--> Each of these risks provide a plausible challenge to the consensus
--> We think the risks that could have the greatest impact are the least likely
While there is already a consensus about the economic and market outlook for 2014, we also need to be aware of the risks surrounding that view. We have drawn up a list of what we view as the top 10 such risks – mainly developments that would be negative for the global economy and financial markets, but there are also several positives. These are not forecasts, but scenarios that we feel investors should consider as we head into the New Year.
* Fed tapers without a strong recovery
* Fed is forced to increase QE
* QE leads to inflation
>>> Emerging-market risks
* China hard landing
* EM current-account crisis
>>> Developed-market risks
* Abenomics triggers financial instability
* US debt ceiling not raised
* Successful eurozone rebalancing
>>> Good/bad price declines
* The spectre of deflation
* Large oil price decline
Amongst these risks, we believe that a Chinese hard landing and the Fed either expanding QE or deciding to taper without a sustainable recovery would have the biggest impact; however, we believe that a failure of Abenomics, a large decline in oil prices, or the spectre of deflation are the risks
more likely to occur.
Inevitably though, these assessments and our selection of risks are subjective. We may be worrying too much about some of those in our top 10 whilst ignoring other risks that, in time, may prove more important. In an uncertain world, however, the best we can do is highlight some of Donald Rumsfeld’s “known unknowns”. We cannot say anything about “unknown unknowns”. By definition, “black swans” cannot be anticipated.