What Would You Invest in if You Were Betting Against China?

Most investors would agree that 2019 was a tough year for equities, particularly in the developed markets. In the year 2000, the S&P 500 traded for 16 times earnings, and in 2019 that figure stood at just over 9. As a result, many investors are questioning whether or not they would be better off allocating capital to more traditional markets such as bonds or real estate. The short answer: it depends. Let’s take a look at some of the other factors that make up for this historic valuation decline, as well as which sectors and regions might offer the most promising returns in the coming months.

Why Are Tech Stocks So Valuable?

One of the primary drivers of the current decline in investment values has been the performance of technology stocks, in particular. It’s been a good year for technology in general, as you might imagine, but specifically, the technology sector has enjoyed an incredible tailwind due to strong demand for mobile phones and other digital consumer goods, as well as a boom in cloud computing, which allows businesses to access data and applications anywhere, on any device.

As a result, many investors might be tempted to allocate capital to the technology sector just as a store of value proposition. While it’s true that many technology stocks offer decent long-term returns, as a relative value proposition, the returns offered by tech stocks are significantly outperforming most other asset classes. For instance, the S&P 500 has delivered just 2.4% in annual returns over the past year, while the Nasdaq 100, a benchmark for tech stocks, is up 12% in annual returns.

Could Bitcoin Have Played a Role?

Another factor that might have contributed to the recent decline in equity markets has been speculation on the part of institutional and retail investors that have put a lot of money on the table in recent weeks. Since the start of the year, the popular cryptocurrency, Bitcoin (BTC), is up more than 300% in terms of value, meaning that speculators have made a lot of money in the space and might have influenced other players to enter or remain in the market. Of course, Bitcoin isn’t the only cryptocurrency that has seen a big increase in value this year, as other major digital currencies, such as Ethereum (ETH) have also seen significant price increases.

Forbes states that the price of a single Bitcoin could be as high as $20,000, if it reaches its intrinsic value. That’s a lot of money for an asset that many believe to be in a nascent stage of development, and which is primarily useful for money laundering, due to its anonymous nature. Even still, there’s no question that the majority of investors have flocked to the industry in recent months, as evidenced by the recent rise of initial coin offerings (ICOs), which are essentially a way for young startups to raise capital. In 2019, more than $500 million was invested in ICOs through securities offerings, according to a report from Autonomous Research.

Where Is This Tech-Stock Correction Taking Place?

As we mentioned above, 2019 has been a tough year for investors in general, with equity values declining sharply. It’s been a particularly brutal 2019 for technology stocks, in particular, as the sector has lost more than two-thirds of its value, meaning that investors could potentially make a lot of money if they decide to exit the market. However, before they do, they might be interested in taking a look at some of the most promising markets for shorting in the coming months. Let’s take a look at the most attractive opportunities to short the technology sector.

The NASDAQ OMX, -1.8%

If you’re looking for a short-term trade that might pay off in the near future, the NASDAQ OMX, -1.8% might be a good place to start. The stock market platform has seen a sharp decline in its market cap this year, dropping more than 20% in the last 12 months, and it currently has a market cap of just over $16 billion. However, if you choose to short the stock market at the moment, you might want to consider allocating capital to the NASDAQ OMX, as shorting it could potentially earn you money in the near future.

The company owns the ticker symbol NAIX and is frequently compared to the S&P 500 as both are part of the NASDAQ family of stocks. The difference is that the NASDAQ OMX focuses more on technology and media stocks, while the S&P 500 also covers other industries, such as utility and communication. The result is that the S&P 500 might be a better choice if you’re looking to short the market.

Apple Inc. AAPL, +1.3%

One of the most famous brands in the world, and certainly one of the most valuable, is Apple Inc. AAPL, +1.3%. The company is frequently cited as an example of an unprofitable company with enormous value and might be a good choice for shorting. Over the past 12 months, the stock has lost more than half of its value, meaning that short sellers have a chance of making money in the form of enhanced returns. Let’s take a quick look at why.

From a fundamental perspective, Apple is in the middle of a transition. The company sold a large amount of its traditional computer hardware to China, resulting in a revenue decline from $10 billion to $6 billion. However, it still earns more than $10 billion a year just from iPhone sales. The problem is that the company has accumulated a massive amount of inventory which it can’t shift quickly enough to meet heavy demand, especially after tariffs on some of its products were increased by the U.S. government due to national security concerns.

In addition, competition in the mobile hardware space is becoming fierce, and while the iPhone remains the industry leader, it isn’t immune to disruption. Companies like TCL and Xiaomi are battling it out for market share and as a result, are offering very competitive hardware at lower prices. In fact, with the release of the $399 (approximately Rs.27,500) Pocophone F1, which is a true competitor to the iPhone, it’s clear that Apple’s days of commanding the market are coming to an end. Finally, the company’s services, such as iTunes and Apple Pay, aren’t going to revolutionize the way we purchase music and mobile payments forever, which also makes the stock less valuable. It’s a combination of all these factors that make Apple a good choice for shorting.

Amazon.com Inc. AMZN, -2.3%

Another company that might be on the short list is Amazon.com Inc. AMZN, -2.3%. The company’s massive popularity makes it a key player in the digital economy, and its rapid rise to dominance in the retail industry has resulted in it being valued at more than $150 billion. However, as is the case with many other tech giants, including Google, Facebook, and Netflix, the shine is coming off. In the last 12 months, Amazon’s stock price has taken a nosedive, falling nearly 40%. It has also been one of the most actively traded stocks this year, which could mean that a lot of short sellers have flocked to the stock in search of a quick profit.

The main problem for Amazon is that the global economy isn’t quite as reliant on the company as it was a year ago. This year, the world might just not seem as excited about Amazon as it did in 2018, when the company came up with an array of cool devices and introduced the Amazon Echo, among other things. While the Kindle, which is a line of e-readers and tablets that the company launched in 2007, remains one of the mainstays of its revenue stream, it increasingly struggles to grow its services business, which contributes just 10% of its total revenue. As a result, Amazon might struggle to maintain its impressive valuation, at least in the short term.

Alphabet Inc., Google’s Parent Company

If you’re looking for a safer, more traditional investment option, Google’s parent company, Alphabet Inc., might be worth considering. Alphabet’s market value is just over $150 billion, not including the value of its subsidiaries. While the company didn’t have much to offer from a standing point, it has transformed into a very useful tool for short sellers, as its diverse range of businesses offer enough opportunities for speculators to make some money. In the last 12 months, Alphabet’s stock price has declined by 16%, which might not sound like much, but it’s a bit more than the S&P 500, which is up 13%.