The impact of macroeconomic risks on capital markets | Opinion

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As an analyst with over five years of experience in the fintech and cryptocurrency industry, I can confidently say that macroeconomic conditions and geopolitical news indeed play a pivotal role in shaping the trajectory of both traditional markets and digital assets like cryptocurrencies.

According to Joe McCann, founder and CEO of Asymmetric, a firm specializing in crypto and web3 investments, similar to how macroeconomic circumstances and geopolitical events influence stocks and other investments, they also play a role in determining both short-term and long-term prices of cryptocurrencies. When these effects take place, there’s always the possibility of risk and potential gain.

As a researcher, I often find myself navigating the ever-changing landscape of macroeconomic factors such as interest rates, inflation, GDP, debt, unemployment, government policies, and international conflicts. These variables can create an unpredictable environment that breeds fear. Yet, it’s crucial to recognize these fluctuations as signs underscoring the importance of a diversified investment portfolio. Even in challenging times, there lies potential for savvy investors to capitalize on opportunities that emerge from market instabilities.

The current macroeconomic concerns

The overall economic conditions significantly influence how investors carry out their business. An investor’s success and financial health hinge on their quick comprehension and adaptability towards shifts in the broader economic landscape.

In recent times, the slow pace of economic advancement has significantly impacted both developed and underdeveloped economies worldwide. As of 2024, global economic expansion is reported at 3.1%, a figure that remains unchanged from the previous year but slightly surpasses the growth rate prior to the pandemic, which was 3.0%.

High interest rates persistently staying up, disputes escalating worldwide, a decrease in global trade, and an increase in natural disasters exacerbated by climate change are causing economic stagnation on a global scale. The situation seems to be divergent among countries, with many developed economies, such as China and Europe, experiencing slow growth, while the US is seeing some moderate growth. Because of the current high inflation rates across nations, stock markets like those in the U.S. and China are experiencing declines due to this global trend.

China’s fiscal stimulus plan

China plans to roll out an economic recovery plan by providing financial aid to revitalize its slowing economy. The national government aims to alleviate county governments’ debt issues, issue direct monetary assistance to low-income earners, support the ailing real estate sector, and replenish the capital of state-owned banks, as well as engage in other fiscal interventions.

China’s Ministry of Finance will hold a press conference on Saturday, October 12 to discuss fiscal policies intended to boost the economy.

A poll I conducted received nearly 7,000 votes within an hour before it was blocked by Weibo. It appears that the magnitude of the fiscal stimulus has become a topic of widespread public interest.

— Hao HONG 洪灝, CFA (@HAOHONG_CFA) October 11, 2024

These actions are what investors had earlier urged the government to implement. Their demands arose as China’s economy was faltering, grappling with inflation issues and attempting to boost consumer trust during a downturn in the property market.

Conversely, some Chinese investors question if the proposed fiscal stimulus package will promptly revitalize economic expansion to counteract economic downturn and high unemployment. They argue that lowering interest rates or injecting capital may not address the underlying issues.

It seems that these uncertainties are causing investors to shift their money towards non-traditional investments like digital currencies instead of Chinese stocks, which have experienced price drops. In just two weeks after China’s fiscal stimulus announcement, the price of Bitcoin (BTC) climbed back up above $65,000, suggesting that investors might prefer investing in virtual currencies over Chinese equities.

Investing in times of challenging macroeconomic conditions

Understanding the broader economic context can significantly influence an investor’s choice of investments. Different types of capital assets like stocks, bonds, property, raw materials, digital currencies react differently to economic changes. Therefore, it’s crucial to grasp how these assets react to macroeconomic shifts in order to manage portfolios more effectively and profitably.

Creating a well-balanced investment mix can be challenging due to reduced bond yields, limited profits in shares, increased similarities among asset classes, and heightened global risks.

Investing in cryptocurrencies could help establish a well-balanced, varied investment portfolio. Historically, digital currencies such as Bitcoin and alternative coins (altcoins) have yielded substantial profits (with high risks attached), while offering less volatility compared to conventional investments like stocks, bonds, gold, etc. Essentially, this means they can add diversity to your investment mix and potentially enhance returns.

However, cryptocurrency is a volatile investment instrument, so a small allocation is recommended. Research shows that an allocation of virtual currency of around 5% could assist in maximizing risk-adjusted returns for investors with a diversified portfolio of equities and bonds. Despite that, allocating to cryptocurrency tends to heighten portfolio risk.

Prior to delving into cryptocurrency investments, it’s crucial to educate yourself about the market dynamics, evaluate your risk tolerance, and clarify your financial aspirations. Remember that these assets carry a significant level of risk and might not align with the investment preferences of risk-averse individuals or those aiming for immediate investment returns.

The advantages of investing and holding early

In light of the fact that factors in the larger economic environment, such as inflation, can reduce future buying power, a smart approach to counteract this risk is to begin investing and growing your investments at an early stage. By doing so, your investment portfolio can take advantage of the benefits of compound interest.

To make informed investment choices and maintain an effective investment strategy, it’s crucial to consider all factors that could influence investor behavior and preferences – such as how stress and fear might affect various asset classes during turbulent economic times. Adopting a flexible approach, prioritizing diversification, and keeping a long-term perspective are key elements for success.

A good investment portfolio needs to include a varied mixture of financial instruments. Investing funds into various forms of capital assets (like commodities, real estate, bonds, stocks, and cryptocurrencies) spreads risks.

There’s still potential for increased speculative ventures, especially in the realm of cryptocurrencies. In the last century, oil extraction was a lucrative business. Back in the 1990s, internet stocks were the primary path to wealth creation. Today, crypto has been instrumental in making people millionaires. The future of investing lies here and now. Cryptocurrency can provide a good balance between reward and risk when it comes to investment portfolios.

Nicholas Otieno

Nicholas Otieno is a writer who focuses on fintech, particularly the world of cryptocurrencies. Since 2019, he has been writing articles to inform readers about the benefits and potential positive effects of cryptocurrency on global prosperity. Nicholas is personally invested in Bitcoin, as he strongly believes in its underlying principles. His work can be found in various publications like Finance Magnates, Blockchain.news, Bitcoin Magazine, Technewsworld.com, Business2community.com, and others.

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2024-10-31 14:02