While US stock markets have grabbed most of the attention in 2018, some of the more obscure financial bets have yielded plenty of opportunities, for profits as well as career-limiting losses. Here is our pick of some favourites:
European carbon credits
In the relatively niche world of carbon trading, a few big bets made headlines, with some notable winners and losers along the way.
Having languished for the best part of a decade after the financial crisis, when excess supplies of carbon allowances depressed prices, an elite group of specialist traders were quick to comprehend what tweaks by the European Commission to the system meant for tighter supplies.
The result? A 230 per cent rally in the price between the start of the year and September, which took the allowances to a 10-year high above $25 a tonne.
A number of hedge fund managers spotted the trend early, including Per Lekander, a carbon specialist who runs two energy-focused funds at Lansdowne Partners in London. Ulf Ek at energy hedge fund Northlander Advisors also won big.
But perhaps the biggest name of all caught the wrong side of the trade. Einar Aas, a Norwegian power trader who was once the biggest taxpayer in the country, was blindsided by a rise in carbon in late September that violently skewed bets he had placed on Nordic power and German electricity markets. Such was the size of his wrong-way positions that it blew a more than $100m wide hole in a stability fund in Nasdaq’s Nordic power exchange. That forced him to liquidate a number of his assets and leave the industry in return for his creditors forgiving the remainder of the debt.
The market for environmentally labelled debt has grown exponentially in the decade since it was first launched, but 2018 saw its first stutter. Sales of green bonds rose year on year, but the rate of growth dropped off sharply.
After expanding 77 per cent from 2015 to 2016, and 65 per cent in the year to 2017, the value of green bond sales grew just 12 per cent from 2017 to 2018, according to figures from data provider Refinitiv. A total of $120bn of green-labelled bonds had been sold by mid-December.
Industry observers attributed the easing-off partly to wider market conditions, where volatility has limited companies’ opportunities to issue debt. But the emergence of a wider range of ethical labelling in the capital markets has also played a role. Sales of social and sustainable bonds are up sharply year on year, although both are still very small markets.
Ethically labelled debt is popular with investors because of the additional disclosure that it forces issuers to provide. Yet so far there is no clear evidence that investors are willing to pay a premium for green-labelled debt, and the question of whether it can outperform conventional debt remains an open one.
“We believe the main issue prohibiting clear disclosure is the diversity of projects financed, coupled with lack of universally applicable impact measurement standards,” said Rahul Ghosh, a senior vice-president at credit rating agency Moody’s.
Catastrophe bonds were one of the big winners from quantitative easing. The instruments, which back insurance-like risks such as storms and earthquakes, attracted investors with decent yields and low correlation with other asset classes.
Doubts have started to creep in, however. After a relatively quiet period, 2017 turned out to be a very active one for natural catastrophes. Many cat bond investors lost money as hurricanes Harvey, Irma and Maria barrelled through the Caribbean and the US.
Confidence returned to the market early this year — after all, perhaps there would be no repeat of the 2017 disasters. The Swiss Re cat bond index returned just over 3 per cent in the first half of the year.
But as the year has drawn on, those doubts have returned. Storms in the eastern US, typhoons in Asia and wildfires in California have made 2018 another above average year for natural catastrophe losses. Cat bond investors could find themselves paying out once again. People in the insurance industry are asking if 2019 will turn out to be the big test of just how sticky the new cat bond capital really is.
In 2017, one of the biggest niche money-spinners in financial markets was betting that they would remain tranquil. But in February those punts unravelled in dramatic fashion and this year the smart money has been wagering on renewed turbulence.
Two popular Vix volatility index-linked exchange traded notes highlight the abrupt shift. XIV, an “inverse-volatility” ETN that makes money when markets are calm, was shredded by a spurt of volatility on February 5 and was swiftly shut down by its sponsor. Meanwhile, its “long” counterpart, VXX, has benefited from the choppy market environment in 2018 and notched up its best annual performance since inception. In fact, 2018 was its only positive year.
“The low vol bubble is deflating, and signs of regime change are growing,” analysts at Bank of America wrote in a report.
The complicated structure of VXX means that it is suitable only as a short-term trading instrument, as it has lost almost 99.9 per cent of its value since its birth in 2009. But this year it has returned more than 50 per cent, thanks to bursts of turmoil in February and October. A fine performance in the ETN’s last year of life, because its structure (ETNs are essentially debt instruments, with a fixed maturity) means that it is due to be shuttered in January.
Wine traders can toast a vintage year for Burgundy prices in 2018, as this niche corner of the fine wine market surged to record highs.
Wine can be a tough asset to trade, due to high transaction and storage costs, and the broader fine market offered little to investors this year, gaining just 0.22 per cent according to Liv-ex’s Fine Wine 100 index.
But its Burgundy 150 index has surged 35.52 per cent, its best performance in a decade. In October, two bottles of Romanee-Conti broke the record for the most expensive bottles of wine ever sold at auction.
The Burgundy market, roughly one-quarter the size of the dominant Bordeaux market, is benefiting from tight supply after fierce hailstorms shredded much of the crop in recent years.
Added to that, Asian buyers who pushed the Bordeaux market to record levels in 2011 only to be burnt when the market retreated, are now moving on to Burgundy, viewed as a more sophisticated market.
But those hoping to join the party at this stage could be left with a hangover as the upcoming 2017 crop, released for drinking in January 2019, is back to more normal levels.
This year marked a move by cannabis companies into the financial mainstream. Canada became the first country to legalise adult recreational use of marijuana nationally; one Canadian company, Tilray, became the first to go public in the US listing on the Nasdaq; and established household brands began to experiment with the sector.
Marlboro cigarettes maker Altria took a stake in Canadian marijuana company Cronos for C$2.4bn (US$1.86bn), Corona beer maker Constellation Brands invested just under $4bn into fellow cannabis group Canopy Growth, lifting its stake to 38 per cent, and Tilray formed partnerships with AB InBev and pharma group Novartis.
The number of Canadian licensed producers that are publicly listed, almost exclusively, in Canada has grown to 46 in 2018, from 27 from last year and 11 in 2016, according to New Cannabis Ventures, a financial data and news provider for the cannabis industry. In addition to Tilray’s US IPO, Canopy and Cronos achieved dual listings in the US this year.
“You saw the emergence of an investable opportunity in the US,” said Sean Stiefel, a portfolio manager at Navy Capita. “The story next year will be winners beginning to emerge and cannabis brands becoming household names.”
Like any hot new area, shares were volatile. Tilray went public at $17 in July, rose as high as $300 and was trading around $70 late in the year. That was still enough of a rise to be the top performing US-listed IPO this year, according to Dealogic.
Sales of electric cars are set to surpass 1m this year, as the largest carmakers go electric after decades of selling petrol cars. This month Mercedes-Benz owner Daimler said it would spend €20bn on batteries over the next decade.
Despite that demand, going short producers of battery metals was surprisingly one of the best trades in commodities this year. The price of lithium has more than halved in China this year, while cobalt prices are down about 10 per cent.
That has hit share prices of the largest producers, with Chile’s lithium giant SQM down 31 per cent this year and cobalt producer China Molybdenum off by 40 per cent. As new lithium mines came into production this year, supply overwhelmed the market.
“Lithium had an almighty run-up,” said Simon Moores, the founder of Benchmark Mineral Intelligence, which tracks the market. “Everyone thought it was a bubble. It’s been proven that the fundamentals are there but it became frothy. So people were just waiting for bad news.”
As a result of the share price fall, large investors such as Blackrock’s Mining Trust have cut their exposure to smaller lithium miners trying to develop new projects.
In the case of cobalt, the market has been overwhelmed by an increase in supply from the Democratic Republic of Congo, which produces more than 60 per cent of the world’s cobalt.
Renewable identification numbers
In addition to being obscure and opaque, the market for renewable identification numbers has an inelegant name. But it is important because it influences how much petrol is sold in the US, the world’s leading oil-consuming nation.
Rins, as the numbers are known, are government-issued credits used in biofuels markets. Fuel companies can acquire them in lieu of meeting a government mandate to supply more corn ethanol or soya oil-based biodiesel to filling stations.
The market’s ups and downs have become legendary, such as the first bout of what became known as “Rinsanity,” when prices surged more than 1,000 per cent in the first months of 2013.
The year 2018 has been the opposite: the most common type of ethanol Rin had fallen by two-thirds to $0.22 a gallon by the middle of December, according to Thomson Reuters.
The decline came amid legal and regulatory moves that softened the impact of the mandate, which dates to 2007.
In addition, the US Environmental Protection Agency has issued dozens of exemptions from the mandate under a programme for small refiners.
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