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The top five global risks for investors in 2021 are all surprises to the consensus view: problems with the vaccine rollout, geopolitical and trade tensions do not subside, fiscal and/or monetary policy tightens, a “zombie” economy and interest rate/dollar shock. Whether or not these particular risks come to pass, a new year almost always brings surprises of one form or another. Having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome are keys to successful investing, Jeffrey Kleintop, CFA, Senior Vice President, Chief Global Investment Strategist at Charles Schwab apprises. 

Key quotes

“There is potential for the stock market to pullback some of the gains if vaccine distribution, adoption, or efficacy lags, resulting in delays to the recovery timeline. Bottlenecks with virus testing capacity and turnaround times in both the UK and the US raise concerns about the ability to roll out widespread vaccination, an even larger operation. Also, we believe the market has not yet discounted the potential return to lockdowns in early 2021 should the December holidays result in new waves of cases and hospitalizations, or the potential for the virus to mutate and render current versions of the vaccine less effective.”

“The market does not anticipate any flare up in foreign policy tension in 2021. Yet, there are hot spots that could spill over into markets. US President-elect Biden has made it clear he won’t be easing trade tariffs immediately and intends to confront China on environmental and labor issues in addition to intellectual property rights. China may respond by alerting other countries that new alliances with the incoming Biden Administration against China might prompt retaliation. Australia and China have been in low key conflict over the past couple of years, but tensions have now escalated, with the potential for meaningful economic damage.  Failure to craft a post-Brexit UK-EU trade deal could lead to conflict; heightened by a transition to new leadership in Europe. There is the potential for renewed US tensions between North Korea, Russia/Syria, Venezuela, and others with interests in conflict with US goals.”

“Markets are clearly betting on continued easy policy in 2021. Premature monetary or fiscal policy tightening in major economies could slow the recovery and deal a setback to the stock market. Policymakers are unlikely to tighten policy anywhere near as rapidly following this global recession compared to recent history. But signs of less easing may prompt a market pullback, should policymakers begin to seek ways to contain runaway budgets and balance sheets.”

“Lingering structural economic impacts from the 2020 crisis and recession could slow the economic rebound. Instead of a quick return to the pre-crisis economy, it is possible we may need a longer period of structural adjustment. Continued easy fiscal and monetary policy could also result in a drag on productivity and growth from hordes of ‘zombie’ companies. These companies may use aid to make debt payments rather than fuel economic growth through hiring or spending on equipment.”

“An unexpected jump in inflation, surprise surge in bond yields or plunge in the dollar might lead to higher stock market volatility. Inflation expectations have been rising fast. Any breakout above the five-year range may spark tighter financial conditions and prompt investors to reassess stock market valuations.”