10 Market Risks
Significance for Investors"Corporate profit margins [in the U.S.] are at an all-time high and consensus expects them to move up further. But rising costs, including wage growth, trade tariffs and financing costs could bring them down next year," HSBC warns. They add, "Faster than expected wage growth could cause a significant miss to earnings estimates and derail the equity bull market." Goldman Sachs also has flagged a sharp deceleration in S&P 500 earnings growth as a major headwind for the market in 2019, per an earlier Investopedia article.
Record high U.S. corporate debt and falling credit ratings among investment grade companies in the midst of rising interest rates promise to push down profit margins, HSBC observes. Worse yet, this may be a recipe for widespread corporate bankruptcies and a perhaps a new financial crisis, as detailed in another Investopedia report.
"Corporate bonds remain a structurally illiquid asset class," HSBC also warns. As a result, in a sharp selloff, willing buyers may be scarce, sending prices crashing and yields soaring. If that were not enough, central banks around the world are reversing policies that had kept interest rates low and stable, a risk that others have noted, as reported by Investopedia. "If fixed income volatility does rise, vol is likely to pick-up in other asset classes as low and stable long-end rates have been a key determinant of performance of risky assets," they assert.
The final two risks that HSBC lists actually would be positives. If emerging market countries adopt "structural reforms to address their imbalances, boost productivity, and improve efficiency," their bond markets and currencies should rally. If trade tensions between the U.S. and China are resolved, that would be a boost to growth in China and elsewhere, and spark a recovery in the Chinese yuan.
Looking AheadWith stock prices already in a tailspin, and fears of an oncoming recession rising, the market may not be able to digest more bad news. If several of HSBC's warnings come to pass, the impact may be devastating.
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