A big AI trade rescued the stock market. A niche bet on Bed Bath & Beyond sank amateur day traders. A buy-China call backfired on investing pros.
A slew of trades around the world, from bank bonds to cryptocurrencies, either blew up or rocketed higher against expectations this year.
Short-seller attacks on Adani’s empire in India took a surprising turn. Crypto diehards got a shot of redemption. So-called bubbles, like ESG, deflated. The irresistible force behind much of the action: the Federal Reserve’s disruptive monetary-tightening campaign, creating new winners and losers in its wake.
As this year’s trading draws to a close, Bloomberg chronicles the good, the bad and the ugly, as told by market reporters from New York to Singapore.
AI: Hedge funds play catch-up
The great AI rally of 2023 showered untold riches onto tech companies and their visionaries and sparked huge gains for portfolios big and small. Yet for all their shrewd bets and million-dollar bonuses, the smart money missed out in epic fashion.
Hedge funds’ exposure to technology stocks hovered near multiyear lows in January — the very moment when euphoria over artificial intelligence took off. That left managers shut out from an historically lucrative trade that they were paid to capture. By late September, they had reversed course dramatically with their tech exposure jumping to the 99th percentile of historic readings, per Goldman Sachs Group data.
See also: Unveiling value opportunities in energy, healthcare and technology
Nothing has been able to stop the AI fervour. Not frothy valuations. Not the drama at Microsoft Corp-backed OpenAI. Not even fears that the newfangled tech won’t live up to the hype. All told, the seven largest tech firms — from Microsoft to Nvidia Corp. — have been responsible for an astonishing 65% of the S&P 500’s rally this year through Wednesday.
That’s been a boon for the likes of Katam Hill LLC’s Adam Gold, who elevated Nvidia to his highest-conviction pick one year ago in the grip of the stock’s biggest drawdown in 14 years. In turn, his Deep Growth Plus fund has gained 124% this year through November. — Elena Popina
Bonds: Ackman times the swings
The “Year of the Bond” may have misfired, but billionaire Bill Ackman still profited handsomely from what turned out instead to be a year of big swings in US Treasuries. In August, the Pershing Square Capital Management founder disclosed that he was betting against US 30-year bonds, citing elevated inflation and swelling government deficits. He got it right. By late October, yields on the benchmark Treasuries shot up past 5% to a 16-year high.
See also: Time to rethink traditional thinking in emerging markets
Ackman, who specializes in picking individual stocks, then announced that he unwound the macro trade just as yields peaked. It helped his flagship fund return 16% this year through November on a net basis. The billionaire investor exhibited similar prowess last year when he netted more than US$2 billion by betting interest rates would rise.
“Ackman did a great trade,” said Ed Yardeni, a longtime market veteran and founder of Yardeni Research. “For a short while there, he was the king of the bond vigilantes.” — Ye Xie
Regional Banks: Lenders’ loss is JPMorgan’s gain
The bank trade famously didn’t go to plan. The fastest monetary-tightening cycle in decades was supposed to juice interest income for lenders while continued economic expansion would buoy credit growth and investments. In fact, weeks before a handful of regional banks blew up, mutual funds were heavily overweight financial shares, according to Goldman Sachs.
Then the biggest tumult in the banking industry since the financial crisis left Wall Street reeling. Cue emergency actions, rescue efforts, a government intervention, a cascade of Congressional hearings and a handful of new rules for the industry.
Lifelines — like the one allowing banks to borrow from the Federal Reserve, which accepted bonds at par value as collateral — helped to contain the crisis. Meanwhile, JPMorgan Chase & Co's acquisition of failed lender First Republic Bank may prove to be one of Jamie Dimon's best deals in years.
The turmoil created an opportunity for Bill Nygren, who upped his stake in First Citizens Bank when the stock reeled in early March, before the news that it’s acquiring Silicon Valley Bank pushed it more than 50% higher in one day and by a similar clip in the ensuing months. Nygren’s Oakmark Select Fund gained 32% this year through November. — Elena Popina and Natalia Kniazhevich
China: The comeback that wasn’t
Almost everybody got China wrong. Goldman Sachs called for double-digit increases in both the MSCI China benchmark and the CSI 300 Index and Morgan Stanley turned overweight on Chinese stocks last December, joining prognosticators who expected the world’s second-largest economy and markets would get a lift as the government relaxed Covid-19 restrictions.
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Yet the reopening revival failed to materialize. Stocks are nowhere near pre-pandemic levels, and China’s property debt crisis swallowed even more companies. As of Dec. 20, the MSCI China Index was down more than 14% for the year.
Another US$71 billion was wiped out from the value of real estate stocks. Country Garden Holdings Co. — once China’s largest developer — plunged into default and China Evergrande Group struggled to avoid liquidation. Some Evergrande dollar bonds are now trading near 1 cent on the dollar, trapping investors in a bet that has seemingly lost all appeal.
Some savvy market watchers got it right. In January, Freya Beamish, chief economist and head of macro research at TS Lombard, made an out-of-consensus call: Sell China and buy US and the UK. While most had expected the Asian nation to recover from the pandemic and America to slip into a recession, she argued — correctly, as it turned out — that China would be “left high and dry on a debt mountain” while the US would benefit from a benign credit and capex cycle. — Tassia Sipahutar, Eliza Ronalds-Hannon, John Cheng and Ye Xie
India: The rally that was
“Buy India” is a popular Wall Street investment mantra these days, but back in January it was a very different story. Short-seller Hindenburg Research’s attack on Gautam Adani suddenly put the billionaire’s energy-to-ports empire into a tailspin – spurring a US$150 billion market loss – and raised broader fears about India’s credibility as a hot investment destination. The Supreme Court was forced to open an investigation into the famed industrialist’s projects in the world’s most populous nation, while Indian politicians quickly launched an overseas charm offensive.
Months later, Adani is enjoying something of a redemption in markets and the court of public opinion. Thanks to refinancing maneuvers that improved the group’s financial discipline, sanguine signals from policymakers and continued economic growth, Adani-linked shares and bonds are on a relief rally.
One clear winner: GQG Partners LLC’s Rajiv Jain. The emerging-market investor sank billions into the Adani group in March and again in August. Bloomberg News reported earlier this month that the value of its investments has risen to more than US$7 billion. Among other investors with well-timed trades: Qatar Investment Authority, which bought a 2.7% stake in Adani Green Energy Ltd. before a spirited price rebound. — Tassia Sipahutar
Japan: Land of the rising stocks
Japan, a perennial underperformer in world markets in recent years, emerged as an investor darling. Several factors combined to help boost the nation’s profile, from an upturn in economic growth to prospects for corporate reform and optimism that central bankers may finally be ready to abandon their rock-bottom interest-rate policy. China’s malaise and an endorsement from Warren Buffett didn’t hurt, either.
The legendary investor said in April that he was considering more Japanese investments after raising his stakes in the nation’s trading houses. Buffett’s Berkshire Hathaway Inc. then said in June it had further increased its stakes in five of Japan’s trading firms. The benchmark Topix index duly rose to a 33-year high.
Another successful trade was shorting Japanese government bonds, a formerly perilous strategy. Investors who have been betting on an end to the Bank of Japan’s ultra-loose monetary policy finally received some validation, with the BOJ loosening its vice-like grip on yields. That eventually sent the rate on the 10-year benchmark to an 11-year high before easing as monetary action proved less hawkish than expected. Still the bond bears, including RBC BlueBay Asset Management’s Mark Dowding, are clear winners on the year.
Those who expected a turnaround in the yen’s weakness haven’t been so fortunate. Barclays Plc and Nomura Holdings N33 Inc. forecast a 9% rally in the yen from last December’s levels and T. Rowe Price Group Inc. said there was scope for gains on a more hawkish Bank of Japan. Instead, the currency once again finds itself as the worst performer in Asia and among its Group-of-10 peers. On a brighter note, 2023 will be remembered as a year when the yen carry trade — borrowing the Japanese currency cheaply to buy currencies in higher-rate regimes such as Mexico and Brazil— paid off fabulously. — Tassia Sipahutar, Ruth Carson and Ye Xie
Bitcoin: Back from the dead
The crypto market — and its reputation — was left reeling after high-profile 2022 blowups, bankruptcies and overall bad behaviour. Bitcoin, the oldest and biggest digital currency, was nursing a loss of more than 60%, and the fallout from the collapse of Sam Bankman-Fried’s FTX exchange was still reverberating. Prospects for a Bitcoin revival — let alone a rally — seemed remote.
During the first half of the year, the market couldn’t manage more than a tepid recovery as trading evaporated and watchdogs let loose with a string of enforcement actions including lawsuits against market leaders Binance and Coinbase Global Inc. But starting in June, a sustained turnaround took hold after investment firms led by BlackRock filed a flurry of applications to list ETFs tracking the spot price of Bitcoin.
Optimism these ETFs will win approval and spur wider adoption of Bitcoin, combined with the legal resolution of some high-profile crypto cases and expectations for Fed rate cuts, helped turbocharge gains. The result: The cryptocurrency has more than doubled this year, making it one of the best performers in any market. Bitcoin is still far from its all-time high of US$69,000. But diehards like investors Cathie Wood and Anthony Scaramucci, who took their lumps during crypto’s crackup last year, are looking much better now. — Beth Williams and Vildana Hajric
Bed, Bath, & Beyond: Wall Street schools the meme crowd
Even as Bed Bath & Beyond spiralled toward an April bankruptcy, its stock price remained inexplicably high. It was a famous beneficiary of the pandemic-born meme-stock movement that continues to send a handful of companies’ shares soaring seemingly without rhyme or reason.
Bed Bath & Beyond’s advisers found a hedge fund in Hudson Bay Capital Management willing to buy gobs of new shares it issued at a discount. The idea: Buyers in the secondary market were willing to pay the sticker price.
The company raked in US$360 million this way, with Hudson Bay set up to earn a profit reselling each share it acquired. Yet much of the cash went straight to Bed Bath & Beyond’s group of bank lenders, led by JPMorgan, which had gotten on board with the deal as a last-gasp attempt to recover steep losses at the retailer. As for the investors who ended up with the stock? They ran out of luck when Bed Bath & Beyond ran out of time. — Eliza Ronalds-Hannon
ESG: Throwing in the towel
The alliance between progressives and hard-nosed capitalists in fueling the environmental, social and governance movement was never going to be easy. But this year, the ESG agenda took a big beating from all sides of the political aisle. The sector is raising questions from Republican lawmakers as well as watchdogs about its methodology, transparency and the potential for overstating the effectiveness of its stated goals via “greenwashing.” Some industry watchers have even gone as far as saying that ESG is headed for its “inevitable end game.”
The biggest casualties included a group of BlackRock exchange-traded funds as well as veteran hedge fund manager Jeff Ubben. BlackRock, the world’s largest asset manager, saw more than US$9 billion pulled from its biggest ESG-focused ETF, a record annual outflow, while Ubben abruptly closed his socially responsible investment firm Inclusive Capital Partners last month.
When Inclusive Capital opened three years ago, Ubben said his new venture would back companies focused on tackling problems ranging from environmental damage to food scarcity, and his goal was to raise US$8 billion for that purpose. In the end, the fund failed to come close to that target. Its closure coincides with one of the worst years for climate-related investing, as higher borrowing costs and supply-chain bottlenecks battered capital-intensive green companies.
Not everyone has soured on the sector. Analysts at JPMorgan Chase & Co wrote in a recent note to clients that equity strategies with an ESG tilt may well beat the broader market next year. That’s because these assets offer precisely the kind of defensive strategy investors will need to navigate a market cycle that’s likely to include a slowing economy, declining bond yields, easing inflation and a strengthening dollar. — Tim Quinson
Credit Suisse: Out of the AT1 ashes
The sudden death of Credit Suisse unexpectedly wiped out big-name holders of the firm’s riskiest bonds — eliciting a backlash from money managers and senior bankers warning the bank-funding market would fall into crisis.
That turned out to be melodramatic in hindsight after European policymakers engineered market calm in a matter of days. Yet the controversial decision by the Swiss regulator to liquidate holders of US$17 billion of so-called additional tier 1 securities — even while preserving some value for equity investors — left a long list of losers. The latter includes Pimco, Invesco and wealthy clients at Mitsubishi UFJ Financial Group Inc.
As ever, bargain-hunting funds spied opportunity. GoldenTree Asset Management bought roughly US$300 million of AT1 bonds at knockdown prices for a cool US$100 million profit. There were other fast-money trades that won big by picking over the corpse of Credit Suisse: Scooping up the bank's senior debt, which was changing hands at deep discounts in the days before the firm's demise. Alternative lender Marathon Asset Management LP, for one, bought US$150 million of those bonds for a quick US$30 million return. — Irene Garcia Perez
Discos: Obscure bonds win big
An obscure class of dollar bank bonds issued almost four decades ago delivered a windfall this year for investors, generating returns exceeding 50% in some cases for holders including James Carter, portfolio manager at Waverton Investment Management.
Issued in the 1980s to help pad bank capital, the securities — known as “discos” for discount perpetuals — had languished for years at deep discounts because of their meager coupons. Issuers had little incentive to redeem them beyond their loss of status as a regulatory cushion. But for investors willing to bet that they would one day be repaid in full, they offered the potential of a big payout.
That’s just what happened. Banks started facing increasing pressure from regulators, investors and lawyers to redeem them. And the end of Libor, the reference rate against which the securities were linked, was a catalyst, adding the additional headache of making coupon calculations practically impossible. Once HSBC Holdings Plc gave up and announced the repayment of its notes in April, several other banks followed.
After this year’s redemptions, the age of disco in finance is effectively over. — Tasos Vossos
