Alvarez and Marsal
A&M Global Transaction Advisory Group

US Public Equity Market Volatility March 2018

Paul Aversano
Global Practice Leader, Global Transaction Advisory Group
paversano@alvarezandmarsal.com

In February & early March of 2018, we’ve seen a high level of volatility and uncertainty in the US Public Equity Market. While interest rates and inflation certainly are to blame, there are more factors responsible. Click here to read my insights on the other contributing factors, including tech disruption, over-abundance of capital and the “fear of missing out.”

In February & early March of 2018, we’ve seen a high level of volatility and uncertainty in the US Public Equity Market. While interest rates and inflation certainly are to blame, there are more factors responsible. Click here to read my insights on the other contributing factors, including tech disruption, over-abundance of capital and the “fear of missing out.”

For the last several weeks, the focus has been on both inflation and interest rates as cause for the recent volatility and uncertainty in the public equity markets – but there is more to it. When SNAP can lose $1.3 billion of market capitalization simply as a result of a tweet from Kylie Jenner, we are living in a new age of volatility.

Working for a global professional services firm like Alvarez & Marsal, we are fortunate to have a seat right at the crossroads of both good and bad economies, a vantage point that offers a more unique perspective than most others.

While inflation and interest rates are main factors, there are other key areas worth discussing. The points I share below are not only relative to the volatility currently happening in the US public equity markets, but how they may impact the overall economy and many companies in general going forward.

Technological Disruption: The Amazon Effect

The Amazon Effect, which started to be the buzz in 2017 has since transformed into the FANG (Facebook, Amazon, Netflix & Google) Effect – an evolution that’s here to stay as all tech enabled entrants have become staple players globally. They are changing the game in the consumer landscape and how we find, purchase and consume/use anything in the market today. This phenomenon is also occurring in a lot of industries.

However, in industries such as healthcare, fintech and automotive sectors, we’re seeing other disruptive innovations including but not limited to:

  • Artificial Intelligence (AI)
  • Big Data
  • E-Commerce
  • Augmented/Virtual Reality
  • Hybrid/Wireless Technologies

Currently, I’m seeing a technological transformation in a large chain of automotive dealerships. As a result, there is a major shift with regard to their business model. A once traditional automotive sector, where customers would physically come to a dealership and purchase a vehicle, customers now have the ability to:

  • Sell and purchase a car online
  • Drive electric or plug-in hybrid vehicles
  • Use ride sharing apps/car-sharing organizations (i.e. Uber, Lyft)

We are even seeing the dawn of a new auto revolution: Autonomous driving. This, despite being automotive-specific, shows how new technology is changing the landscape of all industries. Shifting customer desire combined with the continuous development of revolutionary technologies is becoming the new normal.

What does this mean for you?
With consumer behavior rapidly evolving, identifying the market’s winners and losers will be challenging. Companies can choose to either act or react. If you are a small, start-up unicorn with exciting new technologies – you’re on track to thrive so long as you continue to embrace disruption. If you are a large, old-line business, you must adapt to new technologies to survive in this new economy.

“Over-Abundance” of Cheap Capital & Asset Valuations at Record Levels

Is it true that too much of anything is bad? With record amounts of capital seeking to be deployed, it’s merely a waiting game. This capital “over-abundance,” when combined with low interest rates has resulted in strict competition to invest and the chase of any opportunity that becomes available to them. Additionally, this has resulted in record high asset valuations, a trend seen in almost all global markets – two examples from my recent meetings with clients include but are not limited to:

  • The Middle East: where investors are looking to diversify out of declining oil revenues and distance themselves from
    regional geo-political risk; and
  • China: where massive amounts of capital, up until recently, have been deployed outside of the country.

What does this mean for you?
The need to deploy more-than readily available capital combined with the low cost to get more capital, can lead to taking extreme risks – the very definition of an asset bubble. I’d advise being cautiously optimistic, long-term thinking and strategic risk management going forward.

Investing: Everyone Wants In

Everyone wants in on rising investments. I’d equate this to the feeling of what Millennials call “FOMO,” Fear Of Missing Out. From crowdsourcing platforms like Kickstarter to Bitcoin to the Marijuana business, everyone from the nurse to the schoolteacher to the professional investor is seeking to grab any piece of the pie they can get. The barriers for entry to these new opportunities are low, so it makes getting into the game that much easier, such that everyone wants in.

For example, in the same week, my friends who are (i) an exterminator, (ii) a Verizon employee and (iii) an elementary school principal as well as (iv) my barber, each separately asked me if they should invest in Bitcoin – this gets me worried. Folks are seeing the tremendous run-up in the public equity markets, coupled with the non-stop news cycle of all things Trump (especially the Tax Reform and Jobs Creation Act). As a result, they don’t want to miss out on opportunities. Further, I think this is just the beginning. As the benefits of tax reform hit the pocketbooks of individuals and corporates, it will bolster investor confidence and create a “feel good” psychological impact on investors.

What does this mean for you?
With so much market volatility, tech disruption and the signs of asset bubbles forming, investing can be risky for anyone. As the market moves through 2018, there are many factors to keep in mind in addition to the above. It’s critical for companies and individuals to stay grounded and avoid rash decision-making, but still keep a forward-thinking mindset.

Source:

SOURCE: ALM VANGUARD: TRANSACTIONS - ACQUISITIONS CONSULTING JUNE 2019 REPORT

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