Friday27 March 2020 ★ FINANCIAL TIMES 9
M A R K E T S & I N V E ST I N G
E M I KO T E R A ZO N O
Consumers fearful of contracting
coronavirus have been boosting their
immune systems the old-fashioned
way — by loading up on orange juice.
Frozen concentrated orange juice,
traded in New York, is the best
performing of all commodities this year,
according to Bloomberg data, rising 25
per cent to $1.214 a pound since the start
of January.
US shoppers have rushed to stock up
on thestaple, analysts said, as fears over
labour shortages in factories and trans-
portation have also given prices a lift.
“There is plenty of orange juice
around but it’s a bit like toilet paper —
there’s no shortage but people have
been rushing to buy it,” said Neil Murray
at IHS Markit’s Agribusiness Intelli-
gence.
Jack Scoville at commodity brokers
Price Futures Group in Chicago said
prices had been boosted by worries over
supply-chain glitches.
“Traders are wondering if workers are
around to man the plants in Florida and
in Brazil,” he said. “In addition, there are
not enough tankers or containers
around for shipping the product to buy-
ers.”
The jump in orange juice prices comes
even as the market has been languishing
amid a rise in production in Brazil, the
largest producer and exporter, and Flor-
ida, said IHS.
On the demand side, too, consump-
tion has been waning over the past few
years as shoppers switch to water and
other drinks with lower sugar contents.
Arabica coffee, the higher grade bean,
has also experienced a sharp upswing,up 24 per cent from a week ago to $1.
a pound in New York.
The commodity had sold off during
the early stages of the viral outbreak on
concerns of falling demand in cafés and
coffee chains but analysts said the focus
had turned to securing supplies amid
rising logistical risks.
“Everyone in the supply chain is
trying to get their hands on stock,” said
Carlos Mera, analyst at Rabobank,
noting strong demand from importers
and roasters.
On the retail end, too, demand has
been solid. In the UK, for example,
consumers have turned to fuelling their
caffeine addiction by buying coffee and
beans from retailers. In the week to
March 14, retail sales were up 30 per
cent compared with the previous year
and up 8 per cent over the previous
week, according to Nielsen data.
Wholesale coffee buyers have
been spooked by calls among port work-
ers in Brazil, the largest producer and
exporter of coffee beans, to close ports.
While this has yet to materialise,
companies and importers were stocking
up in case the flow of coffee dries up,
said analysts.Commodities
Orange juice price performance pips all
rivals as consumers dash for vitamins
L E O L E W I S— TO K YOMarket turbulence, an old investment
proverb and orders to work from home
due to coronavirus have lured record
numbers of Japanese people to open
online trading accounts and dive into
the stock market — in many cases for
the first time.The surge of new accounts in March —
four times the average monthly rate in
the case of Matsui Securities — has
brought as many as 250,000 new inves-
tors into the market across Japan’s five
largest online trading houses. Most of
the new account holders, said brokers,
are aged between 30 and 50 years old.
The temptation of bargain prices in
Japan’s stock market — the benchmark
Topix is down 20 per cent this year —
has also prompted existing online bro-
kerage customers to revive dormant
accounts, triggering a deluge of phone
calls to helplines from customers asking
how to reset long-forgotten passwords.
SBI, Japan’s largest online brokerage,
said it expected new accounts to hit a
record high of between 120,000 and
130,000 in March — or several times the
monthly average.The sharp increase in new accounts,
said analysts, was testament to Japanese
retail investors’ penchant for contrarian
trades. In the first two weeks of March,
foreign funds sold a net ¥833bn
($7.5bn) of Japanese shares but individ-
uals bought a net ¥726bn.
Mizuho Securities strategist Masa-
toshi Kikuchi said a number of market
adages had reasserted themselves dur-ing the volatility caused by the corona-
virus pandemic.
One belief among retail investors in
Japan is that amateurs can beat profes-
sionals over a longer timeframe. That
made them natural buyers during the
huge falls earlier in March.
“Japanese individual investors have
been markedly contrarian, having not
believed in the ongoing bull market for
some time,” said Mr Kikuchi.
New account op enings at AUKabu.com were about twice the average
pace during March, said a spokesman.
Rakuten Securities, Japan’s second-
largest online brokerage with 4m cus-
tomers, expected a record 130,000 new
sign-ups in March.
Oki Matsumoto, chief executive of
Monex, said the online trading platform
expected about 8,000 new accounts will
have been opened by the end of March
— roughly twice the average monthly
pace. It has about 2maccounts but only
half of them trade regularly.
“Because the market dropped off a
lot, there were a lot of people who saw it
as an opportunity,” said Mr Mat-
sumoto. “A lot of them were new but
some of them were people who had been
out of the market for a long time and
were coming back.”
Over the past two weeks, retail inves-
tors’ stock trading volumes have been
about two or three times higher than
average, according to three brokerages.
Local investors in recent weeks have
also piled into so-called“hibernation”
stocks, which reflects a theory that the
spread of the virus may convince corpo-
rate Japan to make its structures more
accommodating to telecommuting.Equities
Trading turbulence entices Japanese
retail investors to dive into stocks
‘Japanese investors have
been markedly contrarian,
having not believed inthe ongoing bull market’
Shoppers have rushed to stock up on
orange juice since the crisis startedFastFT
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ft.com/fastftJ O E R E N N I S O N
The financial storm unleashed by
coronavirus has ripped bond exchange
traded funds from their moorings, pro-
viding the first big test of a market that
has grown dramatically in recent years.
Investors have flocked into fixed
income ETFs, which sell shares under-
pinned by corporate debt to give simple,
speedy ways to bet on a market that can
otherwise be tricky to access and trade.
But a deep sell-off earlier this month
createdbig dislocations etween theb
prices of bond ETFs and the value of the
bonds behind them.
These discounts became so wide that
some predicted investors wouldlose
faith n the fund structure altogetheri
and dump their holdings — further
damaging debt market conditions.
Then, the US Federal Reserve stepped
in. On Monday, the central bank
announced that it would begin to buy
corporate debt to quell the crisis —
including bond ETFs. And itpicked
BlackRock, one of the biggest providers
in the $1.1tn market, to manage the
purchases. ETF prices surged.
So what went wrong?
Corporate bond prices tumbled in early
March but fixed income ETFs fell even
further, resulting in extraordinary
discrepancies between the price of ETFs
and their assets.
For example, the price of BlackRock’s
$35bn-in-assets investment grade bond
ETF — known by its ticker LQD — has
historically bounced around within 50
cents per share of its “net asset value”, or
the value of the bonds it holds.
But recently it slid to more than $6 per
share below its NAV, the biggest dis-
count since the depths of the 2008
financial crisis.
A host of other ETFs that track junk
bonds, municipal debt, bank loans and
even US government bonds have also
traded at extraordinary discounts to
their NAVs.
As markets rebounded on Monday
following the Fed’s move, the price of
LQD soared to more than $5 per share
above its NAV, the biggest premium
since the ETF’s creation in 2002. Others
mirrored the move.Why are big swings a problem?
ETFs are designed to mimic the markets
they claim to track. Some analysts and
investors argue that the product is
fundamentally flawed if it fails at that
basic task — and no longer accurately
reflects the movements of the underly-
ing securities.
The biggest fear is that this could
cause investors to lose trust in bond
ETFs entirely, pouring fuel on the fire of
a sell-off in the underlying market.What stops this from happening?
When ETF prices drift from the value ofthe underlying holdings, market
makers — known as “authorised
participants” in the industry jargon —
normally swoop in to close the gap by
creating or redeeming shares in the ETF.
Creation is when an AP buys bonds
and hands them over to the ETF pro-
vider in exchange for a set amount of
shares. Redemption is when it gives
back shares in exchange for the bonds.
In theory, the price of the fund and the
value of the debt it holds should be the
same. So, if the ETF value drops below
the value of the underlying bonds, APs
can buy the cheaper ETF shares and
exchange them for the underlying
bonds.
When conditions are reversed, they
can buy the cheaper underlying bonds
and turn them into ETF shares. Most of
the time, this arbitrage keeps an ETF’s
price and its NAV in line.So when prices diverge, which one
is correct?
Fund proponents say that, despite gaps
displayed on trading screens, the price
of the ETF is not higher or lower than
the true value of the debt. Instead, the
ETFs reflect the real value and it is the
bond market that is dysfunctional.“In our view, this is not an ETF
dynamic occurring right now but a bond
market dynamic and the ETF is showing
you in real time how conditions are
evolving,” said Steve Laipply, US head of
BlackRock’s iShares fixed income ETFs.
APs say that, if they were to redeem
shares and try to sell the bonds in the
market, the price they would get would
be the same as the ETF.
They argue that the prices reflected
by bond indices are inaccurate because
they have become stale, reflecting assets
that have seen little or no trading
activity.
“It’s a market structure problem,”
said Reggie Browne, a principal at GTS, a
market maker.
Investors complain that the ease of
trading debt has drastically deterio-
rated in the midst of rapid outflows
from bond funds.
Instead, investors have used ETFs to
conduct broad trading against the
index, making them a better gauge of
the “true” market.What happens next?
The Fed will buy investment grade cor-
porate bonds with a maturity of five
years or less. The central bank’s decision
to include ETFs in its purchases has
been taken as a nod to the products’
widespread use among fund managers.
It has also been seen as a potential
backdoor for the Fed to influence longer
dated corporate debt held by the ETFs —
extending its sway over borrowing costs.
Some investors say the medicine is
already working. LQD has taken inflows
of more than $1bn each day this week,
according to Bloomberg data, while its
price has rebounded.
ETFs are “likely moving faster than
corporate bonds”, said Viktor Hjort,
global head of credit strategy at BNP
Paribas. “I think we will start to see
some stability emerge.”US central bank’s decision to
purchase debt funds releases
pressure at a critical time
‘This is not
an ETFdynamic
occurringright now
but a bondmarket
dynamic’BlackRock has
been picked
by the Fed to
manage its bond
ETF buying
Gabriella Angotti-Jones/
BloombergFixed income. rading dislocationsT
Fed buying helps bond ETFs
rise to biggest challenge
P H I L I P STA F F O R D A N D TO M M Y
ST U B B I N GTO N— LO N D O N
R I C H A R D H E N D E R S O N— N E W YO R K
Global index providers have delayed
updates to some of the most important
stock and bond indices amid concern
that forcing investors to follow suit
could trigger fresh market turmoil.
S&P Dow Jones Indices, FTSE Russell
and ICE Data Services have all post-
poned updates to benchmarks, which
would normally be rebalanced at the
end of the month to reflect changing
market prices.
Analysts said index providers are
nervous about compelling index-track-
ing investors to buy or sell large quanti-
ties of bonds at a ime when the creditt
worthiness of many borrowers was
uncertain and prices were volatile.
“The securities moves this month
have been so extreme that they are
afraid a rebalancing will force trillions of
indexed and passive money to 'adjust'
their portfolios,” aid Jim Bianco ofs
Bianco Research.
FTSE Russell said it would postpone
the March month-end rebalances for its
monthly total return indices ut plansb
to resume the operation in April.
The provider, which is owned by the
London Stock Exchange Group, said it
would incorporate March’s turnover in
April’s numbers.
ICE Data Services said it would post-pone the regular month-end rebalanc-
ing of its bond indices, which was due to
take place on March 31 until the follow-
ing month. The delay applies to more
than 5,000 fixed income benchmarks
run by ICE, some in partnership with
Bank of America, which trackmore
than $77tn of debt around the world.
The decision was made “given the
continued disruption in the markets,
and after careful consideration of feed-
back received in response to our consul-
tation with stakeholders”, ICE said.
Earlier in the week, S&P said it would
postpone until the end of April the
March rebalancings for most of its S&P
and Dow Jones equity indices because of
market volatility.
The changes had been due to come
into effect before US markets opened on
Monday. Most of the quarterly index
rebalancings dueat the end of March
will be rescheduled until June, it said.
Peter Chatwell, head of multi-asset
strategy at Mizuho, said it looked like
index providers were aware that, if
institutions were forced to rebalance
their portfolios in illiquid markets,
passive funds would have to sell the
bonds which have just lost their
“investment grade” rating.
“In reality, however, this probably
means that the advantage is once again
with the active manager. Active money
can sell the downgraded bonds at their
discretion while passive managers will
be forced to postpone for a month,” he
said.Cross asset
Benchmark
index updates
delayed amid
turmoil fears
The decision was made
‘given continued disruption
in the markets and afterconsideration of feedback’
Gaps emerge between ETF prices and the value
of the assets they hold
BlackRock iShares LQD investment-grade bond exchange traded fund
( per share minus net asset value)Source: Bloomberg-
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MARCH 27 2020 Section:Markets Time: 3/202026/ - 18:19 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR , 9, 1