All to play for: A breakdown of market performance in H1 2024
25 June 2024
Matthew Chessum, director of securities finance at S&P Global Market Intelligence, reviews the securities lending market’s performance in the first half of the year
Image: Shutterstock
Before reaching for the suitcase and factor 50 and setting off to the beach, it seems like a good time to stop and take the opportunity to have a brief look at the securities lending market’s performance over the first half of the year.
The macroeconomic environment has provided a degree of stability throughout the first six months of the year, as inflation has continued to cool and interest rates, for much of the period, have been kept on hold. Despite inflation falling closer to the magic two per cent level, the path has not always been easy. The inconsistent economic data during the first quarter made interpretation challenging, leading to heightened volatility in bond prices that fixed income markets had to contend with.
In the equity markets, the impact of the data has been less pronounced, as many global equity indices have continued to reach new highs. At the time of writing, the S&P 500 has just achieved its 27th new record high of 2024 so far. From New York to Tokyo, global markets have reached new peaks with little to no correctional periods taking place. Even Chinese equities have started to make a sustained comeback after declining significantly during the first couple of months of the year.
Looming interest rate cuts, healthy economies and higher than expected corporate earnings have been the main drivers behind the sustained increase in valuations. With over US$6 trillion currently sitting in money market funds and the VIX hovering close to record all-time lows, heading into the second half of the year, there does not appear to be much change on the horizon.
Context remains crucial
In securities lending markets, it is well documented that revenues during the first half of the year have not been as robust as those seen in 2023. Although revenues to the end of May are approximately 24 per cent lower year-on-year (YoY), they do still compare favourably to previous years. At the moment, revenues are trending in line with those seen during 2021 or 2022, depending on the month examined. Both years rank among the top five highest revenue-generating years since our securities lending data service started in 2006, so context remains crucial at this point in the year.
Much of the difference in year-to-date revenues has come from the specials market. 2023 was an exceptional year for equity specials and the revenues associated with these trades were responsible for catapulting 2023 to the second highest revenue producing year since 2008. The US specials market generated US$3.573 billion during 2023, approximately 70 per cent of all Americas revenues and 28 per cent of the entire 2023 market revenues.
Nevertheless, during the opening months of 2024, several stocks have proven to be highly profitable for lenders. When examining the top 10 revenue-producing stocks (up to the end of May), several observations can be made.
All of the top 10 stocks are US equities or US domiciled ETFs, a number of well known names continue to produce strong revenues for lenders and three sectors dominate the table — media and entertainment, financial services, and pharmaceutical and biotechnology stocks.
During the first half of the year, two stocks have surpassed the US$100 million revenue mark: Sirius XM Holdings (US$118 million) and Trump Media and Technology Group (US$106 million). While the main drivers behind the two borrows remain very different, the reformulation of Liberty Media’s tracking stock and a related spin-off versus a pure short sale based upon the expectation of a significant decline in the company’s share price, lenders of these equities have benefitted from sustained demand and revenues.
Automobile and component stocks have also attracted strong revenues throughout the period. Two stocks in particular, Lucid Group and Vinfast Auto, have collectively generated US$122 million. Lucid Group continues to provide strong returns for lenders after taking the top spot in 2022 (US$267 million) and second place during 2023 (US$159 million). Vinfast Auto pushed its way into the highest revenue generating table following its SPAC listing on 15 August, which experienced a rapid increase in its share price.
The Vietnamese car maker’s sudden US$190 billion market valuation meant that it was larger than at least half of the companies within the Dow Jones Industrial Average. The limited free float of the company and its appeal to momentum-focused retail investors helped to push market valuations increasingly higher despite its lack of revenue generation and general market liquidity. This naturally attracted short sellers, as the company’s valuation was deemed to be significantly higher than expected.
Hawkish monetary policy, intense competition and on-going trade wars continue to affect this sector and heading into the second half of the year this only looks to intensify following the 100 per cent tariffs recently placed on some Chinese-made electric cars by the US government.
Visa and B Riley Financial have remained stalwarts of the highest revenue generator during the first half of the year. The saga surrounding alleged improprieties at B Riley Financial continue to attract short sellers and the restructuring of Visa shares has generated approximately US$43 million each, during the year so far.
Since the end of the pandemic, a growing number of pressures have started to take their toll on biotechnology company balance sheets. A story of revenue normalisation, following strong demand during the pandemic, higher interest rates leading to more expensive and difficult refinancing opportunities, and a rise in regulatory pressures that are likely to restrict future innovation, are all impacting the industry. Immunitybio and Cassava Sciences continue to be affected by market conditions and remain heavily shorted companies, generating a collective US$72 million over the first five months of the year.
Heading into the summer months and the third quarter of 2024, many of these themes will continue to play out in the securities lending markets. Many new themes are also likely to play a growing role in the market's performance. Regulatory change will continue to dominate flows and resources, the changing shape of several influential democracies around the globe will impact both financial markets and investor confidence and sadly, on-going conflict will stamp its bleak mark upon the geopolitical landscape.
Figure 1
As interest rate divergence is now a reality, inflationary pressures have eased and equity markets are experiencing some of their longest periods of increased valuations on record without any significant correction — there is plenty of uncertainty and opportunity to navigate in the coming months. Uncertainty often leads to volatility which is predominantly positive for the securities finance markets.
All is left to play for in terms of revenues during the second half of the year, given the level of uncertainty and prospective change to come. This provides the potential for Q3 and Q4 to prove more lucrative than the first two quarters of 2024 — but we can worry about that after some much deserved summer sunshine.
The macroeconomic environment has provided a degree of stability throughout the first six months of the year, as inflation has continued to cool and interest rates, for much of the period, have been kept on hold. Despite inflation falling closer to the magic two per cent level, the path has not always been easy. The inconsistent economic data during the first quarter made interpretation challenging, leading to heightened volatility in bond prices that fixed income markets had to contend with.
In the equity markets, the impact of the data has been less pronounced, as many global equity indices have continued to reach new highs. At the time of writing, the S&P 500 has just achieved its 27th new record high of 2024 so far. From New York to Tokyo, global markets have reached new peaks with little to no correctional periods taking place. Even Chinese equities have started to make a sustained comeback after declining significantly during the first couple of months of the year.
Looming interest rate cuts, healthy economies and higher than expected corporate earnings have been the main drivers behind the sustained increase in valuations. With over US$6 trillion currently sitting in money market funds and the VIX hovering close to record all-time lows, heading into the second half of the year, there does not appear to be much change on the horizon.
Context remains crucial
In securities lending markets, it is well documented that revenues during the first half of the year have not been as robust as those seen in 2023. Although revenues to the end of May are approximately 24 per cent lower year-on-year (YoY), they do still compare favourably to previous years. At the moment, revenues are trending in line with those seen during 2021 or 2022, depending on the month examined. Both years rank among the top five highest revenue-generating years since our securities lending data service started in 2006, so context remains crucial at this point in the year.
Much of the difference in year-to-date revenues has come from the specials market. 2023 was an exceptional year for equity specials and the revenues associated with these trades were responsible for catapulting 2023 to the second highest revenue producing year since 2008. The US specials market generated US$3.573 billion during 2023, approximately 70 per cent of all Americas revenues and 28 per cent of the entire 2023 market revenues.
Nevertheless, during the opening months of 2024, several stocks have proven to be highly profitable for lenders. When examining the top 10 revenue-producing stocks (up to the end of May), several observations can be made.
All of the top 10 stocks are US equities or US domiciled ETFs, a number of well known names continue to produce strong revenues for lenders and three sectors dominate the table — media and entertainment, financial services, and pharmaceutical and biotechnology stocks.
During the first half of the year, two stocks have surpassed the US$100 million revenue mark: Sirius XM Holdings (US$118 million) and Trump Media and Technology Group (US$106 million). While the main drivers behind the two borrows remain very different, the reformulation of Liberty Media’s tracking stock and a related spin-off versus a pure short sale based upon the expectation of a significant decline in the company’s share price, lenders of these equities have benefitted from sustained demand and revenues.
Automobile and component stocks have also attracted strong revenues throughout the period. Two stocks in particular, Lucid Group and Vinfast Auto, have collectively generated US$122 million. Lucid Group continues to provide strong returns for lenders after taking the top spot in 2022 (US$267 million) and second place during 2023 (US$159 million). Vinfast Auto pushed its way into the highest revenue generating table following its SPAC listing on 15 August, which experienced a rapid increase in its share price.
The Vietnamese car maker’s sudden US$190 billion market valuation meant that it was larger than at least half of the companies within the Dow Jones Industrial Average. The limited free float of the company and its appeal to momentum-focused retail investors helped to push market valuations increasingly higher despite its lack of revenue generation and general market liquidity. This naturally attracted short sellers, as the company’s valuation was deemed to be significantly higher than expected.
Hawkish monetary policy, intense competition and on-going trade wars continue to affect this sector and heading into the second half of the year this only looks to intensify following the 100 per cent tariffs recently placed on some Chinese-made electric cars by the US government.
Visa and B Riley Financial have remained stalwarts of the highest revenue generator during the first half of the year. The saga surrounding alleged improprieties at B Riley Financial continue to attract short sellers and the restructuring of Visa shares has generated approximately US$43 million each, during the year so far.
Since the end of the pandemic, a growing number of pressures have started to take their toll on biotechnology company balance sheets. A story of revenue normalisation, following strong demand during the pandemic, higher interest rates leading to more expensive and difficult refinancing opportunities, and a rise in regulatory pressures that are likely to restrict future innovation, are all impacting the industry. Immunitybio and Cassava Sciences continue to be affected by market conditions and remain heavily shorted companies, generating a collective US$72 million over the first five months of the year.
Heading into the summer months and the third quarter of 2024, many of these themes will continue to play out in the securities lending markets. Many new themes are also likely to play a growing role in the market's performance. Regulatory change will continue to dominate flows and resources, the changing shape of several influential democracies around the globe will impact both financial markets and investor confidence and sadly, on-going conflict will stamp its bleak mark upon the geopolitical landscape.
Figure 1
As interest rate divergence is now a reality, inflationary pressures have eased and equity markets are experiencing some of their longest periods of increased valuations on record without any significant correction — there is plenty of uncertainty and opportunity to navigate in the coming months. Uncertainty often leads to volatility which is predominantly positive for the securities finance markets.
All is left to play for in terms of revenues during the second half of the year, given the level of uncertainty and prospective change to come. This provides the potential for Q3 and Q4 to prove more lucrative than the first two quarters of 2024 — but we can worry about that after some much deserved summer sunshine.
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