The impact of macroeconomic risks on capital markets | Opinion

Just as macroeconomic conditions and geopolitical news affect stocks and other investments, these factors also impact short- and long-term prices of cryptocurrencies, according to Joe McCann, the founder and CEO of Asymmetric, a crypto and web3 investment firm. Whenever such impacts occur, there is always risk and opportunity.

Macro environment factors (like interest rates, inflation, GDP, debt, unemployment, government policies, international conflicts, etc.) typically trigger a volatile environment plagued with fear. These issues point out the need to have a diversified investment portfolio. Even during difficult periods, investors can take advantage of opportunities emerging from price instabilities.

The current macroeconomic concerns

Macroeconomic factors continue to affect investors’ operations. Investors’ stability and profitability depend on their ability to swiftly recognize and respond to changes in the macro environment.

The present stagnated economic growth has had tremendous effects on the economies of industrialized countries and low-income nations. Current international economic growth stands at 3.1% in 2024, the same level as 3.1% in 2023 but slightly above the pre-pandemic growth rate of 3.0%.

Constant high interest rates, increased conflicts across various parts of the world, slowed international trade, and rising climate disasters contribute to the current stagnant global growth. The outlook appears to differ across nations, with sluggish economic growth witnessed in several advanced economies, especially China and Europe, and some mild growth in the US. Due to the current elevated inflation levels across the international scene, stock markets, including the US and China, are currently down.

China’s fiscal stimulus plan

China plans to offer a fiscal stimulus package to help revive its scrambling economy. The federal government intends to assist county governments in addressing their debt challenges, provide financial handouts to individuals with low incomes, help the struggling property market, and top up the capital of government-run banks, including participating in other fiscal measures.

All these measures are the steps investors have previously requested the government to adopt. The requests came as China’s economy was losing strength, struggling to tackle inflation and instill user confidence amid property market decline.

However, investors in China are concerned about whether the fiscal stimulus package plan could immediately boost economic growth to tackle the economic decline and unemployment rates. Some investors feel that interest rate reductions or capital infusion into the economy could not resolve the fundamental problems.

Such uncertainties appear to influence investors to channel their funds into alternative assets, such as virtual currencies instead of Chinese equities, which have witnessed price declines. Bitcoin (BTC) price resurged to trade above $65,000 levels in two weeks following China’s fiscal stimulus announcement, drawing attention to sentiments that investors would invest in virtual currencies rather than Chinese stocks.

Investing in times of challenging macroeconomic conditions

Macro environment factors can immensely impact investors’ investment portfolios. Various capital assets (such as stocks, bonds, real estate, commodities, and cryptocurrencies) respond differently to macroeconomic conditions; thus, understanding such responses is essential for efficient and effective portfolio management.

Developing a diversified investment portfolio is difficult because of lower bond returns, narrow gains in stocks, higher correlations across assets, and more macro risks.

Cryptocurrencies can be valuable for developing an efficient, diversified investment portfolio. In the past, crypto assets like Bitcoin and altcoins have provided enormous profits (for high risks) and a low correction to traditional capital assets like stocks, bonds, gold, and others. This implies that they have the capacity to diversify investment portfolios and offer greater 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.

Before making investments in cryptocurrencies, users should study and understand the markets, assess their willingness to take risks, and understand their financial objectives. These instruments are high-risk and may not be suitable for people who avoid taking risks or those who want to achieve short-term investment goals.

The advantages of investing and holding early

Considering that any degree of macro environment factor (like inflation) decreases future purchasing power, one efficient strategy to combat this threat is to start investing and increasing holdings at an earlier stage. This could enable an investor’s portfolio to benefit from the compounding effect.

It’s essential to understand all factors that might impact investors’ investment decisions and style, including the effect of stress and fear on the performance of different asset classes during financial distress. Cultivating flexibility, focusing on diversification, and considering the long-term perspective is essential.

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 is still room for greater speculative investments. Oil harvesting was a profitable venture in the 20th century. Investing in internet stocks served as the key activity of money-making during the 1990s. Today, it is crypto that makes people millionaires. The future of investing is now. Cryptocurrency can help balance reward and risk in an investment portfolio.