CrowdStrike-induced Microsoft outage stirs temporary market volatility

While CrowdStrike's shares dropped more than 20% in pre-market trading, the overall fiasco is expected to benefit cyber security ETFs, experts say

Passengers stuck at the Ninoy Aquino International Airport in Manila, amid a global IT disruption caused by a Microsoft outage and a CrowdStrike IT problem. Getty Images

The Microsoft Windows outage on Friday, which affected many industries and millions of computer users globally, is expected to temporarily heighten US market volatility, especially tech-heavy indices such as the Nasdaq.

The outage was linked to a faulty software update from CrowdStrike, one of the world's largest cyber security companies, which hit millions of Microsoft Windows users, leading to widespread disruption across airlines, banks and other industries.

CrowdStrike shares dropped by more than 20 per cent in pre-market trading on Friday following the disruption. Microsoft dipped more than 2.5 per cent in pre-market trading.

The two companies' shares have been fluctuating since the market opened. Texas-based CrowdStrike was down more than 9 per cent, while Microsoft was trailing 0.4 per cent at 8.05pm UAE time.

The disruption will prompt investors to adopt a “risk-off approach”, pulling back from high-risk stocks such as CrowdStrike and opting for safer companies offering similar services, Vijay Marolia, founder and chief investment officer of Regal Point Capital Solutions, told The National on Friday.

A risk-off approach involves reducing exposure to riskier assets and shifting focus towards safer, more stable investments.

Investors will become more cautious and "seek to protect their capital”, said Mr Marolia.

“However, we see potential benefits for CrowdStrike's peers and have increased our long position [buying more shares] in cyber security ETFs [exchange-traded funds],” he added.

“Additionally, we have increased our long position in Apple, as it appears their technology was not impacted by this issue."

Mr Marolia said that this outage might just be a “precursor to more severe problems”, indicating a broader vulnerability in IT systems that could disrupt tech-heavy indices in the weeks ahead.

Nasdaq Composite and S&P 500 Index were trading 0.33 per cent and 0.32 per cent down, respectively, at 8.05pm UAE time on Friday. While another major US stock market indice Dow Jones Industrial Average was down 0.75 per cent.

European stock markets also extended their losses on Friday following the outage. The Euro Stoxx 50 index dropped 0.97 per cent and the Euro Stoxx 600 index was down 0.85 per cent at 8.05pm UAE time.

Advice for investors?

Given the scale of the outage, short-term market instability is expected to remain high, and investors are likely to see significant price swings as companies work to restore normal operations, said Adam Garcia at financial services firm Stock Dork.

“Investors should brace for continued volatility and remain agile in their investment strategies to capitalise on the potential recovery and opportunities arising from this situation,” Mr Garcia said.

For those looking to navigate this turbulent period, diversification remains key. Spreading investments across different sectors can help mitigate risks associated with specific industries being more severely impacted by IT disruption, he added.

How long will it take for markets to recover?

The tech outage seemed to have sparked a “sentiment-driven reaction” rather than indicating a long-term impact, suggesting that the initial drop is likely to be fully recovered during US trading hours, according to Vijay Valecha, chief investment officer at Dubai-based Century Financial.

“This dip is likely to be recovered within the day’s trading session as many investors are viewing it as a buying opportunity,” Mr Valecha told The National.

However, if the problem recurs several times, it could lead to a systemic risk, he added.

Some industry experts called it an “isolated issue” that does not show the potential to evolve into a more structural problem.

At this point, there is no indication of a larger shockwave effect spreading into the broader tech space, Thomas Monteiro, senior analyst at Investing.com, said.

"That said, individually, it is very likely that CrowdStrike will face an unexpected margin squeeze due to the need to ramp up both programmer and marketing expenses to convince clients worldwide that such issues are out of the cards,” Mr Monteiro told The National.

As for Microsoft, it is unlikely that this particular event will negatively affect performance, given the sheer depth and diversification of the company's offering, he added.

“In this case, it appears that the vendor [CrowdStrike] was confident in the update and had deployed it at scale,” James Maude, field chief technology officer at cyber technology firm BeyondTrust, told The National.

The fix requires physical intervention to rename or remove the malicious file, making the recovery process time-consuming and complicated for remote systems, Mr Maude said.