Trading and brokerage activity continued the trend of increased volumes in 2021, as economic uncertainty caused by the continuation of the COVID-19 pandemic and expansionary monetary policy pursued by leading global central banks continued to affect global markets. As a result, valuations and trading volumes in equity, commodities, crypto [cryptocurrency] and derivatives markets increased.
Despite ongoing dislocations in labor markets, industrial supply chains and periods of COVID-19 resurgence (such as the current rise in cases related to the Omicron variant), many asset classes have seen precipitous valuation increases, many reaching all-time highs in 2021.
Investors generally pursued a ‘risk-on’ mentality during the year, benefiting from the considerable levels of quantitative easing provided by global central banks with the intention to support global markets. The main beneficiaries of this were technology stocks and cryptos.
Shariah compliant products also benefited from this increased investor activity, with many new and innovative products coming to market, particularly in the crypto sector.
Review of 2021
According to Tradeweb, a leading global operator of electronic marketplaces for rates, credit, equities and money markets, their total reported trading volume for January–November 2021 was US$217 trillion, with an average monthly year-on-year (y-o-y) increase of 22.6%.
The asset classes that experienced the largest y-o-y growth were US government bonds which were up 44.3%, swaps/swaptions were up 44.9% and rates derivatives were up 76.7% y-o-y. Considering the increasing inflationary concerns that have been percolating through the global investor zeitgeist, the increases in some of these interest rate sensitive asset classes should not be surprising.
Another important trend during the course of 2021 was the continuation of an increasing number of retail traders entering the market. Trading apps such as Robin Hood continued to onboard retail users at an astonishing rate, many of whom had never traded before.
Boosted by the distribution of stimulus cheques in the US, Europe and other major economies, Robin Hood saw its user base grow by 73% from 13 million in 2020 to 22.5 million in 2021. This growth in retail traders contributed to the increased trading volumes and volatility in ‘story stocks’, such as Tesla, GameStop and AMC.
GameStop and AMC were the central figures in perhaps the global markets and trading story of the year in January–February 2021, whereby a sophisticated group of retail traders formulated a trading strategy on a discussion group on Reddit called r/WallStreetBets.
Their plan was to buy GameStop and AMC shares and call options, with a view to driving the price up and liquidating the leveraged short positions of several hedge funds that had amassed huge short positions against the companies, betting on their collapse.
The total crypto spot trading volume for 2021 (up to the 15th December 2021) was US$14.27 trillion, an increase of 7.9 times from US$1.81 trillion in 2020. This astonishing rise has been partly due to the rise of corporate, institutional and sovereign investment in the asset class. MicroStrategy is the largest publicly traded holder of Bitcoin, with over 121,000 Bitcoins on its balance sheet for a total value of US$5.9 billion (as of the 21st Dec 2021).
Led by its visionary CEO, Michael Saylor, MicroStrategy has issued several rounds of corporate bonds with the sole intent to buy Bitcoin. Institutional investors have begun actively trading cryptos, such as Bank of America that has begun trading crypto futures.
Regarding crypto futures, the total trading volume up to the 21st December 2021 was US$21.78 trillion, an increase of 3.7 times from March–December 2020/2021. Given the intense volatility inherent to crypto markets, many traders routinely use derivatives contracts to hedge their spot positions, hence the large volumes of derivatives trading volume for a relatively young asset class.
Several highly respected Islamic scholars have come out in support of cryptos’ Shariah compliant features during the course of 2021, which is an important step in the further adoption of cryptos across the Muslim world.
Total Sukuk issuance continued its upward trajectory during the course of 2021, with global issuance reaching US$147 billion up to the third quarter (Q3) of 2021, up 7.2% from US$137 billion across the same period in the previous year, according to Refinitiv.
End-of-year projections are for total Sukuk issuance to reach US$180 billion and to reach US$290 billion in 2026, as GCC economies bounce back from the twin shocks of an oil price slump and the COVID-19 pandemic.
One of the main trends in the global Sukuk market has been the increasing traction gained by environment, social and governance (ESG) Sukuk, with 73.5% of respondents to a Refinitiv survey stating that ESG-related Sukuk, including green, sustainability and Waqf Sukuk, were gaining the most traction compared to other emerging trends. Cumulative ESG Sukuk issuance amounted to US$15 billion up to Q3 2021.
Preview of 2022
As global governments and corporations settle into a steadier post-pandemic modus operandi, the primary driver for determining the momentum and direction of the global economy, trade flows and asset valuations will be how global economies combat rising inflationary fears.
In the US, the Federal Open Market Committee projected three interest rate increases in 2022, as well as an accelerated tapering of its asset-purchasing program.
The European Central Bank also announced a tapering of its bond purchasing scheme; however, it has not yet announced interest rate increases, given the fragility of its post-pandemic recovery when compared with the US.
China is the outlier, announcing in December 2021 that it would cut interest rates for the first time in 20 months.
Furthermore, Chinese corporate debt (particularly among housebuilders) and its demographic challenges of an aging and reducing population pose a significant risk to interconnected global markets.
The trading and brokerage industry continues its staggering recovery following the onset of COVID-19 in 2020. All-time high valuations and trading volumes were achieved in equities and cryptos, as well as new entrants to global markets through channels such as retail-focused trading apps and innovative bond issuances bringing a new dynamic and vigor to global markets.
As these new and existing market participants continue to battle macroeconomic turbulence in the face of the evolution of the COVID-19 virus and rising inflation, further uncharted territory is expected to be entered into in 2022.
Under these uncertain conditions, the principles of Islamic finance of participating in secure investments will gain increasing pertinence and adoption.
This article is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated.