Larry Hatheway Group Head of Multi-Asset Portfolio Solutions and Group Economist
While it remains unlikely, in my opinion, that the UK’s referendum will result in a negotiated withdrawal of the country from the EU, for markets the risk is the uncertainty about that outcome and what it might mean for asset prices. The parallel is the Scottish referendum in terms of polls, but the market implications could include some weakness in sterling and financials, among others.
Lack of growth in Europe
Oliver Maslowski Portfolio Manager, European equities
The growth crisis afflicting Europe remains unresolved, and is potentially being made worse by the migration crisis. On top of that, the euro crisis remains far from being solved and investors need to be aware of that. Many countries still do not comply with the Maastricht treaty regarding new budget deficits, including France, Greece, Italy, Portugal and Spain. Thanks to loose monetary policy, debt levels are constantly increasing, while GDP growth remains weak. For the moment, only the very low interest rates prevent many of these countries from becoming debt-distressed situations. The migration crisis will increase the EU’s debt levels further, whereas the hoped-for contribution to economic growth remains to be seen.
Oil prices and the Middle East
Paul McNamara Investment Director, emerging market debt strategies
I think the key risk globally is the impact of lower oil prices in the Middle East. Strains are already beginning to show, and if prices stay low, instability may well result. In particular, Saudi Arabia’s budget deficit is currently around 20% of GDP and the government has announced an aggressive debt issuance programme. Although, like most countries in the region it has ample reserves for a ‘rainy day,’ thanks to its sovereign wealth fund. Iran is less transparent, but onshore bond yields of 26% suggest that there is stress there. We highlight those two countries as between them they account for nearly 20% of global oil production.
Higher wages and lower margins
John Lambert Investment Director, global and UK equity strategies
Income inequality has been a very topical issue for a while now, especially in Western countries. The share of income in US society taken by the higher echelons is at levels only previously seen at the end of the ‘Roaring Twenties’. However, companies in the US and across Europe are starting to raise wages. This is driven both by the shortage of suitable calibre staff, but also more generally by a change in the political wind. While that’s certainly a good thing, material increases in minimum wages could impact between one-third and one-half of all companies, according to research on the US market, and this will hit corporate profitability. Since this long bull market has been built on the idea that the historically high margins are here to stay, we think this represents considerable risk to the consensus view of the world.
China’s geopolitical ambitions
Michael Lai Investment Director, Asian equity strategies
Rising political tension in Asia will likely affect regional sentiment in 2016. China's continuing efforts to assert sovereignty over much of the South China Sea and its unconstrained reclamation and construction of facilities resembling military installations are expected to further inflame sentiment among countries with competing claims over the disputed area. To counter China's dominance, these countries will continue to welcome the US’s ‘pivot’ toward Asia, and might even look favourably on a more militarised Japan. Raising the temperature further, Taiwan will hold elections next year, with leadership widely expected to move to the pro-independence DPP camp.
Protectionism and trade barriers
Ernst Glanzmann Investment Manager and Head of Japan equity strategies
We could see a swing toward more protectionism in terms of the circulation of goods and people. First, the prevailing lukewarm recovery in global trade, as well as in the global economy, and China’s recent export promotion policies may trigger the raising of tariffs or non-tariff barriers globally. Furthermore, as a result of a slew of terrorist attacks leading to more votes for the extreme right, the unhindered movement of people may become more limited and a number of countries may introduce a quota for work visas. In this kind of changing environment, the discrepancy between the winners and losers tends to be wider.
US presidential elections
Matt Linsey Managing Partner and Portfolio Manager at North of South Capital LLP, who run an emerging market equity strategy for GAM
A less discussed source of political risk for 2016 is next year’s US presidential election. To give an example, one ‘tweet’ by Hillary Clinton a few months ago regarding excessive drug prices was enough to send biotech stocks into a tailspin. Although it is by no means certain that Donald Trump will win the Republican nomination, he has suggested a number of protectionist measures that would certainly impact the emerging markets. Regardless of who wins the race, we are expecting a significant investment in infrastructure, particularly if there is a slowdown in US economic growth, given that monetary policy has reached a point of exhaustion. This might provide some hope to commodity markets, which are still suffering from a decline in Chinese demand.
ECB and the Fed: Time to move?
Tim Haywood Investment Director and Head of fixed income strategies
Politicians are generally held in very low regard globally, evidenced by mid-term polls, demonstrations, devolution talk and blossoming fringe parties. The ironic risk is therefore that they will become more impressive and take the weight off central bankers, who occupy the first (Janet Yellen) and second (Mario Draghi) principal focus points. Both the ECB and the Fed risk having to reverse their anticipated December moves rather soon. Over the last four decades, ISM manufacturing data has been a great bellwether in predicting recessions when the reading is below 50, which it now is. US business confidence is struggling in many regional surveys too. Is this the backdrop upon which to hike? Consequently, the risk of a reversal of the Fed’s policy within 12 months is 25%, in my view. European strong money supply growth should help bolster future European growth. Is this the backdrop upon which further stimulus is required? I would attach the same probability of a reversal to the ECB.