ASX investors will probably be keen to see the back of 2018 after the big market sell-off over the past few months, although you should be careful of what you wish for as the new year could herald a few new bogeymen.
To be clear, I am still optimistic about the outlook for risk assets, at least for the first half of 2019, but ASX shares remain particularly vulnerable to rising global uncertainties that could threaten some of our best performing blue-chips such as the RESMED/IDR UNRESTR (ASX: RMD) share price, CSL Limited (ASX: CSL) share price and BHP Group Ltd (ASX: BHP) share price.
These shares have gained between 18% and 43% each over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 6%.
The experts at global bank HSBC have picked 10 top risks that could rattle markets in the new year in a report released this week and published in BusinessInsider Australia.
But investors shouldn't be alarmed, HSBC isn't forecasting these events to happen – it's merely pointing out where the biggest icebergs are as global markets sail through 2019.
What I do find unnerving though is that some of these events are linked. This means if one of these risks becomes a reality, it could trigger another.
The 10 risks are (not ranked in order of probability or severity):
- Eurozone crisis 2.0: The threat to the survival of the EU could become a big feature again and that will send the bloc's common currency into a free fall. I fear the dreaded "C" word will rear its head again and that word is "contagion".
- Trade tensions end: This is an upside risk as this would be a positive for global economic growth, particularly China's (and Australia by extension).
- Brace for 'climate' impact: HSBC warns there is a risk of adverse market reaction to extreme climate events and preparing for such outcomes is "expensive".
- US corporate margin falls: HSBC pointed out that record high profit margins have been a key driver to US corporate earnings and consensus is forecasting further margin increases. But rising inflation could become a headwind that derails this bull market.
- EM reform surprises: The bank is cautious towards emerging markets (EM) but if these countries start to focus on real structural reforms, their currencies could enjoy a big bounce.
- The ECB initiates new unconventional policies: The European Central Bank (ECB) may have only just outlined the end of quantitative easing last night but HSBC warns it could soon have to return to unconventional programs if the regions economy comes under significant threat.
- Leveraged risks and accounting tactics: "US nonfinancial corporate debt is at its all-time high and average credit ratings of investment grade debt have fallen sharply," wrote HSBC. If profits come under pressure, US firms may resort to more aggressive accounting practices.
- The Fed keeps hiking: HSBC expects three more rate hikes by the US central bank in 2019 and rising inflation pressures could force the Fed to hike rates by more than what the market expects.
- No bid in a credit sell-off: HSBC warns that corporate credit remains a structurally illiquid asset class (meaning there aren't many buyers and sellers so any large order can distort the price). This is a big problem if there is a major sell-off in these assets.
- Fixed income volatility comes back: Central banks are removing liquidity from markets and global capital flows are shrinking, which could make fixed income securities more volatile. HSBC warns this would be a threat to risk assets as these have benefited from the stable and low fixed income market.
