Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The risk vortex of crypto and bubble baskets
Peter Garnry
Chief Investment Strategist
Summary: Our Bubble Stocks and Crypto & Blockchain baskets are the two worst performing baskets this month as these pockets of the market are currently going through a big realignment in terms of expectations. The Fed's new objective of getting inflation under control will accelerate tapering and led to several rate hikes next year. Combined with a significant fiscal drag next year, US growth stocks will be hit by both lower growth and higher discount rate on cash flows, the worst of all combinations. This means that growth stocks that can show a credible upward sloping path on operating margin will fare much better whereas growth stocks that will fail in delivering higher operating margin will experience more trouble.
Friday’s price action was not pretty. Despite strong economic figures from the US the 10-year yield declined and normally that would have been a positive for technology stocks, but instead Nasdaq 100 continued lower with our Bubble Stocks and Crypto & Blockchain baskets leading the declines. On Saturday, Bitcoin was down as much as 21.2% at the lows adding to the woes of these pockets of the market. We know from surveys that there is a large overlap in exposure between investors in growth/bubble stocks and cryptocurrencies and that it is people under the age of 35 that dominates the exposure.
The Crypto & Blockchain basket (see composition below) is down 12.7% in December making it the worst performer and if we see the Fed getting ahead of the curve hiking rates three times next year then it could take more steam out of the crypto industry. The recent high profiled listing of Bakkt through a SPAC is a crypto related company that we will soon release a more thorough analysis of. As the table below also show analysts remain bullish on the industry with a median price target 77% above current prices. The key risk for bubble stocks and crypto related assets this week is the US inflation report on Friday which could accelerate the market’s expectations of tapering and rate hikes if inflationary pressures remain stubbornly high.
| Name | Segment | Market Cap (USD mn.) | Sales growth (%) | Diff to PT (%) | YTD return (%) | 5yr return |
| Coinbase Global Inc | Crypto exchange | 57,169 | 139.3 | 44.1 | NA | NA |
| Signature Bank/New York NY | Bank | 18,487 | 9.7 | 22.2 | 128.2 | 110.5 |
| MicroStrategy Inc | Investment firm | 6,896 | 5.1 | 38.5 | 62.4 | 218.0 |
| Galaxy Digital Holdings Ltd | Crypto services | 6,245 | NA | 83.5 | 128.3 | 1,213.0 |
| Silvergate Capital Corp | Bank | 4,364 | 61.3 | 32.1 | 121.0 | NA |
| Marathon Digital Holdings Inc | Crypto mining | 4,274 | 4,562.5 | 64.1 | 298.9 | 57.7 |
| Bakkt Holdings Inc (*) | Digital assets platform | 3,354 | NA | 114.9 | 29.3 | NA |
| Riot Blockchain Inc | Crypto mining | 3,339 | 1,497.4 | 90.3 | 68.6 | 659.6 |
| Northern Data AG | Infrastructure | 2,523 | 62.7 | 20.7 | 26.8 | NA |
| Voyager Digital Ltd | Crypto broker | 2,105 | 8,169.3 | 83.1 | 234.0 | NA |
| Monex Group Inc | Financial institution | 1,827 | 75.3 | 50.4 | 111.2 | 182.7 |
| Hut 8 Mining Corp | Crypto mining | 1,553 | 203.9 | 102.8 | 241.8 | 352.1 |
| Hive Blockchain Technologies Ltd | Crypto mining | 1,216 | 395.3 | NA | 67.4 | 3,900.0 |
| Bitfarms Ltd/Canada | Crypto mining | 1,194 | 7.0 | 57.0 | 220.0 | NA |
| Canaan Inc | Infrastructure | 1,040 | 225.5 | NA | 2.2 | NA |
| Stronghold Digital Mining Inc (*) | Crypto mining | 872 | NA | 132.3 | NA | NA |
| Argo Blockchain PLC | Crypto mining | 690 | 131.5 | 127.5 | 236.4 | NA |
| Coinshares International Ltd (*) | Digital asset management | 586 | NA | -7.3 | NA | NA |
| Bit Digital Inc | Crypto mining | 571 | NA | 69.9 | -62.4 | NA |
| Bitcoin Group SE | Crypto broker | 236 | 138.7 | 187.4 | -41.8 | 626.8 |
| DMG Blockchain Solutions Inc | Investment firm | 128 | 2.7 | 104.1 | 58.1 | 1,533.3 |
| Digihost Technology Inc | Crypto mining | 118 | NA | NA | 100.7 | NA |
| Taal Distributed Information Technologies Inc | Blockchain platform | 105 | NA | 139.5 | 49.0 | NA |
| Future FinTech Group Inc | Blockchain e-commerce | 85 | 2,555.0 | NA | -35.1 | -83.6 |
| Quickbit EU AB | Crypto payment services | 59 | -27.2 | NA | -18.1 | NA |
| Safello Group AB | Crypto broker | 17 | NA | NA | NA | NA |
| Aggregate / median | 119,055 | 135.1 | 76.5 | 68.0 | 352.1 |
* Added to theme basket on 29 October 2021
** Infrastructure segment means physical computing applications for crypto mining
Growth stocks have a profitability problem more than a growth problem
The selloff in growth stocks have many liquidity and technical characteristics, and the recent shift by the Fed to focus on getting inflation down is beacon of what to come. The Fed will accelerate its tapering of bond purchases and move more quickly on interest rates which means that the discount rate will go up while growth might face headwinds from higher interest rates and a fiscal drag (the fiscal deficit will shrink in 2022). This is a double whammy for growth stocks.
DocuSign’s Q3 earnings release was portrayed as a problem of revenue growth but if you model the company’s shareholder value then you will see that the more sensitive parameter to its implied expectations is its future operating margin. While DocuSign lifted its operating margin to 3.1% for the quarter up from 0.5% in Q2 and -5.2% a year ago, it was still below expectations and that extends the trajectory for improving the operating margin and thus lowers the value of the company. Many growth companies will not have growth trajectories that will differ much from what is implied in current market values, and a downside miss is definitely not the biggest downside trigger on market value. The reality is that growth stocks are priced for high growth and then a hockey stick on operating margin, but if that hockey stick is pushed further out then it has a big impact on market value. The next year will separate growth stocks into two camp. Those that can deliver on expanding their operating margin and those that will fail to do that.Latest Market Insights
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