5 Reasons Why the Stock Market Crash is Inevitable in 2018

5 Reasons Why the Stock Market Crash is Inevitable in 2018
 

1. A new technology bubble bursting

Many high-tech companies have indirect or third-party revenue streams, depending on advertising revenues or pay-per-click advertising services to generate revenue, rather than a direct revenue from user subscriptions. This is particularly true for social media operators and telecoms operators. As competition for advertising spends intensifies, the main asset for such businesses, their user base, becomes the main driver for its selection criterion. As seen with the Cambridge Analytica and Facebook row which has emerged in recent weeks, it is dependent on user trust and the brand’s reputation. Users can vote with their mouse when a company seems to abuse its privileges around user data access and applications. It has been calculated that Facebook’s valuation fell by $58 million following reports of misappropriation of personal data and connections. Facebook is not the only company vulnerable to user sentiment.

2. E-commerce Impacts on Stocks

E-commerce Growth

Another recent trend is the fall in the value of many retail companies on global stock markets, due to competition from e-commerce operators. The e-commerce business model requires lower capital investment, a website as apposed to a physical building (either bought and /or fitted out for its distinct purpose), and lower running costs (fewer staff and property related costs). Those large retailers who have not already bitten the bullet and developed an e-commerce arm early in the game, are finding it very difficult to build traction and gain market share in the online retail space. Many of these new competitors are SMEs who are not a part of the global stock markets.

Intensified Competition

Those retailers who have already built their online brand and have some market share, continually face competition from new entrants looking to carve out their own slice of the pie. With barriers to entry significantly lower and many splits in the global market between geographies, language, currency and delivery services for online customers, these smaller and newer operators can still compete for niche market segments against the big players.

No longer so Recession Proof

So where once major retail shares were considered a recession proof investment asset, their significance in a portfolio mix is reducing.

3. Trade Wars and Political Frictions

Political will is imposing battle lines on the big economies of the USA and China, as well as between the UK and Europe.

Brexit

As Britain exits from the European Union its position as a global financial center is being disrupted, with cities like Frankfurt and Paris offering invitations to merchant banks and other financial service providers. This could have some significant short-term impact on trade in both equity and currency-based assets, as witnessed by the fall in the pound in the aftermath of the EU referendum. While transitional arrangements have been agreed for the UK’s withdrawal there is at least a year till the final exit is complete and much can happen in that time.

Trade Tariffs

The recent imposition of tariffs on imports of steel and other materials and goods, into the US is generating friction amongst global economies. This has an impact on the stocks and shares trading in these markets and leads to greater volatility and higher costs as the movement of goods around the globe because embroiled in further bureaucracy. Not to mention the impact on global prices for the actual goods themselves. Such protections measures have been shown before to hamper trade, and while they may offer improvement and employment security to a domestic economy in the short-term, they have been shown before to fail in the longer term.

4. Digital Security, Virus Disruptions, and similar crises

Malicious hacking, disruptions etc including automated management of portfolios all pose a threat to the normal trading conditions of the stock market and for the business quoted on them.

While technological advances have created many opportunities for new industries and reduced costs of operating a commercial enterprise, they have also brought with them some new risks and dangers.

Malicious and Criminal Activities

There have been many reports in the media of incidences of malicious hacking and disruption to commercial operations, for example the leaking of LinkedIn account details in 2016, the grounding of many flights by British Airways due to server failures in their main systems in 2017, the disruption in Ukraine and Eastern Europe by a virus infection, all of which impact on the trade for the company(s) affected. Various companies have also lost millions, if not billions, of dollars to criminal fraudsters through email scams and hack into banks and other methods of diverting funds or goods to the wrong address.

Automated Responses to Market Changes

Another risk to stock market valuations is the increased use of AI drove portfolio management and transaction processing. One underlying element of the price of any stock or share is an expectation of future performance of the business. This is very much a judgment driven factor and if sentiment changes for a small group of investors this could create a downward spiral in the market, as the rest of the AI herd follow suit. There have been suggestions that this has happened more than once recently regarding swings in the valuation of the dollar on currency exchanges.

Cryptocurrencies

Bitcoin was launched in 2009 and has become the flagship of the cryptocurrency market. However, it has been followed by many more cryptocurrencies, ICOs and ITOs all offering solutions to various problems faced by business and people in the modern world. However, the percentage which will be successful in the long term and are backed by sustainable operations is yet to be determined. Failures for some of these will be behind a loss to investors for some of their capital assets and reduce their overall return on investments. This will have an impact on overall capital in the market which will reduce its liquidity. Although it is hoped that many prove to be successful there are no guarantees and again sentiment is a factor in the valuation of many of these coins and tokens.

5. Skills Gaps Employment Patterns and Ageing populations

Aging Populations

In many Western and developed economies, there is a trend of an aging population for these nations. Amongst other concerns, this is impacting some large corporate pension fund investors who face deficits in the amounts set aside to meet future liabilities. Similarly, other institutional investors from financial services companies face growing annual payments to their members or annuity holders as greater numbers reach retirement age and start to withdraw funds. This includes where governments like that of the UK relax the rules on only using pension pots for the purpose of buying an annuity.

Growing Populations

For other economies, including in the Middle-East and Africa, they face a different demographic. Here there has been a significant growth in the population size in the last 25 years, with many of there youth now reaching working age but unable to find employment. This increases the burden on the state for making some provision to meet the daily needs of its unemployed citizens. So, the demand for government borrowing and rising deficits for these countries will impact their economies.

Skills Shortages

A point to note is the differences in educational standards amongst these countries and how that correlates to changes in working patterns in recent times. With automation and technology comes less reliance on manual labor and greater emphasis on human skill sets for employment opportunities. This requires a better-educated workforce. Those economies currently experiencing population growth also tend to have lower levels of education amongst them which will have consequences for businesses looking to recruit a skilled team of staff.

The demographics of the global population, its needs, costs, and requirements are working against each other

A Eurozone Rainy-Day Fund

Christine Lagarde, managing director of the International Monetary Fund, said that eurozone leaders should set up a “rainy day fund” to help member states in the event of an economic downturn.

In a speech in Berlin in March 2018, Ms. Lagarde said there is a “sustained and broadly shared upswing” in the global economy which she said offered leaders an opportunity “complete the architecture” of the eurozone.

But she said: “There are other, forceful headwinds threatening. Think of the rise of populism and the short-sighted siren call of protectionism.”

M.s Lagarde said the initial decision to get to work on building a rainy day fund could happen quickly.

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