risks-2018-beware-of-these-risk-factors
Articles

Beware of These Risks – What Investors Need to Be Aware of in 2018

Investors can be optimistic for 2018. Financial market experts expect a broad-based acceleration in growth. However, there is no world without risk. Fourteen risk factors investors must be aware of.

Investors Must Be Aware of These Risks in 2018

Political stress in the USA

Failure of US tax reform and deeper political tensions domestically could be very negative for global equities and the USD.

Credit bubble bursts in China

Escalating corporate debt levels in China or a liquidity shock could lead to a growth slowdown or vice versa, with a severe negative impact on equities and credit.

Escalation of US/North Korea conflict

A severe escalation of North Korea tensions or an armed conflict would be highly negative for risk assets.

Large scale terrorist attacks

Terrorist attacks in a large city comparable with 9 /11 would have a major impact on growth and markets.

Technology sector regulation

Regulation could threaten the business model of technology companies (e.g. license withdrawals for Uber cabs or similar).

Disruption of business models

This risk is particularly real in retail, as online shopping squeezes traditional retailers, and the auto sector, as electric cars impact companies’ profitability.

European instability yet again

An EU/euroskeptic election outcome in Italy, a renewed escalation of tensions in Spain (Catalonia), or a breakdown of EU-UK negotiations (“hard Brexit”) would hurt European risk assets.

Policy error in global trade

A trade war between the USA and China or the cancellation of NAFTA without replacement would severely impact growth and risk assets, especially in emerging markets.

Recession or overheating

A surprise slowdown in China or the USA would lead to a sharp pull-back in risk assets. An overheating of the US economy and an interest rate spike would also have adverse effects.

High yield sell-off

A Fed interest rate shock or rising defaults could lead to a sharp sell-off in high yield bonds and leveraged loans, a key market risk.

Armed conflict in the Middle East

A further escalation in the Middle East involving the Kurds, Iraq, Turkey, and/or Iran could hit emerging markets and commodities.

Cyberattack with global disruptions

A cyberattack that would disrupt IT services globally would have far-reaching repercussions for financial markets.

Pandemic

Not on the radar of global markets at the moment, but a major pandemic could disrupt individual businesses (e.g. airlines) or economic growth in general.

Drug (opioid) epidemic

Though on the agenda of the US administration, a further escalation could have an impact on US growth potential.

Protect Portfolio against Risks

Many risks have a low probability of occurring, but if they do, they are likely to have a major impact on the global economy and financial assets. Such “tail risks” remind investors that constructing a diversified portfolio is the best way to protect against the unforeseen and the first step to successful long-term investing.

In terms of economic risks, we are watching developments in China and the USA in particular. As these are the two global heavyweights, a worsening of economic imbalances or seriously inadequate policy responses would have stark consequences. If these risks materialized, risk assets such as equities and bonds with credit risk would suffer, while safe-haven assets such as core government bonds, gold and the Swiss franc would soar. Meanwhile, geopolitical risks remain centered on the Middle East and the Korean peninsula.

Italy Is Considered a Risk for the Euro

Regionally, Europe still suffers from some degree of fragmentation risk, which can also affect markets. The GBP would be vulnerable if Brexit negotiations failed. If euroskeptics came to power in Italy, Italian sovereigns as well as bank stocks and bonds would suffer, and broader contagion could not be excluded.

Key sector risks concern the retail, automotive and tech sectors. The tech sector in particular has enormous cash piles and contributed very little fiscally in the countries where it generates revenues, so it is vulnerable to regulation. Yet, we expect authorities to be less stringent regarding regulation than they were in the case of bank regulation following the global financial crisis.