Wednesday, 9 September 2020

 

The wider risks in SoftBank’s US tech bet

Masayoshi Son, the Japanese entrepreneur behind SoftBank
Masayoshi Son, the Japanese entrepreneur behind SoftBank © Alessandro Di Ciommo/NurPhoto/Getty

There are few business people who profess to have a plan for the next three years, let alone the next 300. Masayoshi Son, the Japanese entrepreneur behind SoftBank, wants his company to last that long, a goal that is meant to underpin the investments made by his $100bn Vision Fund. So the unmasking of SoftBank as the mystery “whale” whose options trading appears to have helped drive US technology stocks to record highs is a surprise — this type of trading appears at odds with the self-professed strategic nature of SoftBank’s investments. The revelation has, rightly, fuelled concerns that far from acting like a visionary technology investor, the group is behaving like a hedge fund

Whatever the exact details of SoftBank’s equity derivatives trade, the key question is whether the wider market cares. The answer is yes. Aside from the general curiosity — and sometimes mockery — that SoftBank attracts in the industry, investors and regulators should be alert to the consequences of one large, determined investor being able — at least in part — to influence the world’s largest, most liquid and most scrutinised stock market. 

Even before the identification of SoftBank, there were concerns that the US market was defying fundamentals, and that the one-sided rally in US technology stocks was unsustainable. Trading volumes on Nasdaq, where most of the big tech stocks are listed, are double what they were before the pandemic. Monetary stimulus by central banks in response to the pandemic have helped to propel equity markets higher. The retail trading boom, as day traders have turned to online trading platforms such as Robinhood, has also driven much of the activity, both in equities and derivatives. 

This surge of activity in the options markets is what makes some investors nervous. Financial institutions, advisers and regulators should be alert to the dangers of unsophisticated investors putting their money — or, even worse, borrowed money — to invest in higher-risk trades such as derivatives. In the event of a downturn, there is a possibility that some investors will lose their shirts, leading to real economic pain just as the downturn caused by the coronavirus pandemic bites.

In the case of SoftBank, its heavy bet on derivatives has done little to damp fears that the group has lost its strategic focus — even if it had already announced it would be setting up an asset management unit for public investments. It bears remembering that Japan’s corporate history is peppered with examples of companies and retail investors betting heavily on derivatives and getting burnt.

Many companies’ problems also often start when they have an excess of funds to deploy; the ill-fated foray of Germany’s Landesbanken into US subprime mortgages was triggered, in part, by a search for ways to invest a cash surplus. In the case of SoftBank, its recent tech investments were partly funded by cash from its $41bn asset disposal programme.

Some investors are already fearful of a market crash. Coronavirus looked like it had decisively ended the American equity market’s record bull run; its Lazarus-like revival in the past few months has only heightened the air of unreality. Previous market tumbles have normally had a tipping point, however small relative to the correction that followed. The recent drop in the valuations of tech stocks may have been enough to take some of the heat out of the market for now but a concern must be that SoftBank could be the snowflake that starts the avalanche.

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