Risk factors for 2019

In a world of renewed volatility with political risk at a heightened level in Australia and abroad, it is no surprise that strategists find it easy to highlight a raft of potential future risk factors for markets.

Davison What is the main risk factor you are looking out for in 2019 and what risk do you think is most overstated?

GOODMAN I think the main overstated risk is China falling off a cliff. Through 2017 and 2018 there has been a fear of China’s growth stalling. It is slowing, but we are comfortable that this is an overstated risk to the world economy and to Australia’s economy. The main risk globally, I think, is quantitative tightening (QT) and what it means for liquidity. The US$15 trillion which has been inserted into the global economy in the last decade peaked in March 2018. It is slowly coming off, but I think we are still playing in that experiment.

Domestically, with an upcoming federal election there is uncertainty around corporate regulation. This clearly makes for an uncertain environment for investment.

STANLEY I think the biggest risk and the most overstated risk for markets are related. I think the biggest risk is that there is more momentum in the US economy and more tightening than the market currently expects. The counter to this is the overstated risk of a US downturn because of the idea that we have come so far that it necessarily has to start going the other way.

QT is another one. Our thinking is that we won’t get much more on this from the other major central banks next year, but it could change. The European Central Bank is not rearing as a major threat but will still be on a slow path of removing policy accommodation.

It is very difficult to test the regulatory system for funding when QE is being run at the same time. But we have changed the rules on funding, and we are now starting to test them. The outcome of these tests is a risk.

PHILIP BROWN COMMONWEALTH BANK OF AUSTRALIA

BROWN One underappreciated risk factor for 2019 is if things go well. This is easy to forget, and it is particularly relevant in Europe. The problems with LIBOR and bank-bill swap rate (BBSW) are a risk factor.

I don’t think it is a fluke that problems in the funding market started to appear when the US began to withdraw QE. If Europe gets on the same bandwagon because things are going well, it will create a lot of discussion about financial plumbing issues.

There has been some talk already about issues with BBSW and LIBOR and this will only continue as more QT comes onto the table. One observation I have made is that it is very difficult to test the regulatory system for funding when QE is being run at the same time. But we have changed the rules on funding and we are now starting to test them. The outcome of these tests is a risk.

WHETTON The US curve is presaging a recession that may or may not take place. The expectation alone may mean that it does eventuate.

I think the risk that is understated is the breakdown of multilateral institutions. About 5-6 weeks ago president Trump pulled out of the United Postal Union – a Swiss institution which has been around for more than a century – which is true to his dislike of these institutions.

The US is the major shareholder of International Finance Corporation, World Bank and Inter-American Development Bank. If the president decides to pull back on called capital it would be problematic for these solid, triple-A-rated Washington names.

Germany and other European countries would be loathe to pull out of the European institutions and European integration will be ongoing. But if president Trump is re-elected and emboldened by his voter base these institutions could be in danger, particularly if there is a downturn in the US economy.

STANLEY If this does happen there is the question of who steps in. If it is China it makes for a lot of geopolitical risk.

WHETTON Exactly. As we discussed earlier, if the US begins to lose its exorbitant privilege as the world’s reserve currency these risks will play out over time. The euro has been tested hard and has survived, and the yuan and yen are both robust.