15th December 2014
Over the coming 12 months investors will need to get to grips with how much investment risk they wish to take on, Tom Elliott international investment strategist at advisory firm deVere Group has warned. Below he explains why…
Investors who are sensitive to market volatility may need to increase their exposure to defensive sectors and stockmarkets, because volatility is likely to increase in 2015.
The uncertainty over the ongoing development of the euro project, and Japan’s use of massive fiscal and monetary expansion to achieve consistent economic growth, represent existing political risks for investors.
Next year may also see some increase in risk coming from other countries. For instance, we may discover if China’s private sector has taken on too much debt, if a wave of defaults from property companies, for example, leads to a banking crisis, will the Chinese government bail them out? What will the impact be on growth?
In addition, it should be noted that a weak Russian bear is potentially more dangerous than a strong one, and if export energy prices remain depressed and the economy falls into recession, President Putin may choose to ramp up the rhetoric.
However, the country most likely to experience a rise in political risk is the UK as voters and investors make sense of a new political landscape, triggered by two nationalist parties (UKIP and the SNP) challenging the Conservative and Labour parties’ traditional dominance of Westminster. The spring general election may well result in a minority government that seeks allies on a policy-by-policy basis, or another coalition government. Neither promises stability.
In terms of the evolving regulatory requirements, a wave of post-credit crunch financial sector regulation, most notably the American 2010 Dodd-Frank Act, have caused investment banks to allocate less capital to market making, in both stock and bond markets. As a result financial markets have become less liquid, and as the October ‘flash crash’ demonstrated, more susceptible to panics.
The high yield bond sector looks most vulnerable to this problem, even when the run-up to the credit crunch liquidity was thin. Rolling over debt for high yield issuers may become expensive, negatively affecting earnings and their stock valuation.
In light of both the pressing geopolitical factors and the changing regulatory landscapes, it would be prudent for many investors to reassess their risk appetite for 2015 with their independent financial adviser.