There’s always lots of chatter about market opportunities, whether it’s broad macro trends, asset classes or individual stocks. It seems everyone has an opinion about how and where to invest.
 
What you hear far less talk about are market risks, but we all know they can have enormous impact on an investment portfolio.
 
To a degree, that’s understandable. Forecasting risks or shocks that may affect the market is always fraught with danger for the very reason that once a risk emerges the market prices it in. Market shocks occur when something happens that wasn’t expected and hadn’t been priced in.
 
So what are the risks – even shocks – as we enter 2015?
 
The end of 2014 saw market volatility increase, especially in Australia. Expect this trend to continue because of our links to commodity markets, especially oil, copper and iron ore, which remain volatile.
 
The obvious consequence will be a fluctuating Aussie dollar that is still very responsive to commodity prices. In addition, the growing divergence between the US and Europe, in terms of economic growth and monetary policy, is simply increasing the level of volatility in currency markets.
 
Speaking of Europe, many analysts see deflation as a significant market risk and this will remain a theme for 2015.  The recently lower-than-expected inflation figures are driven by lower oil prices.
 
The US economy also poses a risk, although it’s a risk we’ll happily live with. For the first time since the GFC there’s a distinct possibility the US economy begins to accelerate too quickly, especially if oil prices remain low. If this happens the Fed might have to raise interest rates faster than expected.
 
The geopolitical risks are well known – and factored in; East Asia, especially the tension between China and Japan, the Ukraine and, more broadly, the ongoing friction between Russia and the West, the Middle East and global terrorism.
 
What attracts far less attention, and could provide the 2015 “shock”, is the growing divergence in wealth in Europe and US. There are many Europeans and Americans, especially in ethnic minorities, who are now 30 and have never had a job.  This could cause widespread social unrest and the rising of populist parties – and solutions.
 
We have recently seen this in France and the US. We are also seeing it happen in Greece where a populist party is likely to win the next election that could lead to a renegotiation of the EU rescue package and even Greece’s departure from the Euro.  Many argue that Greece has been “firewalled”, but it could still prove a shock to markets.