MTTM Podcast Episode 472 – What to do in a stock market sell-off, share lending explained & too late to fix your energy?

Listen to Episode 472

In this week's podcast I discuss stock market sell-offs and how markets typically behave after a slump. Next, I explain what stock lending is, how it works and its potential impact on investors. Finally, Andy provides an update on the energy price cap and whether it is too late to fix your energy tariff before prices start rising.

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Podcast summary notes

Episode 472: Market Sell-Offs, Stock Lending explained, and the new Energy Price Cap

Market Sell-Offs and Recovery Patterns

In this episode, Damien revisits a comprehensive study he first conducted in 2015, which has now been updated to include 40 years of FTSE 100 daily traing data, stretching back to 1984.

One of the key insights from this research is that the strongest market rebounds often occur within a short period following the worst market days—typically within 6-7 trading days. This pattern suggests that selling investments during a downturn could lead to missing out on these critical recovery days, which can have a significant impact on long-term investment performance.

The discussion also highlights how different market crashes, such as the 2020 COVID-19 pandemic, the 2008 financial crisis, and the 2000 dot-com bubble, followed similar patterns of rapid declines followed by significant, though sometimes delayed, rebounds. Understanding these patterns can help investors stay calm during volatile periods and avoid making impulsive decisions that could hurt their portfolios in the long run.

Understanding Stock Lending

Stock lending is a practice that’s gaining more attention in the UK, but it’s something that many investors might not fully understand. In this segment, Damien breaks down how stock lending works, its benefits and the ethical concerns it raises.

At its core, stock lending involves the temporary transfer of shares from one party (often a large institutional investor or an investment platform) to another (usually a hedge fund or an investment bank). The borrowing party uses these shares to engage in short selling—a strategy where they sell the borrowed shares with the expectation of buying them back at a lower price, thereby making a profit.

For the lending party, stock lending is an opportunity to earn additional revenue. However, this practice isn’t without controversy. One of the primary ethical concerns is that it enables the borrower to bet against the very shares that the lender owns, potentially driving down the price of those shares. This conflict of interest can be particularly troubling for individual investors and pension fund members who may be unaware that their shares are being used in this way.

The discussion also covers how stock lending is becoming more common in the UK, with platforms like Freetrade offering users the option to lend out their shares. However, the returns from participating in stock lending as an individual investor are typically modest and there are potential downsides, such as losing the right to vote on shareholder resolutions and the risks associated with market manipulation by large players.

Energy Price Cap Updates and What They Mean for You

The UK energy market has been in flux, with significant changes to the energy price cap affecting millions of households. In this episode, we discuss the latest increase to the energy price cap, which is set to rise to £1,717 per year for the average dual fuel household from October 2024.

The energy price cap is a limit set by OFGEM on the maximum amount that energy suppliers can charge consumers on default or variable tariffs. This cap is intended to protect consumers from sudden spikes in energy prices, but it also means that as wholesale energy prices rise, so too does the cap.

The discussion includes an analysis of whether it’s still a good time to lock in a fixed-rate energy tariff, considering the recent and expected future increases in the price cap. While some consumers might feel that they’ve missed the boat on the best fixed-rate deals, the podcast highlights that there are still options available that could save money compared to the variable rates dictated by the new cap.

We also explore some of the best current deals on the market, including tracker energy tariffs that promise to stay below the price cap and fixed-rate deals that offer protection against further price increases. Additionally, the podcast touches on the importance of regularly reviewing your energy tariff, especially as we head into the colder months when energy usage typically increases.

Multiple-Choice Questions

Test yourself on the topics covered in this week's podcast.

1. Over the last 40 years, how soon after the worst tradings days have the best trading days occured on the FTSE 100?
   • A) 2-3 days
   • B) 6-7 days
   • C) 10-12 days
   • D) 15-18 days
2. Which event caused the fastest bear market on record?
   • A) The dot-com bubble bursting
   • B) The global financial crisis
   • C) The COVID-19 pandemic
   • D) Brexit
3. What is the primary purpose of stock lending by investment platforms?
   • A) To increase the number of shares in circulation
   • B) To generate extra revenue by lending shares to third parties
   • C) To decrease the stock market volatility
   • D) To help retail investors buy more shares
4. What is the potential ethical issue associated with stock lending?
   • A) It increases market prices unfairly
   • B) It allows for unsanctioned trading
   • C) It enables short selling, which can push down share prices
   • D) It may increase transaction fees for the lender
5. On 1st October the energy price cap is increasing from £1,568 to what?
   • A) £1,678
   • B) £1,717
   • C) £1,771
   • D) £1,832

Answers

1. B) 6-7 days
2. C) The COVID-19 pandemic
3. B) To generate extra revenue by lending shares to third parties
4. C) It enables short selling, which can push down share prices
5. B) £1,717

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