Morgan Stanley provides its list of top risks for 2015 today:
Risk #1: US Bond Yields Rise Sharply, Rapidly Reconnecting With Fundamentals. US bond yields have tracked Europe and Japan lower, but the strong US economy, diminishing spare capacity, Fed forward rate guidance and valuation all point to upside risk. Rising US yields would pressure Australian bonds and yield stocks.
Risk #2: The Impact of the Oil Price Collapse is Underestimated – energy consumers will enjoy a substantial “tax” cuts, worth up to 2.5% of GDP in the US, and a major positive for Developed Markets. On the other hand, lower prices are a major challenge for non-diversified producers like OPEC and Russia- financial and political risks will remain elevated.
Risk #3: The Reserve Bank Restarts an Easing Cycle: given below-trend growth, rising unemployment, low inflation and constrained policy, the onus for navigating the post-resources boom transition falls on the RBA. Signs of a moderation in housing may increase the RBA’s freedom to cut rates. Rate cuts would be a major market positive, and help Consumer Discretionary stocks.
Risk #4: The Eurozone Slips Into Deflation. The double-dip recession, high unemployment, and low starting point put theEurozone perilously close to deflation. A weaker Euro and aggressive ECB should help contain this risk. Abundant ECB liquidity should be positive for risk assets.
Risk #5: The Fed Jawbones and Then Lifts Rates Sooner Than Expected. The strong US economy and falling spare capacity may lead the Fed to act, should dovish market expectations persist. This would drive a market correction- but strong growth would then push the US market higher.
Risk #6: An Emerging Markets Crisis – a strong US Dollar and Fed tightening have historically been negative for EM. Consistent with this, fund outflows are currently occurring. That said, currencies, policy and rates have moved to pre-emptively adjust. India, Indonesia and Turkey appear less risky. On the other hand, Russia and Brazil remain vulnerable.
That’s a pretty bland list. The first is very unlikely given the combined deflations being triggered by oil. The second, third, fourth and sixth are already priced in. The fifth is very unlikely and given consensus still expects rate hikes at some point the real risk is them not coming at all.
Here’s my own list of top risks in no particular order:
- the RBA cuts rates and Australian east coast houses takes another dramatic up-leg because APRA’s macroprudential isn’t tough enough;
- China grows at 6%, iron ore falls to $40 and oil to $30 as the commodity deflation cycle rages;
- a systemic bank or hedge fund is dragged down by the commodities rout and counter-party risk soars, leading to QE4.
