26 January 2020
The valuation of tech stocks has become overly based on momentum in recent years. Photo: Reuters
The valuation of tech stocks has become overly based on momentum in recent years. Photo: Reuters

Will capital markets stay volatile in Year of the Pig?

It’s fair to say 2018 was a turbulent year for markets. Volatility became a watchword as US monetary conditions tightened, the Trump-induced trade war erupted, and Big Tech came under the regulatory spotlight. Indeed, across traditional and crypto assets, markets haven’t seen this level of sustained volatility since the financial crisis.

Many investors are now asking: What does the new year have in store for them? How will the Year of the Pig affect their performance and fortunes? The early days of trading in 2019 have suggested some of last year’s volatility could continue, yet other early signs are pointing to upward swings in markets like crypto.

Yes, things have been volatile, but volatility can also bring opportunity, especially at the levels we’re seeing now.

With the exception of a few months in the middle of the year, 2018 has been incredibly volatile and 2019 has started out with a bang. The slowdown we are seeing in China’s economy coupled with increased uncertainty around Brexit will only continue to drive this trend.

Stock markets: short-term volatility or long-term stability?

The FTSE 100 tumbled 12.5 percent in 2018 – its biggest fall in a decade. The Dow and S&P 500 experienced their worst December performance since 1931. The conclusion many economists are coming to has been to call the end of one of the longest market bull runs we’ve seen in decades.

This has caused investors, including those in Asia who have become accustomed to steady gains, to rethink their strategy.

Volatility will likely remain a strong theme in 2019 – at least in the first half of the year. Many assets were overpriced previously, and a market correction, once complete, should enable investors to enter the market at a more reasonable price.

Factors with the strongest potential to move stocks in 2019 – and that should be watched – will include the threat of an international trade war, an economic slowdown in China, tightening monetary policy from the world’s central banks, and the inevitable fallout from Brexit. 

If these issues are resolved within the next few months, volatility may well recede, creating a clearer run for markets in the second half.

Tech stocks: further to fall or realignment complete?

Tech stocks, in particular, were hit hard in 2018. As Wall Street turned against the previously mighty FAANGs (Facebook, Apple, Amazon, Netflix and Google/Alphabet), roughly US$1 trillion was wiped off their combined market cap. BAT (Baidu, Alibaba, Tencent) shares also plummeted last year amid the US-China trade tensions. It’s fair to say some investors were caught off guard.

The valuation of tech stocks in particular had become overly based on momentum in recent years.

A market correction shows investors are reconsidering the fundamentals that underlie tech stocks, and such correction presents an opportunity for savvy investors in 2019 and beyond.

This year is likely to see this price realignment completed, likely offering potential opportunities and more price stability before too long.

Crypto assets: end of the bear market or continued slide?

Crypto assets began last year chasing the highs of 2017. Yet a bear market quickly took hold, with many cryptos falling around 80 percent in value across the year. As with tech stocks, however, the bull run of 2017 was based on momentum, not value.

Going into 2019, crypto assets are still trying to find a bottom. However, it is important to look beyond price alone in this nascent market.

The fundamentals and development of the underlying technology will remain strong. As a result, investors who best understand the technology that underpins assets like bitcoin and XRP have remained in the market.

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Senior analyst at eToro