Vaccine hiccups, US political turmoil and a possible taper tantrum are among Natixis Investment Management’s head of market strategy Esty Dwek’s 10 biggest risks for the year ahead.
With many hoping the year will be a better one than the preceding one, the rollout of a successful vaccine was at the front of everyone’s mind going into the new year.
However, this did not mean there would be risks ahead when it came to monetary policy and handling the pandemic recovery.
- Vaccine hiccups: Already, the vaccine rollout is slower than hoped. Logistics, availability, population willingness, side effects, mutations, all could lead to hiccups and delay broad inoculations and a possible return to normal, which was already priced in by markets.
- Growth disappoints: The virus could linger longer than anticipated, either due to poor vaccine uptake, problems with the rollout or mutations. Global growth cannot rebound as lockdown measures continue to be extended.
- Inflation surprise: Activity could get back to normal quicker than expected and, with ongoing fiscal stimulus, inflation and inflation expectations move higher, bringing into question Federal Reserve policy and leading to a spike in yields.
- Taper tantrum: If vaccine rollouts go smoothly and growth picks up. With base effects, inflation ticks up as well and the Federal Reserve starts to talk about tapering sooner than expected. Bond markets overreact, yields spike and equities suffer as they were counting on improvements in growth and earnings but with ongoing low yields.
- Political turmoil: Infighting among moderate and progressive Democrats or concerns about President-elect Joe Biden’s tenure could lead to internal tensions and shake markets.
- US-China tensions: The trade war may improve with Biden, but tensions would remain and the tech wars were not over.
- Geopolitical tensions: Middle East tensions with Iran, tensions over Taiwan, upcoming elections in Europe could all grab headlines and lead to volatility.
- Tech sell off: The tech leadership ends, the “bubble” bursts or regulation impacts the sector, leading to a broader market sell-off.
- Valuations/exuberance: With an already-constructive consensus and high valuations, markets could become overly optimistic and positioning too aggressive, leading to a sharp correction.
- Credit event: As a result of the 2020 crisis, a credit event occurs, spilling over into broader markets.
