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The Japanese Softbank has staked $ 50 billion in US tech stocks. That boosted the titles, until they collapsed on Friday. Is there now the threat of a drastic stock market correction?
His company’s hedge agreements also caused his shares to collapse on Monday: Masayoshi Son, founder, main shareholder and director of Softbank.
Photo: Issei Kato (Reuters)
Significant price losses for US tech stocks on Thursday and Friday sparked riots. Shares of Apple fell nearly 8 percent in the two days, the Nasdaq 100 technology index by 6.4 percent and the US S & P500 stock index by 4.3 percent. The losses have fueled concerns about whether a drastic stock market correction will begin after huge price gains despite the recent crisis.
As the Anglo-Saxon media revealed over the weekend, the recent surge in tech stocks was due less to the investment behavior of the market as a whole, and more primarily to investments by Japanese private equity firm Softbank. The company has made big bets on companies like Apple, Amazon, Microsoft, and Netflix. For one thing, he acquired shares in these companies totaling about $ 4 billion in the spring. In addition, it subsequently bought the so-called call options for around another 4,000 million dollars, which are also denominated in these shares.
Call options purchased for $ 4 billion entitle the holder to purchase technology shares with a total value of 30 to 50 billion.
Call options are financial derivatives that cost a small premium relative to the share price and include the right to buy shares at a specified price until a specified time. If stock prices exceed this price set on the option and the premium paid for it, the option buyer makes a profit. But if the price remains lower, the options expire worthless after their expiration date.
The bet continues to pay off
According to various reports, the call options bought by Softbank for $ 4 billion entitle the holder to buy technology shares with a total value of $ 30 to 50 billion. The sellers of these options, generally investment banks, protect themselves, among other things, by buying the shares of the companies in question. But that makes their prices go up even more. So option purchases even more than outright stock purchases have caused a massive surge in tech stocks of late.
After the disclosures, Softbank’s shares on the Tokyo Stock Exchange came under massive pressure on Monday. They lost 7.2 percent, which equates to a market value of $ 9 billion. However, the holding company’s share has already increased by 33 percent in the current year. Additionally, insiders report that the bet on US tech stocks would still pay off for Softbank, despite the technology course correction, if the company traded options now. This could change if the stock price falls further in the US.
Observers justify the negative reaction of the Softbank stock market not only with the risk that the Japanese company has assumed with the commitment to the US technology sector. It is also important that its shareholders were surprised that the institute even got involved in such a deal.
The deciding factor will be how the US stock markets continue to evolve. Due to a holiday (Labor Day) they were closed on Mondays. As measured by the Nasdaq 100 index, technology stocks are still up more than 30 percent this year, even after last week’s correction. Most commenters have shown little concern so far. Rather, they spoke of a healthy development after the sharp increase in value of the last week, which is now explained by the actions of Softbank.
