16/12/2019 10 Risks That Could Shake the Markets in 2019

TRADING SKILLS & ESSENTIALS RISK MANAGEMENT

10 Risks That Could Shake the Markets in

2019

BY MARK KOLAKOWSKI | Updated Dec 21, 2018

With stock prices already under severe pressure and declining globally, one or more growing
risks could intensify the downdraft. Among these are falling profit margins, interest rate
hikes, high corporate debt, an illiquid corporate bond market, and rising interest rate
volatility, per a report by London-based multinational banking giant HSBC, as summarized
by Business Insider. In particular, "a significant miss to earnings estimates [would] derail the
equity bull market," the report says. Below are the top 10 risks for the world economy and
world securities markets, as seen by HSBC.

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10 Market Risks
Falling U.S. corporate profit margins
Interest rate hikes by the Federal Reserve
Record high U.S. corporate debt
Illiquidity in the U.S. corporate bond market
Rising interest rate volatility
Extreme, costly climate events
A eurozone crisis
Europe needs negative interest rates to fight recession
End of trade tensions
Structural reforms in emerging markets

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Significance for Investors

"Corporate profit margins [in the U.S.] are at an all-time high and consensus expects them to
move up further. But rising costs, including wage growth, trade tariffs and financing costs
could bring them down next year," HSBC warns. They add, "Faster than expected wage
growth could cause a significant miss to earnings estimates and derail the equity bull
market." Goldman Sachs also has flagged a sharp deceleration in S&P 500 earnings growth
as a major headwind for the market in 2019, per an earlier Investopedia article.

Record high U.S. corporate debt and falling credit ratings among investment grade
companies in the midst of rising interest rates promise to push down profit margins, HSBC
observes. Worse yet, this may be a recipe for widespread corporate bankruptcies and a
perhaps a new financial crisis, as detailed in another Investopedia report.

"Corporate bonds remain a structurally illiquid asset class," HSBC also warns. As a result, in a
sharp selloff, willing buyers may be scarce, sending prices crashing and yields soaring. If that
were not enough, central banks around the world are reversing policies that had kept
interest rates low and stable, a risk that others have noted, as reported by Investopedia. "If
fixed income volatility does rise, vol is likely to pick-up in other asset classes as low and
stable long-end rates have been a key determinant of performance of risky assets," they
assert.

The final two risks that HSBC lists actually would be positives. If emerging market countries
adopt "structural reforms to address their imbalances, boost productivity, and improve
efficiency," their bond markets and currencies should rally. If trade tensions between the
U.S. and China are resolved, that would be a boost to growth in China and elsewhere, and
spark a recovery in the Chinese yuan.

Looking Ahead
With stock prices already in a tailspin, and fears of an oncoming recession rising, the market
may not be able to digest more bad news. If several of HSBC's warnings come to pass, the
impact may be devastating.

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Related Terms
Currency Risk
Currency risk is a form of risk that arises from the change in price of one currency against another.
Investors or companies that have assets or business operations across national borders are exposed
to currency risk that may create unpredictable profits and losses. more

What Is a Risk Asset?

When an asset's value is subject to substantial volatility that could potentially vacate its worth, it is
called a risk asset. more

Risk
Risk takes on many forms but is broadly categorized as the chance an outcome or investment's actual
return will differ from the expected outcome or return. more

Secular Market
A secular market is driven by forces in place for many years causing the price of a particular
investment or asset class to rise or fall over time. more

What happens in an Economic Collapse

An economic collapse is a breakdown of a national, regional, or territorial economy that typically
follows or spurs a time of crisis. more

Austerity Definition
Austerity is defined as a state of reduced spending and increased frugality. more

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