As those well meaning New Year’s resolutions slowly get broken, it’s time to consider what investment risks you might be facing in the next few months
Five Areas Of Potential Investment Risk
It’s a fact that nothing in the world of money can be predicted with any particular accuracy. Whilst spreading your investments is a well proven strategy, it can’t protect you from all the investment risks to which your money could be exposed.
So rather than try to work out where the winners might be, perhaps a more prudent way to work out what this year holds for your money is to focus on the main investment risks you could face as the months roll by.
In no particular order, here are five investment risk areas of which you should be mindful.
The Eurozone Crisis Is By No Means Over
It’s all gone rather quiet in Europe, since the heady days of the much-reported problems in Greece and Cyprus last year.
You’d be forgiven for being a little complacent. After all, there’s been a rise in the price of bonds issued by the governments of Portugal and Greece, the two countries with the least sustainable debt positions.
The problem is that the Eurozone’s future stability depends on its ability to introduce structural reforms. This primarily means the harmonisation of taxation, banking and regulation across countries. But it could be years before that happens, not least because our own politicians are currently debating whether to have a referendum as to whether to stay in or our of Europe.
Until there is true harmony, the Eurozone is an investment risk.
Continual Worry From The USA Debt Ceiling
It’s often said that when America sneezes, the rest of the world catches a cold.
It’s definitely been proven in recent times that when the American economy gets into difficulty, the global effects are serious. When the default scare occurred at the end of last year, the shockwaves were felt throughout financial markets. It’s primarily due to the dollar’s position as the world’s reserve currency.
Unfortunately, that scare wasn’t an isolated incident. A variety of fiscal problems have occurred in recent years. And we're not out of the woods yet. Whilst the default was headed off last time, there’s a stay of execution only until March, when it will revisited again.
Much of the issue is political posturing. But be under no illusion. There is no guarantee a deal will always be brokered. And that will result in an investment risk of massive downward pressure on markets.
Fall-out From The End Of America's Quantitative Easing
The US Federal Reserve will reduce and eventually stop its eye-wateringly large asset purchase programme. It’s been pumping in $85 billion each month to support prices and to reduce the cost of global borrowing. The net result is that markets and economies around the world are greatly distorted.
When these payments fall, US bond yields could sharply rise. The knock on effect is that emerging markets could suffer greatly.
There’s no doubt you should keep an eye on quantitative easing in America, particularly when the monthly amounts begin to fall, as they must do soon. Ignore this investment risk at your peril.
Japan's Strategy Of Encouraging Inflation
In an attempt to boost economic growth, the Bank of Japan is supporting a rise in inflation.
But if this doesn’t create growth or tax receipts, the Japanese bond market could suffer.
The fall out could be an unsustainable debt position.
At the moment, this strategy is working well.
But as the long term success in Japan is dependent entirely on generating strong growth, if it doesn’t pan out as expected, the investment risk of a run on its bond market is significant.
China’s Growth Cannot Be Guaranteed
China is putting itself at serious investment risk of financial crisis as it continues to grow credit at an incredible pace.
The market in Shanghai fell 15% last year as the government put the brakes on credit growth in an attempt to avoid financial risk. The result is an increased possibility of bankruptcies because of the lack of liquidity.
It’s expected this year that credit limitation will be relaxed to boost growth. But this might just be creating other problems for the future. For it’s unclear whether the newly released credit is being used wisely. Until the Chinese Government gets to grips with what’s really happening in its economy, the investment risk is unknown.
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