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SINGAPORE (Jan 17): Economic and investor risks still abound despite relatively optimistic outlooks for 2018, according to Esty Dwek Roditi of Natixis Investment Managers.
In a Wednesday commentary, the investment specialist lists 10 of the biggest risks in the year ahead.
With the majority of market views remaining in line with consensus for the rest of the year, Dwek Roditi sees this as a manifestation of market complacency which translates to unpreparedness.
“Very few views (including ours) diverge from consensus. How long can we all be right? If the market is complacent, what happens when it wakes up?” she questions.
While Dwek Roditi expects volatility to gradually rise from what it deems “extremely low levels”, she argues that the possibility of more violent-than-expected swings.
One such instance is market volatility as caused by geopolitics. Headlines which the investment specialist sees continuing into 2018 include North Korea, Russia and Brexit. She also highlights the danger of populism returning to Europe, even with far-right Marie Le Pen now out of the picture following her French election loss in 2017.
As Dwek Roditi points out: “Germany still doesn’t have a coalition (with a strong showing by the far right party), Italy still has elections coming, as does Mexico, and more.”
The Natixis investment specialist notes that no market, be it in equities or bonds, is currently cheap. This means that stretched valuations could begin to weigh on market sentiment this year, especially if overall growth begins to show signs of slowing down.
“Right now, growth is underpinning equity markets as profitability begins to improve – a.k.a., markets are ignoring valuations because profits are strong – but if the growth support falters, markets may become less sanguine,” elaborates Dwek Roditi.
She also highlights how long yields ended 2017 where they began, and aren’t expected to rise much in 2018. A sudden sharp backup in yields would easily cause market scares, in her view, while recession worries could also spike should the yield curve invert.
Meantime, emerging markets (EM) are also facing the risk of de-facto tightening monetary conditions in the face of possible US inflation, which would lead to the appreciation of the USD. This scenario is likely should inflation occur faster or higher than Natixis’ expectations of it gradually moving up towards 2% in the US.
Dwek Roditi says that similarly, markets also risk scares should central banks turn more hawkish sooner than expected.
“If the European Central Bank (ECB) runs out of bonds and ends quantitative easing before September, it could also spook the bond market, and European HY with it… As liquidity falls, risks of an over-leveraged entity ‘swimming naked’ increase,” she adds.
Lastly, Dwek Roditi believes big tech companies cannot risk being seen as sources of positive disruption or creators of value. This could lead to a disillusionment with the tech revolution.
“Today, the FAANGS (Facebook, Apple, Amazon.com, Netflix and Google) are seen as a positive for consumers. But if that changes, they could impact the overall market as well,” she concludes.