Trading and brokerage activity witnessed a phenomenal increase during the coronavirus pandemic in the calendar year of 2020. Investments in equities, gold, Sukuk and cryptocurrencies gained significant momentum. The COVID-19 lockdowns led to a significant decline in global asset prices in March 2020. Since these record-low levels, most of the asset prices have recovered significantly. Investors sought refuge in the US dollar during the meltdown in asset prices and have gradually diversified their portfolio to include not only gold — considered as a traditional safe haven asset, which surprisingly decreased in price along with global equities in March 2020 — but also cryptocurrencies that are gradually being accepted as an alternative asset class for diversification of portfolio risk with significant advantages when compared to traditional physical assets. Shariah compliant instruments also gained significant interest due to better risk management principles and lesser volatility.
Review of 2020
Based on the latest available Futures Industry Association statistics, the trading volume of futures and options contracts on international exchanges across all asset classes increased from 25.8 billion contracts (January–September 2019) to 33.7 billion contracts (January–September 2020) — a record increase of 30.3%. Remarkably, the total trading volume in the period from January to September 2020 is already at 97.7% of the total trading volume for the entire previous calendar year of 2019 — this is indicative of the extent of volatility in asset prices attracting traders and investors. The major contributors include precious metals (124.1%), equity indices (108.7%) and individual equities (109.5%) as well as agricultural commodities (102%).
The significant increase in trading volume is primarily due to the momentum provided by ‘Robin Hood’ traders who are primarily investing in small and mid-cap stocks. This trend is seen in developed markets such as the US where millions of new trading accounts have been opened by Generation Z and millennials to take advantage of the decrease in stock prices due to the pandemic.
The spot trading volume of cryptocurrencies in the first quarter (Q1) of 2020 was US$6.6 trillion — an over 300% increase from US$1.6 trillion during Q1 2019. In Q2 2020, trading volume decreased to US$5.4 trillion as compared with Q1 2020, although this was an over 200% increase over Q1 2019. The trading volume of CME bitcoin futures increased to 1.58 million contracts in the January to September 2020 period from 1.3 million contracts in the same period during the previous year — an increase of 21.53%.
Cryptocurrency prices have been volatile since March 2020 due to the pandemic in line with other asset prices, thereby leading to an increasing trading volume in bitcoin derivatives used for hedging price risks. Recently, several positive opinions have been given regarding cryptocurrencies being compliant with Islamic finance principles. Several scholars have supported cryptocurrencies (particularly bitcoin) as a medium of exchange, hence permissible under Shariah guidelines.
Total Sukuk issuance in the January to September 2020 period reached US$130.5 billion as compared with US$127.3 billion for the same period during the previous year, based on reports from Refinitiv. GCC countries accounted for 41.3% of global Sukuk issued in 2020 as compared with 32.2% in the previous year due to the increasing requirement to fund the fiscal deficit because of low oil prices.
Decreasing interest rates by central banks have resulted in increasing bond prices during the last few months. Lower profit rates have also made it attractive for borrowers to issue Sukuk at a much lower cost of capital. Fixed income securities have provided excellent returns for investors in the previous year. An extended period of low interest rates is expected to cap price gains in the fixed income securities markets.
Preview of 2021
The outcome of the US presidential elections and the mass availability of a vaccine for COVID-19 are the primary drivers for determining the momentum and direction of the global economy, trade flows and recovery of asset prices in 2021 and beyond. Markets are expected to remain volatile due to the higher levels of uncertainty of these events. Investors are expected to flock to safe haven assets and Shariah compliant instruments due to increasing uncertainty in global markets amid the pandemic. Property prices are expected to recover gradually which can result in increased demand for real estate-backed Islamic finance products.
Conclusion
The trading and brokerage industry has witnessed a remarkable rebirth in terms of volume and activity, largely due to ‘Robin Hood’ traders emerging as a significant factor for driving price volatility. With investors confined to their homes and having nowhere to splurge their savings, investments in equities, cryptocurrencies and gold have skyrocketed in 2020. This trend is expected to continue in the years ahead due to increased volatility in asset prices. With the lessons learned from the crisis caused by the pandemic, the principles of Islamic finance will gain wider acceptability to secure investments and increase the saving habit.
Arshad Khan is the co-founder and CEO of Arabian Bourse. He can be contacted at [email protected]