Lots to fear, including fear itself

Binary scenarios for key investment risks in this year’s Top 10 are worrying buy-siders

Many of the investors that Risk.net spoke to for this year’s Top 10 investment risks survey were in gloomy spirits.

“We’ve got World War III, climate disaster, American civil war, the end of democracy,” a US-based CIO told us as he ranked his top risks. “That’s only four. It’s bad.”

A twist in this year’s review of buy-siders’ worries, though, is that the gloominess could become a risk in itself. Even as the most pessimistic investors catalogue their fears, they also recognise they might be worrying too much.

This is especially the case because the likely outcomes for so many of the risks in this year’s Top 10 are bimodal. It makes life hellish for investors who have to decide how best to position portfolios. 

In geopolitics, for example, fundamental risks seem self-evidently to be growing. But the likelihood of peace in Ukraine has also probably increased. Being on the wrong side of a “peace rebound” could create losses for investors, too.

The comments of one macro hedge fund CIO illustrate the challenge.

On one hand, he considers the outbreak of World War III to be a “non-zero probability”. At the same time, the balance of likelihood is tilted in precisely the opposite direction, he says. He thinks wars in Ukraine and in the Middle East are more likely to end this year than to worsen.

Crude oil could fall by $10 to $15 a barrel as a result, he reckons, with the potential for prices to move suddenly: “The market doesn’t really believe it until it sees it.”

Related

Risk.net’s top 10 investment risks for 2025 

Fresh concerns this year include a trade war, a stock market crash and growing social discord

Equally, some of the policies of the incoming Trump administration that most worry investors might never become real. A multi-asset strategist distinguishes between “good Trump” – deregulation, tax cuts, efficiency gains – and “bad Trump” – tariffs, immigration controls, reckless spending.

In one view, Trump’s threats are a tactic. The president-elect seems often to start negotiations with hardline demands in an effort to frame subsequent discussions in his favour. The bullheadedness might work, investors say.

Suppose, then, the US and China reach an accommodation on trade, without tariffs ever coming into effect. Perhaps Trump’s most extreme promises to clamp down on immigration turn out to be largely electioneering. Investors’ concerns about inflation and trade wars in such a scenario may fall away.

Most of all, despite the frothy valuations of US stocks, the deregulatory agenda of the incoming government, together with a potentially benign macroeconomic environment, creates a fair chance the market’s two-year upwards trajectory will simply continue.

“People talk about how expensive equities are, and they’re not wrong,” says the CIO at a European asset manager. “But equities were expensive in 1998 as well. And it didn’t stop them making significant progress for the next couple of years.”

If today I gave you next year’s newspapers, I’m not sure actually it would help you that much

Quant fund CIO

There's also a case that the risk associated with ballooning public borrowing could turn out differently from expected. 

Governments might appear to be sinking unsustainably into further debt, but there are some who reckon the colossal borrowing could actually weaken the hand of the so-called bond vigilantes.

That’s to say, investors hold such large volumes of bonds that they might prove reluctant to push yields too high. To do so would depress the value of existing portfolios.

Ballooning issuance could encourage greater profligacy, a head of research suggests. A buyers’ strike from a relatively small section of investors would fail to “move the needle”, he says, meaning bond yields, if anything, could come down over time.

All this may explain why predicting how markets will react to news has become such a struggle. 

“There’s no reason a company should lose a fifth of its market cap because its expectations over the next year are less rosy than they were last year,” says the head of research. Nowadays, it happens often, he complains.

The things driving markets have become unusually hard to define, agrees a quant fund CIO. “If today I gave you next year’s newspapers, I’m not sure actually it would help you that much.”

The risks are many. They are made more complex by the chance that fears remain unrealised and cautious investors miss out.