2023-12-15 21:08:53
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Investors are always on a tightrope of risk, but rare and catastrophic events are unpredictable. It is better to accept the reality of stock market risks and prepare for them.
We’ve identified eight stock market risks heading into 2024. Let’s take a deeper look, with help from the experts at Morningstar Investment Management (MIM).
1) Extension of the conflict in the Middle East
After Hamas’s attack on Israel on October 7, many observers are concerned regarding an escalation of the conflict involving other countries in the Middle East. This might impact energy markets and cause oil shocks which, in turn, might increase the risk of recession for vulnerable economies. Although most commentators have been relatively agnostic regarding the risk of Israel’s own markets finding themselves at the epicenter of a financial crisis, the situation depends on the role Tel Aviv plays in any ground or air conflict.
2) Prolongation of the conflict between Ukraine and Russia
The prolongation of the conflict between Ukraine and Russia might also have an impact on energy and food markets, which, in turn, might increase the risk of recession for European countries. Eurozone economic activity has generally stagnated in 2023. In September, the European Central Bank (ECB) lowered its forecasts for gross domestic product (GDP) growth, particularly for this year and next year, “due to a greater contractionary effect due to tighter financing conditions and a weakening international business environment.” It now expects the economy of this economic bloc to grow by 0.7% in 2023, 1% in 2024 and 1.5% in 2025.
3) Resurgence of inflation
Inflation has fallen significantly from its peaks in 2022, both in Europe and the United States, but upside risks are still present. “It’s clear that the fall in energy prices was the main driver of the decline in the headline rate to 2.4% (in November, in the euro zone),” says Michael Field, Morningstar market strategist. European.
“However, energy prices can be volatile and therefore easily rise once more in the coming months. If inflation starts to rise once more, central banks will be forced to increase interest rates, while the market expects them to fall over the course of next year.” It might also impact corporate profits and increase the risk of recession.
4) Sovereign deficits of developed markets
With rising debt levels, investors are demanding increased term premiums, or compensation for the risk of holding bonds in developed markets. In other words, they seek higher forward returns. Additionally, central banks are no longer reinvesting proceeds from maturing bonds amid quantitative tightening, and investors are struggling to absorb the influx of new bonds. In this scenario, long-term yields are expected to rise once more, and prices to fall.
Click next to discover 4 additional risks
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