Our top five financial market risks for 2022


We had planned to publish this article the week before Christmas, but the biggest risk on our list is now showing up early. We have therefore decided to publish this article early in case any other risks on our list emerge in the coming weeks!

It is important to note that these are risks that we believe will impact the markets, or part of them, if they occur in the next year. This is something that investors should be aware of and ideally prepare for if they can.

COVID 19 mutation

We list them in order of magnitude and, unfortunately, probability. We have been expecting a ‘worrying’ COVID mutation for some time, so the advent of Omicron in southern Africa is no surprise. The fact that many countries in the developed world are switching to vaccine booster shots while millions of Africans still do not have access to vaccines is paving the way for further mutations in countries with slow immunization programs.

“The Covid-19 virus is not going anywhere anytime soon and will continue to mutate until we run out of Greek letters,” said Barclay Pearce Capital in a note to investors today. “Given the history of the virus mutation, it is highly unlikely that the virus will change significantly to alter the effectiveness of currently available vaccines. It seems the biggest risk to financial markets is not the virus but the government’s reactions to the virus, but given the foreclosure fatigue experienced by citizens around the world, it would take convincing evidence for governments to restart them. lockdowns and close international borders again. “

Either way, governments will tend to err on the side of caution, and the virus will continue to mutate in 2022. Although there has been some sort of post-COVID atmosphere taking hold on the streets of London in November, it is obvious that relaxation is going to be a short-lived phenomenon.

Inflation

Before COVID reared its ugly head again, investors were much more concerned about the specter of inflation in 2022. This was starting to show itself in the almost hysterical coverage of the Fed in the financial media. Markets are worried about when central banks will start to withdraw support for businesses and raise interest rates. The problem is, they can’t let inflation run indefinitely, and rates in many developed countries are already starting to look penalizing.

“Certainly hyperinflation in immense proportions can have a devastating impact on an economy, as we have recently seen with Zimbabwe and Venezuela,” said Mati Greenspan, founder of Quantum economy. “However, there are many more examples of countries that have lived with high inflation levels for many years and have yet to fall on the planet. My furtive suspicion is that most probably wouldn’t indicate inflation as their number one problem right now, it’s more like a symptom.

Inflation will also hit stocks, so investors are wary. To take United Utilities (LSE: UU) for example: the company recently reported that inflation has increased its cost base and that part of its debt is also linked to inflation. That was enough to put the group’s bottom line in the red. Many predict that the rise in inflation is of course only a short-term burst, but how deep until 2022 will this “blow” last?

European energy crisis

Natural gas prices have been on the rise for some time now and we have reported gas as the longest commodity trade for 2021 in the summer. There has obviously been some serious disruption in the US and European gas markets and to be honest you can’t blame COVID this time around. As winter approaches, electricity prices in the UK are also high and the cost of heating a house is considerably higher than in 2020. The situation is also leading directly to the collapse of small energy suppliers like the UK. Bulb energy.

“The collapse of Bulb Energy is the latest indicator of the difficulties facing the UK energy retail sector,” said Allegra Dawes, analyst at Third bridge. “Since August, more than 10 energy suppliers have collapsed and our experts expect that by the end of the year, the market will have only a dozen major players, with only a handful. small actors. While current wholesale prices have defied all utility providers, Bulb’s acquisition of customers with zero to negative margins was a particular risk for the company even before their collapse.

The energy sector is going to be a particularly risky place for small businesses in 2022, unless you are a producer. However, rising energy costs will also spill over into corporate profits – a higher oil price will also make life harder for the transportation industry. Most businesses also consume electricity and will feel the effects as well.

Cryptocurrency regulation training

Cryptocurrencies still rely heavily on the news feed for price action. While the SEC’s approval of crypto ETFs has been a big boost for Bitcoin, China’s decision to make Bitcoin mining illegal in the country took the breath away at Bitcoin’s last big rally. Other international moves to get cryptocurrency under control could push Bitcoin and Ethereum prices down in the new year. Most industry experts predict that there will be new card regulations in 2022 and that major cryptocurrency trading platforms will be the starting point for regulators.

“It’s still the Wild West, as the SEC’s Gary Gensler said,” commented Daniel Wilson, Chief Market Analyst at Markets.com. “The point is, fake / questionable coins can moon and become a lot more valuable than real, serious DeFi projects built on years of proper research, which is kinda crazy. Who’s next? Some point to something like self-proclaimed Doge killer Shiba Inu had a terrific October, increasing over 700% for the month. Memecoins are now a problem. And while this is not a scam, we all know that any crypto can go down as fast as it goes up.

It is probably on this more difficult end of the market that regulators will focus. We have seen a number of frauds emerge from this space in 2021, as well as altcoins which, while well-intentioned, simply shouldn’t be the custodians of investors’ money. Two guys in a basement with a computer aren’t a currency or even a bank. Regulators will likely look to focus on entry points and try to sort wheat – regulated cryptocurrency platforms – from straw (shady brokerages in Vanuatu and Panama). But substantial moves to regulate or even ban cryptocurrencies will have an immediate impact on prices. Of course, much of this depends on the appearance of the proposed regulatory regimes.

High power military competition

The latter risk is the least likely in our opinion, but it is now riskier than it was two years ago, so we are flagging it on our list. While there is again a growing chance of some sort of military action against Iran, it has been planned for years now, and is growing and waning like the moon over Tehran. Our main concerns are Russia and China.

China is working towards some form of projected military supremacy in the South China Sea and even in its immediate territorial waters. The bulk of its military spending program appears to be devoted to the ability to protect its coasts from foreign military operations. Its main military project, in our view, is the recovery of Taiwan, and this year we have seen China regularly test Taiwan’s air defenses with incursions with its jets. For China, Taiwan is an unfinished business, and while previous leaders in Beijing (eg Hu Jintao / Jiang Zemin) seem to have invested their hopes in diplomacy, we are not sure about Xi Jinping.

The other big concern is Russia and Ukraine. As with Taiwan and China, Ukraine is still an unfinished business for Russia. Vladimir Putin tested the US and the EU when he occupied Crimea in 2014. Since then, Russian-backed militias have been the main security threat in Ukraine, but more recently Russia has started to deploy substantial military power on the eastern border of Ukraine. Additionally, there have been rumors this month of a coup plot in Ukraine. Before the Orange Revolution of 2005, Russia could work through relatively friendly leaders in Kiev, but since then it has worried about the growing influence of the EU and NATO on the country.


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