Investors must always consider high level "macro" risks. These are essentially events, influences or trends that can have a material impact on a country or region's economy. Macro risks are one of the factors that influence prices in financial markets.
Below we set out key 2017 risks from a couple of sources - Bank of America Merrill Lynch and Deutsche Bank. Firstly BofA - their recent fund manager survey shows how from December 2016 to January 2017 concerns shifted from EU disintegration and a bond market crash to protectionism and US policy error. This very fast and significant shift in risk perceptions coincides with the new Presidential appointment (source: Daily Shot):
Deutsche Bank recently set out 30 key issues for 2017. That's a lot of risks to digest, so we have summarised some of the main ones below. Any of these could trigger significant market volatility:
Global relationships: US/China, US/Mexico, US/Russia
Elections: Dutch, German, French, Catalonia (and possibly Italy)
Key appointments: Change of Fed Chair and new FOMC members
Europe: higher inflation, ECB tapering, Brexit fallout
US: infrastructure spending, Dodd-Frank changes, higher wages, higher inflation, 3 Fed rate rises, corporate & border tax reform, spreading industry deregulation
China: corporate debt levels, deficit increases
Rest of the world: house prices in Australia, Canada, Norway and Sweden (but no mention of NZ??!!)
In our view China continues to add significant risk to global markets. Its foreign currency reserves are at a 6 year low (down 25% from 2014) reflecting capital flight and central bank support of the yuan. China's financial system also has a growing reliance on structured transactions such as debt for equity swaps by banks. This doesn't fix the problem - swapping a bad debt asset for equity still leaves you with a bad asset.
All investors must learn to assess and mitigate (or live with) risk - in 2017 there's no room to be complacent.
John Berry, Pathfinder