HSBC highlights top 10 risks for 2016

HSBC has outlined its top 10 risks for 2016, splitting them up into three categories ranging from the genuinely optimistic to the truly ugly.

“The current consensus suggests slow but stable growth for 2016. But what if this doesn’t materialise? What if a tail risk emerges to challenge commonly held assumptions?

“With the global economy arguably in the latter stages of the business cycle, leverage still high, and limited policy ammunition available, any shift in sentiment could have major economic and market implications. With this in mind, we have compiled our top 10 risks for 2016.”

There are two risks in the bank’s ‘good’ category.

The first is a US capex recovery. This would mean tighter labour markets, strong profits and an improving demand outlook leading to a revival in US capital spending, which would feed through into higher productivity, supporting real wage growth.

The potential implication of this would be European equities outperforming and higher capex driving commodity prices up.

The second is a spike in emerging market capital flows. In this scenario, China’s policy stimulus bears fruit and looser monetary conditions support demand for EM assets, the bank said.

HSBC said it would favour high-yielding currencies and commodities.

The bank’s ‘bad’ category dominates, taking up six of the ten slots, with policy paralysis, a supply-led oil price increase and the UK voting for Brexit all on the list.

“If the UK votes to leave the European Union, it could adversely affect the European political landscape more broadly. Brexit would imply that EU membership is not a one way street, raising uncertainty about the other parts of the union. As such, periphery risks could resurface.”

In addition, it brought up more frequent flash crashes – sudden crashes in stock prices – and a rise in corporate defaults in China.

Finally, in the ‘ugly’ category, HSBC mentioned a US recession and Fed policy error.

As regards the final risk, it said: “We would expect a Fed policy error to have a bigger negative impact than policy paralysis.

“Markets are currently pricing in a gradual Fed tightening cycle under the premise of continued modest growth. If the Fed was viewed to be committing a policy error though by tightening too quickly, asset prices could fall materially.”

The bank stressed that the above are tail risks, not forecasts and none of them may come to pass.