Illuminate: The investment risks we cannot ignore

It’s been a nervous time in booming equity markets, and bond markets too. As we get closer to the end of the year, a growing number of voices are drawing attention to several lurking risks that while so far have not held back markets, cannot be ignored.

There is the risk of a hard or badly prepared Brexit because of delayed and protracted exit negotiations. The looming constitutional crisis in Spain over the Catalan separatists’ movement has brought further risks to the European Union (EU). Globally, the prospect of a rising US dollar, and a slowing economy in China, could cause damage to emerging market economies. Geopolitical risks, such as the tensions arising from North Korea’s desire to be recognised as a nuclear power, are even harder to weigh up.

In the UK, pessimism levels have increased following a survey from the Confederation of British Industry (CBI) which revealed retail sales had fallen at the fastest rate since the 2009 recession. Consumers have drastically cut back on purchases and rising inflation has weakened their spending power. This reinforces our suspicion the UK economy is unlikely to see any marked pick-up in activity in the near-term, despite GDP growth edging up to 0.4 per cent quarter-on-quarter in Q3 from 0.3 per cent in the previous two quarters.

So, is there any good news to be had? Well, the squeeze on UK consumers should progressively ease in 2018 due to inflation falling back markedly as the impact of sterling’s sharp fall drops out. There will also likely be a gradual pick-up in pay in both the private sector and the public sector due to an easing of the pay cap.

We may not be quite there yet, but at least the global economy is consistently improving and synchronised growth around the world tells a story of expansion, not decline. The forward-looking capital markets also tell us they expect conflicts to be resolved rather than ending in a proverbial car crash. Until we know for certain, during the winter months it will pay to remain vigilant and pragmatic, as there may be as many risks to the downside as there is potential for upside.

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