The Five Biggest Risks To Your Portfolio In 2022

The Five Biggest Risks To Your Portfolio In 2022
Carl Hazeley

about 2 years ago3 mins

  • The Omicron variant could cause another swath of lockdowns, while stubbornly high inflation could drive the global economy into stagflation.

  • The Fed’s interest rates hikes might lead to a recession in 2023, and China’s property market could drag on the country’s – and the world’s – economic growth.

  • And let’s not forget about geopolitics: everything from post-Brexit trade disputes to China-Taiwan tensions could hamper things even more.

The Omicron variant could cause another swath of lockdowns, while stubbornly high inflation could drive the global economy into stagflation.

The Fed’s interest rates hikes might lead to a recession in 2023, and China’s property market could drag on the country’s – and the world’s – economic growth.

And let’s not forget about geopolitics: everything from post-Brexit trade disputes to China-Taiwan tensions could hamper things even more.

Most analysts and economists are feeling good about the global economy in 2022, but they’d all be the first to acknowledge that the next year is fraught with risk. A relief, then, that Bloomberg’s new modeling tool has estimated just how much damage these risks could do if they were to come to pass. Let’s crunch the numbers.

Omicron causes another crash

The jury’s still out on just how bad the new Omicron variant will be. If it ends up being a flash in the pan, it won’t be long before people are back out spending on services like gyms and restaurants. That should add as much as 0.4% to economic growth next year.

Omicron scenarios

But we’re focusing on the downside risks here and for Omicron, they’re major. A deadlier variant could result in more stay-at-home orders: another three-month lockdown could knock 0.5% off economic growth, not to mention an extension of the supply and demand imbalances of the last year.

Inflation stays too high for too long

Inflation this year has shot past all but the most extreme forecasts, and there’s a risk it happens again in 2022.

Inflation forecasts

Sure, the pandemic could be to blame, but product prices and wages – which are already rising at a rapid clip in developed markets – could stay persistently high even if it begins to recede. Geopolitical tensions between Russia and Ukraine, meanwhile, could be responsible for disruptions to gas supplies, which would likewise send prices higher. That could leave the global economy facing “stagflation” – high price growth in a time of low economic growth – putting central banks in an almost impossible position.

The Federal Reserve gets trigger happy

According to Bloomberg Economics, if the Federal Reserve (the Fed) hikes rates three times next year and signals it’ll keep going, the US will be bracing for a recession at the start of 2023.

That could be dangerous for US stocks, which are currently near bubble territory, and for real estate values too. But the effects won’t just be felt stateside: emerging markets (EMs) would most likely take a hit too. Higher US rates typically boost the US dollar’s value, which both leads investors to move their cash out of EMs and into the US and makes dollar-denominated debt held by EMs more expensive to repay. If it happens too quickly, EM currencies could crash, with Argentina, Turkey, and South Africa most at risk.

China’s real estate bubble bursts

China’s property development industry represents between a quarter and a third of its economy, which is why its slump this year played a massive part in the country’s disappointing 0.8% economic growth – a long way short of its 6% target. And unfortunately, that issue – alongside those created by Omicron – could push into next year.

China industries

Economists are expecting China’s economy to grow 5.3% next year. But if demand for, say, commodities tumbled on the back of major property developers’ declining fortunes, that growth might slip. And that would send ripples around the world.

Political instability becomes even less stable

The UK’s departure from the European Union hasn’t been smooth sailing, and the seas could get even rougher in 2022. If trade negotiations – still very much in progress – go south, history suggests the uncertainty would hit business spending and knock the British pound’s value. A trade war isn’t entirely off the cards either, which would cause even more supply chain bottlenecks, inflation to spike, and economic growth to sink. Any escalation between China and Taiwan is also worth keeping an eye on, as is the ongoing Russia-Ukraine situation – both of which have the potential to upset global geopolitics, economies, and markets.

Throw in a number of policy-defining elections all around the world and the rising inequality between society’s richest and poorest, and global economic stability might be hanging on by a shoestring.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG