Heightened Risk

I suspect that the next three to five years will bring a greater geopolitical and economic risk than many anticipate.

The election of a US President prone to making rash decisions and one who is not afraid to take on large debt and file for bankruptcy in business combined with a more assertive China both internally and with its neighbours makes for a precarious dynamic. In addition, the ongoing conflict in the Arab states, involving ancillary support from the major military powers is spreading into the developed world and has the potential to ignite into something more potent.

It is concerning how complacent the world is in light of these events. Optimism across the major economies is high. Share prices are hitting new peaks and asset prices are largely overvalued relative to earnings. Global debt is high and is likely to increase further in the US and China.

While acknowledging these risks, there remains potential for asset prices to continue to ride higher spurred on by momentum and improved economic growth.

However, it only takes a sidestep by a major superpower or a black swan event to bring things back to reality. The risk of a major downside event such as a conflict and/or a recession is significantly increased.