How to Prepare for the New Period of Market VolatilityBy Sofía Hanna | Tue, 07/19/2022 - 14:28
The world is entering a new period of constant volatility characterized by higher inflation and lower growth. Its impact on economic activity is apparent, resulting in uncertainty and investor skepticism that is driving venture funding and investments away from startups. Numerous startups are folding due to their inability to raise fresh capital in this fundraising environment, said investment management firm BlackRock.
Uncertain times have made economic activity withstand the added effects of tightening policies from developed markets. Product costs keep rising because of the geopolitical fragmentation derived from the COVID-19 pandemic and the Ukraine crisis. Meanwhile, the world keeps trying to diversify supply chains, but factors such as the US-China tensions set those efforts back. The world is also continuing its transition toward net-zero emissions by 2050, which will likely generate a shakeout similar to the pandemic.
The persistent inflation could continue to feed social unrest, while populist policies could persist where governments already face the stress of elevated debt levels, according to BlackRock. However, investment opportunities from a rewiring global economy could increase, especially for Mexico, thanks to its proximity to the US. Other companies in Latin America could also benefit from repricing commodities and the strong demand for minerals such as lithium and copper.
Bracing for volatility is the next and essential step for companies and enterprises worldwide, reports BlackRock, which warns that the rewiring of global supply chains and the transition to net-zero will only enhance volatility. BlackRock warned that the traditional 60/40 portfolios of stocks and bonds will not work anymore, so market views will have to change more quickly on both tactical and strategic horizons.
Volatility, uncertainty, and investor skepticism have continued to reduce venture funding. Global financing for startups fell 23 percent quarter-over-quarter to US$108.5 billion in 2Q22, according to private equity firm CB Insights. This has been the most significant quarterly percentage drop in funding in nearly a decade, warns the firm. “While some companies faced other difficulties, such as a data breach and a lack of product vision clarity, a majority of the startups that have folded since April 13 did so due to their inability to raise fresh capital in this harsh fundraising environment,” said CB Insights. The firm also reported that top 10 investors like Tiger Global Management, Gaingels, SOSV, Insight Partners and Andreessen Horowitz, are funding 22 percent fewer companies in 2Q22
While Mexico just acquired its newest unicorn, the world is seeing fewer companies of this type. Unicorn “births” worldwide have decreased by 43 percent year over year, reports CB Insights. However, Mexico’s funding nearly doubled from last quarter, thanks to two mega-rounds. Early-stage deals are dominating investment activity in Mexico in 2022, according to CB Insights.