The National - Is it game over for Big Tech and Bitcoin?

Vijay Valecha, Special to The National January 25, 2022

The two superstar investment sectors of the past decade are US technology stocks and cryptocurrencies, but both are enduring a miserable start to 2022.

Technology trillionaires Apple, Amazon, Microsoft, Tesla and Google-owner Alphabet, and cryptocurrency leaders Bitcoin and Ethereum have been losing investors’ money lately, rather than making more of it.

So, is this just a blip or are the glory days gone for good?

Both enjoyed a blistering 2021. The US S&P 500 returned 28.7 per cent in total, with Microsoft, Apple, Nvidia, Alphabet and Tesla delivering a third of that.

Bitcoin rose 48 per cent, from $32,149 at the start of January to close the year at $47,733, while Ethereum almost quadrupled to $3,767.

Yet, this year has been too tough.

On January 3, Apple became the first company in history to be valued at $3 trillion, but has since slipped to "just" $2.71tn, a drop of 9.66 per cent.

Microsoft has fallen 9.3 per cent over the same period, with Amazon down 8.3 per cent, Alphabet off 7.1 per cent and ever-volatile Tesla crashing 17 per cent.

At the time of writing, Bitcoin was trading at $42,103 and Ethereum at $3,143, dips of 11.7 per cent and 16.5 per cent year to date, respectively.

Tech stocks and cryptocurrencies tend to do well when investors are feeling bullish and buzzy, and are happy to take on a bit more risk in the hope of generating supersized returns. When markets turn bearish, the opposite happens.

Investors have shifted into “risk-off mode” as the Omicron variant and inflation spread, and these two once rampant sectors are feeling the impact.

US investor sentiment turned downbeat in the final days of 2021 even as markets hit historical highs, Olivier d’Assier, head of applied research for Asia-Pacific at financial intelligence company Qontigo, says.

“This negative sentiment is likely to cap further advance by markets in the short term and should continue to reward risk-off strategies more than risk-on ones,” he says.

This favours lower risk, lower volatility “value” sectors such as consumer staples, energy, financials and utilities.

US inflation has hit 7 per cent, the highest rate since 1982, and investors fear the US Federal Reserve and other central banks will now be forced to hike interest rates aggressively, with “potentially very negative consequences for markets”, Mr d’Assier says.

The market has a “strong sense of foreboding”, he adds.

“2020 was the year of the bulls. 2021 the year of the sceptics. Current sentiment seems to bet on 2022 being the year of the bears.”

Rather than trying to turn a little money into a lot, investors are keen to prevent a lot of money turning into a little, Mr d’Assier concludes.

Markets face fresh selling pressure while avoiding a full-blown correction, Chris Beauchamp, chief market analyst at online trading platform IG, says.

The US earnings season has “started with a whimper”, with investors looking for negatives even in positive company reports. “Record annual profits for JP Morgan did little to lift the mood, which remains firmly risk-off,” Mr Beauchamp says.

It didn’t help that JP Morgan predicted six or seven US base rate increases this year, which will make stocks look less attractive as yields on lower risk alternatives such as bonds increase.

“Investors continue to sell into strength, pointing towards a further negative atmosphere,” Mr Beauchamp adds.

It isn’t all bad news, as mergers and acquisition activity remains buoyant, Fawad Razaqzada, market analyst at Think Markets, says.

“It hit a record of more than $5tn in 2021 and Microsoft’s move to buy Call of Duty maker Activision Blizzard for $68.7 billion suggests that will continue,” he says.

Tech stocks are expensive after years of runaway success, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says. “This makes them vulnerable as interest rates rise, because this reduces the value of their future earnings.”

Tech-heavy investment funds such as London-listed Scottish Mortgage Investment Trust, which at one point delivered 500 per cent growth in five years, are also feeling the heat.

“It holds a raft of tech darlings such as Tesla, Amazon and Chinese smart electric car company Nio, and is among the biggest faller amid concerns the tech juggernaut is on a rocky road,” Ms Streeter says.

Bitcoin and Ethereum have got caught up in bearish investor sentiment and are falling in lockstep with Nasdaq-listed tech stocks, Vijay Valecha, chief investment officer at Century Financial in Dubai, says.

“Their statistical correlation has increased to astonishing levels ever since the Fed started beating the drumrolls of an interest rate hike and balance sheet reduction,” he adds.

In the two months to January 18, the statistical correlation of Nasdaq Composite with Bitcoin and Ethereum stood at 83 per cent and 70 per cent, respectively.

“Without any solid recovery in the US tech sector stocks, cryptocurrencies will not hold on to any gains. Technically, both look extremely weak,” Mr Valecha says.

Bitcoin is now consolidating in a narrow range between $41,000 and $44,000, Sam Kopelman, manager at global cryptocurrency exchange Luno, says.

“The winter has been dark for crypto holders as the market has stayed fearful for more than two months now. This makes investors scramble for cash and safety,” he adds.

They are also racing into safe-haven gold, which has climbed almost 1.67 per cent to $1,834 an ounce over the past month, according to Goldprice.org.

More growth could come in a respite for gold bugs, who saw the price dip slightly last year, Mr Beauchamp says. “While higher bond yields should normally put pressure on gold, global inflation should give gold a longer-term boost.”

Others are rotating into companies with pricing power to escape the “inflation inferno”, Paul Allison, head of equity research at Freetrade, says.

“Pricing power is a rare and very valuable thing. It allows companies to pass on higher input costs to consumers and maintain profit margins,” Mr Allison adds.

He picks out two consumer stocks that have this rare ability, Coca-Cola and French luxury brand company LVMH. “They enjoy customer loyalty, which can mean they can raise prices without any meaningful drop off in demand.”

Companies selling essentials such as food, drugs, energy and even insurance enjoy most pricing power as people need their products, Darius McDermott, managing director of FundCalibre, says.

“European firms Nestle and semiconductor company ASML, US consumer goods giant Procter & Gamble and UK-listed information services firms Wolters Kluwer and analytics specialist RELX all have pricing power,” according to Mr McDermott.

Current gloom should not be overdone and global gross domestic product growth prospects remain promising. PwC’s latest Global Economy Watch predicts 4.5 per cent growth in 2022, above its long-term rate, coupled with a jobs boom.

The anti-tech shift may be overstated as many private investors view Apple and Amazon as defensive stocks, Ben Laidler, eToro’s global markets strategist, says.

“They use their products every day, and expect that to continue even if the global economy is struggling,” Mr Laidler adds.

Nothing lasts forever. Tech stocks and cryptocurrencies are the best performing investments of the past decade and at some point, the market had to turn.

However, bargain hunters may see this as an opportunity to buy rather than sell. Just keep an eye on the inflation menace.