alternative markets update march 2021

Alternative Markets Update March 2021
In the current uncertainty in the markets, macroeconomic factors play an important role aside from Covid-19 and the vaccination efforts. Inflation is a major concern in 2021, even though it was very obvious in 2020 already. However, in 2020, it was completely overshadowed by Covid-19 and the tremendous surge in equity markets among others. Inflation is a concern around the world, caused by the severe interventions undertaken by central banks. In particular in the US, where the FED intervened with money printing on such a scale that it cannot be compared to any other economy. This was largely required, as conventional monetary policy was not enough, for example, lowering the interest rates to the area around 0%. Even quantitative easing could not solve the problem, even though the FED’s balance sheet ballooned. Figure 1 shows the FED’s balance sheet over the last five years. At the beginning of the crisis, the federal reserve was at around $4.3tn. In 2020, this increased by 76% to $7.3tn and is still rising in 2021. Currently, it is at almost $7.7tn. In comparison to 2008, during which the federal reserve increased by 151%, the balance sheet increased by “only” $1.3tn in absolute terms. It is important to note that during the last two decades, the FED’s balance never declined by more than 1% on an annual basis with one exception being 2018 with a decrease of 8%. Interest rates in the US have recovered quite spectacularly over the last months. Figure 2 shows the development of interest rates in major economies over the last few months. The US interest rates are higher than any other interest rate from the UK, Europe or Japan, both short- and long-term. The short-term interest rates have remained very stable, while the long-term rates have increased a lot, for example, the 10-y US treasury note is soon back at 2%.

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RESEARCH PERSPECTIVE VOL. 152 March 2021 Alternative Markets Update March 2021 In the current uncertainty in the markets, macroeconomic factors play an important role aside from Covid-19 and the vaccination efforts. Inflation is a major concern in 2021, even though it was very obvious in 2020 already. However, in 2020, it was completely overshadowed by Covid-19 and the tremendous surge in equity markets among others. Inflation is a concern around the world, caused by the severe interventions undertaken by central banks. In particular in the US, where the FED intervened with money printing on such a scale that it cannot be compared to any other economy. This was largely required, as conventional monetary policy was not enough, for example, lowering the interest rates to the area around 0%. Even quantitative easing could not solve the problem, even though the FED’s balance sheet ballooned. Figure 1 shows the FED’s balance sheet over the last five years. At the beginning of the crisis, the federal reserve was at around $4.3tn. In 2020, this increased by 76% to $7.3tn and is still rising in 2021. Currently, it is at almost $7.7tn. In comparison to 2008, during which the federal reserve increased by 151%, the balance sheet increased by “only” $1.3tn in absolute terms. It is important to note that during the last two decades, the FED’s balance never declined by more than 1% on an annual basis with one exception being 2018 with a decrease of 8%. Interest rates in the US have recovered quite spectacularly over the last months. Figure 2 shows the development of interest rates in major economies over the last few months. The US interest rates are higher than any other interest rate from the UK, Europe or Japan, both short- and long-term. The short-term interest rates have remained very stable, while the long-term rates have increased a lot, for example, the 10-y US treasury note is soon back at 2%. Figure 1: Fed Balance Sheet (Total Assets in Billion USD) from January 2015 to January 2021, Source: Compound, March 2021 Figure 2: Interest Rate in Major Economies over the Last Few Months, Source: Barron’s Market Lab, March 2021 This macroeconomic ecosystem causes uncertainty ahead and is further amplified by the huge movement in stock markets. Some sectors have suffered, while others have flourished under the economic support caused by Covid-19. In particular, the tech sector has benefited largely, despite the losses occurred over the last months caused by inflation concerns and increased demand in value stocks. Many tech companies have directly profited from the measures imposed by governments to fight the spreading of the virus. An example would be the online payments which was further empowered by online shopping. Figure 3 show how the stock price of several payment companies has evolved since January 2020. Paypal performed the worst among them but is still up more than 100%. Square was up more than 300% at the beginning of February 2021. However, it is also visible what impact the inflation concern and value rotation had during February 2021. Regardless of this effect, each company outperformed the S&P 500 by a wide margin. The high impact Covid-19 had on Western economies, has driven more attention towards Asian equities, China in particular, with its prosperous outlook. Among the most influential are certainly the internet companies of China, Tencent, Alibaba and Ant Group. Figure 4 shows the influence of those companies in China’s internet startups and their respective valuation. Figure 3: Stock Development of Online Payment Companies from January 2020 to March 2021, Source: The Economist & Refinitive Datastream, March 2021 Figure 4: Investments of Tencent, Alibaba & Ant Group in Chinese Internet Startups, Source: Bloomberg, CB Insights & Crunchbase, March 2021 Cryptocurrencies have not moved tremendously during the two weeks, especially in comparison to its price movements since December 2020. Since mid-March 2021, Bitcoin (BTC) remained in the interval from $53k to $60k. The situation is very similar for Ethereum (ETH) which remains in the range of $1,650 up to $1,950. In spite of the recent crash and relatively stable value over the last month, cryptocurrencies had a stellar Q1 2020. BTC is up 93%, while ETH is up 132% in 2021 (as of the time of writing). Unsurprisingly, the four crypto-related strategies we offer take the first four spots in this year’s YTD. The best performing strategy is up almost 200% as of February, whereas the worst performing crypto strategy is up 53%. Our tactical trading strategy index, which mostly consists of crypto strategies, is also up almost 100%. Nevertheless, it should be emphasized that there is considerable risk involved in the space. With this statement, it is not only the incredible high-risk nature of cryptocurrencies, but also current developments, which will be elaborated. The general ecosystem for BTC looks well, as a cornerstone of BTC is its fixed supply, which makes it resilient to inflation and increases its attractiveness in times of inflation or inflation concerns. However, there are several negative aspects, one should consider. For example, the returns of 2020 and 2021 cannot be considered as being healthy. This is even less the case for emerging altcoins and resembles of what happened in 2017/18. Figure 5 shows how prices of assets have developed after their bubble burst. While most assets came down to their initial prices or slightly higher after a recovery period, the picture of BTC looks entirely different. Its current price is a lot higher than it was when the bubble burst, which is certainly a reason to be cautious. Another bad indicator might be that gold has fallen again. Mostly, gold and BTC are seen as store of value. Over the recent months, when BTC rose strongly, gold continuously lost value, partly because investors sold their gold ETFs to move into BTC. Thus, it may indicate that the confidence in BTC is not that high anymore, as it did not rise in price as it did in the last few months. Figure 5: The Greatest Asset Price Bubbles in History, Source: Cryptocratie, BofA Merrill Lynch, Global Financial Data, Garber, Frehen & Bloomberg, March 2021 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As of 16th February 2021, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 60.3 billion. 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