When it comes to investing, risk management can be quite important for the management of one’s investment portfolio. Although investors do not have to actively speculate on the probability of these risks coming to fruition, it is wise to have an overview of the top risks on the radars of investment banks. Hence why we provide an overview of the top 10 risks investors have to look out for in 2015.
The first risk overview comes from an analysis by Deutsche Bank (Figure 1). According to Deutsche Bank the most significant risks center on the return of the Euro crisis and a slowdown in Chinese economic growth. Both of these risks have a relatively high probability of having some effect in 2015. If so, the impact could be significant according to Deutsche Bank analysts. Other noteworthy risks include: the spread of the Ebola epidemic, a slowdown of the US recovery and large market sell-offs due to the FED hiking cycle.
Figure 1: Risk Matrix with expected impact and probability (Source: Deutsche Bank)
Another forecast of significant tail-risks comes from the investment bank HSBC; in their analysis they chose to take a very non-consensus approach. In doing so, they attempted to identify risks which consensus investors have largely ignored. According to HSBC, the main risks facing investors in 2015 can be divided in three categories: downside economic growth, policy risks stemming from central banks and risks stemming from financial markets. A summary of the main risks according to HSBC, with their possible effects on markets is given Figure 2.
Notable non-consensus risks include the possibility of hyperinflation in Japan due to an overactive Bank of Japan and the failure of the ECB embarking on QE due to legal constraints. Surprisingly, HSBC notes that there is a possibility of an oil price spike, as current low prices derail the US shale boom. This possibility has also been identified in an analysis we previously provided.
Other noteworthy dangers are that an extremely strong US Dollar could cause severe economic and political instability in commodity producing countries such as Russia, Venezuela and Brazil. Lastly, the tightened banking regulations could force banks to reduce their inventory risks, causing sudden unpredictable periods of low market liquidity. The effects of reduced liquidity could be quite significant for investors. A powerful example of how reduced liquidity could cause pain for investors, was the sudden crash of US Treasury yields on October 15th 2014.
Figure 2: Top 10 risks for 2015, with possible market effects (Source: HSBC)
In summary, it seems the most significant risks facing investors in 2015 are of economic and policy nature. With regards to global economies, downside growth in Europe and China are the most probable and significant dangers. On the policy side, the increasing divergence between major Developed Market central banks such as the US Federal Reserve, the European Central Bank and the Bank of Japan require close scrutiny.
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Simon is the CEO and Editor-in-Chief of Foresight Investor. He has been following the markets passionately for over 7 years.