude in two new wells would be hard to commercialise, this week’s warning sent investors racing for the exit.
“Management has cast a shadow over the quality of the company’s assets,” is how one analyst summed it up. “They have scared the pants off people.”
Computer-driven trading and a liquidity drought cannot explain the bruising drop. Rather, it was about shareholders who know the company issuing their verdict after losing faith in management.
A company’s leadership “is everything when deciding what we invest in”, said a fund manager at a large insurer.
In April shares in Saga, which sells to the over-50s everything from cruises to car insurance, tumbled almost 40 per cent in a day.
Saga’s now departed chief executive confessed that a flawed strategy meant it was losing customers even as its target demographic was growing.
The admission that it had taken its customers — and the power of its brand — for granted was punished by shareholders fearing for Saga’s future.
When Californian utility Pacific Gas & Electric plunged 12 per cent in a few minutes last year, our supposedly computer-addled markets were actually underreacting. The company’s stock ended up falling more than 60 per cent that week as PG&E filed for bankruptcy protection.
None of which means that the fast-changing structure and plumbing of stock markets should escape scrutiny. It needs constant examination from regulators.
In the UK, some companies blame Mifid II’s overhaul of equity research for creating a dangerous vacuum of information, leading to less trading in their shares and more volatility.
US Treasury secretary Steven Mnuchin pinned some of the responsibility for the turmoil that swept stock markets late last year on high-frequency traders.
One of the reasons such fears resonate is because, despite the dreaded “fat finger” error that is occasionally still blamed for a plunging share price, the business of buying, selling and managing equities has far fewer human fingerprints than it once did.
According to JPMorgan Chase, assets held in passive exchange traded funds had ballooned to $5.6tn by the end of April, up from $5tn a year earlier.
But sometimes a brutal sell-off in a company’s shares needs to be recognised for what it is: stockpickers holding management to account. For that, we should be grateful.
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