What’s Going On Here?Obscure US investment firm Archegos Capital Management sold more than $20 billion worth of shares late last week, briefly unnerving investors around the world. What Does This Mean?American media companies ViacomCBS and Discovery saw their stock prices plummet 27% on Friday, marking their worst days ever. Chinese internet stocks such as Baidu, Vipshop, and Tencent Music tanked too, albeit a bit less dramatically. Such large share-price moves at such large public companies mean there has to be hefty selling going on somewhere – and when it emerged that those chunky trades originated from a single seller, other investors began to freak out. Concerned that Archegos knew something they didn't, they started preemptively selling shares of other companies too. But they needn’t have worried: it was just another case of one investor’s big bets gone horribly wrong… Why Should I Care?The bigger picture: Be careful when betting with other people’s money.
Archegos had borrowed heavily from various banks to invest – and that’s not for the fainthearted. Such leverage artificially increases the size of your bets: any gains will be bigger, but losses are supersized too (tweet this). And if investments made on leverage start to falter, watchful lenders will demand extra deposits. Failure to respond fast enough leads to forced selling of those investments in an attempt to limit the lenders’ losses – which is why $20 billion worth of shares got dumped on Friday.
For markets: Business as usual.
The fire sale might’ve been unsettlingly unprecedented in size, but its repercussions should be relatively contained. Besides Archegos, the only big losers appear to be the banks that lent it money – most notably Nomura and Credit Suisse. US and Chinese stock markets barely blinked on Monday, and the specific shares involved largely remain above where they were at the start of the year. | 