Asian Investors Take on Alarming Risk

I said ahead of Nvidia  (NVDA)  earnings last week that Asian markets were jittery, poised to sell off on any slight disappointment. The sudden turnaround in the market last Thursday was remarkable — both the Dow and Nasdaq swung by more than 1,000 points — but does indicate how delicately poised stocks are currently positioned.

We’ve also seen intense volatility in Asian tech stocks, particularly those related to the Artificial Intelligence (AI) plays and the semiconductor sector.

And, as I explained on Tuesday’s Money Talk podcast, I think investors are still looking for excuses to sell. You can find the link to the episode here, with host Peter Lewis also compiling a very handy (free) daily newsletter of market-moving news.

SoftBank Sells Down Hard

Wednesday is a bit of a reprieve, but the strong volatility continues. SoftBank Group (SFTBY) (T:9984) shares jumped 5.65% in Tokyo, essentially a rebound session after they sold down hard the last couple of trading days.

SoftBank shares are still down massively this month, posting a drop of 39.9% in November. The venture-capital investor has sold out its US$5.8 billion stake in Nvidia — but, as I explained in my column on that share sale, only so that it can fund investment elsewhere in the AI universe.

That is a course that investors have rewarded handsomely. The stock shot up 44.8% in October, let’s not forget, and is still up 54.6% in the second half of the year. Despite November’s tech selloff, they’re also 76.1% higher year to date.

Bitcoin-Induced Selling

What explains the volatility? Well, I think we have AI perma-bulls in one camp, cheering any good tech news, and buying tech stocks on the dip.

But there’s a rising number of AI bears, with Peter Thiel’s hedge fund selling its entire Nvidia holding in Q3. And we have Michael Burry of The Big Short fame taking bearish put options on NVDA as well as Palantir Technologies  (PLTR) , even comparing Nvidia today to Cisco Systems  (CSCO) , which briefly became the world’s most-valuable company during the dot-com bubble. Then promptly lost 80% of that value.

When stocks move lower, I think we also get a lot of forced selling thanks to the increased leverage many investors are taking. Let’s not forget that last Thursday’s volatility came on a day when Bitcoin broke below US$90,000 to sink to its lowest levels since April. Many Bitcoin investors are levered to the hilt, magnifying forced selling.

Last Thursday, the delayed jobs report showed a solid pace of hiring with 119,000 jobs added in September. That briefly lowered the odds of a U.S. Federal Reserve interest-rate cut in December. It was that event plus Bitcoin’s decline that prompted the sudden reverse.

Asian Clients Taking 'Crazy Leverage'

Asian investors are also willing to take on more risk.

“Investors in Asia behave differently,” David Friedland, the managing director for the Asia Pacific region at Interactive Brokers, tells me in an interview. “They have a higher risk tolerance.”

Mainland China investors have long been known for their willingness to take on risk. Many are momentum traders looking to turn a quick gain. That pattern is only intensifying.

Some clients are taking “crazy leverage,” Friedland notes. The risk-assessment tools at Interactive Brokers flagged one client with a “nine-figure account” who had strayed outside the brokerage’s risk boundaries.

“We know the risk in real time, and we have to protect ourselves from a 40% move,” Friedland explains.

That led to a call to the client, explaining that if the market drops 10%, the client would lose 80% of his portfolio. But that was fine by the client.

“I made my first HK$1 million, then I made HK$100 million,” the client said. “If I lose HK$99 million, I’m still ahead!”

FOMO Carries the Day

Traditional investors would certainly be happy with a 15% to 19% annual return, with the portfolio structured to preserve capital in the face of a market crash.

“After Covid, after the introduction of crypto, they’re not happy unless they’re getting a 25% to 30% return,” Friedland explains.

Brokerages have “gamified investing for a younger mentality,” he adds. There’s a strong Fear Of Missing Out, or FOMO, too.

“I see more active trading,” Friedland says. “The flipside is that investors have more knowledge than we’ve ever had.”

Whether it’s FOMO, the thrill of the chase, or those old market friends who walk hand in hand, Greed and Fear, it is crowding investors into a handful of plays.

25 Top Tickers

I get a report on the 25 tickers that are trading most actively on the Interactive Brokers platform worldwide. It’s a snapshot of what retail investors are looking to trade.

For Tuesday, the only Asia Pacific ticker on the list is the Australian data-center operator Iren  (IREN) . It, too, has taken a beating in November, down 22.0%.

But that’s also after it has quadrupled this year. Like SoftBank, all the action has come in the second half of the year, pushing the stock up 225.0% since the end of June.

Iren is both a Bitcoin and an AI play, since its data centers are used to mine Bitcoin as well as run AI functions and power the cloud. The company is based in Sydney but operates three data centers in Canada, and one in Texas, with another Texas operation under construction.

Steve Sosnick, the chief strategist at Interactive Brokers, also attributes last Thursday’s massive turnaround to the selloff in Bitcoin. He notes in a post covering last week’s sudden turnaround that “market psychology has become quite brittle,” and Bitcoin is one of the key indicators that can puncture confidence.

Bitcoin and Leverage ETFs

Strategy Inc.  (MSTR) , seen as a Bitcoin proxy thanks to its US$60 billion or so that it holds in the currency, has also been highly active among IB traders. So too is the iShares Bitcoin Trust ETF  (IBIT) .

We’re also seeing intense interest among retail investors in the kind of leveraged ETFs that have proved so popular in South Korea. Of the 19 most common ETFs traded in Korea, for instance, 12 of them are leveraged or inverse funds.

So we’re seeing heavy trading in the ProShares UltraPro QQQ ETF (TQQQ), as well as the Direxion Daily Semiconductor Bull 3X shares (SOXL). These triple-leverage ETFs are exceptionally risky, rewarding speculators handsomely if they’re moving in your favor but punishing you with triple the losses of the “regular” Nasdaq 100 or semiconductor stocks if they turn on you.

With Asian investors seeking out exactly that kind of risk in growing numbers, we’re going to see sharp volatility surrounding AI and semiconductor stocks, should the “AI story” continue to encounter skepticism.

The end of the year is normally a strong period for markets. But I expect questions surrounding AI profitability, and discernment between winners and losers in that space, to continue to mount, producing sharp sell-downs when corrections do come.

At the time of publication, McMillan was long NVDA.