Hi everyone, I'm Gareth, a new member of the Stockopedia content bureau! I'll be providing short and long-form pieces on prevalent investing themes, complementing the amazing analysis from Graham and the team.
This article follows on from our recent webinar, 10 Results Seasons Opportunities, which analysed the strongest themes and shares in the current market. Didn’t catch it live? You can watch the full replay here.
When markets get choppy, it’s easy to get fixated on the direction of the headwinds.
Which companies are at risk? Which positions should I unwind?
But that’s first-order thinking. Derisking can be wise, but it also leaves us easily wrong-footed by capricious politicians and agenda-led reporters.
Take the current crisis. A quick sentiment analysis shows that since the Iran conflict erupted on Feb. 28, there have been eight significant ‘mood swings’ in the global news media about the prospects of a deal.
Both sides optimistic > Claim contradicted > A partial deal is announced… the market has turned on each flip and flop.
So try this rule instead
Instead of thinking about who wins and who loses, why not ask ‘who gets paid either way?’
Lots of companies benefit from volatility itself. Take brokers. Investors tend to trade furiously in choppy times, looking for short-term price movements. And brokers don't need markets to go up or down, they just need them to move. The more uncertain the world becomes, the more activity they can profit from.
The current climate throws up several specific examples.
- The interdealer brokers that match buyers and sellers of complex instruments.
- The transport and logistics firms that get paid on rerouted journeys.
- The insolvency and restructuring advisors for whom distress is a business model.
The choppier the world gets, the more indispensable each of these business becomes.
A case study: spread-betting companies
Spread betting is arguably the clearest example of an industry that benefits on volatility.
Spread betting companies make their revenue from spreads, commissions and financing fees. Volume is everything. And volatility drives volume.
Let’s consider three UK stocks in this space.
- IG Group (LON: IGG)
- CMC Markets (LON: CMCX).
- Plus500 (LON: PLUS).
The scale of these companies is very different. IG’s market cap is nearly five times that of CMC Markets. And their operating models are different too.
IG tends…
