Societe Generale is out with a nice succinct breakdown of what they view as the two biggest market risks at present – China and the USA’s fiscal cliff:
Risk 1: US fiscal cliff and prevailing uncertainty
- Now that the US elections are over, the new government can finally focus on the fiscal cliff. If the fiscal cliff – which is scheduled to go into effect on 1 January 2013 – is not resolved, GDP could drop by 0.5% in 2013 (Q4.13 over Q4.12) according to the CBO’s estimate of 8 November.
- According to analysis from SG’s economists, the environment of uncertainty experienced since 2006 may already have cost the US 2.5% in terms of GDP, 10% in terms of private investment and 2.1m jobs.
- However, if a resolution to the fiscal cliff is found, business investment is one area that could see significant upside, especially in light of the recent dive in core capex orders.
Risk 2: Growing inequalities in China
- Last week, at the Communist Party’s 18th National Congress, former president Hu Jintao said that China should seek to double economic growth and per-capita income for both rural and urban populations by 2020(from 2010). He also stressed the risks posed by rising income inequalities as well as corruption for China.
- Indeed, income distribution inequalities and corruption are among the main concerns of the Chinese population according to recent surveys. The Gini coefficient has increased from 0.42 in 2007 to 0.48 in 2009 (source: CIA Factbook).
- The new government will have to address these issues with a view to preventing further social unrest, in the light of lower GDP growth.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.