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Geopolitics, the bursting of the corporate tech bubble and threats financial stability are the three highest level risks of the eight considered to be the most pressing for 2024 by Lombard Odier
A chief investment officer (CIO) viewpoint from the Swiss Bank said it expected tense geopolitics this year, but localised conflicts, meaning financial market risks will be contained.
The bank said the risk of an inflationary rebound in the US is low but rising, and tech stocks’ outperformance should moderate in time.
Strong investor demand for yield and easing financial conditions should help keep credit risks contained the bank said, adding that it judges known market risks to be low or medium.
Geopolitics is the first medium level risk, with Lombard Odier citing the Ukraine war, now in its third year, conflict in the Middle East potentially escalating, Taiwan’s status as a source of US-China tensions and a global race to dominate the future of technology as factors.
However, as long as conflicts remain regionalised and do not pose global issues, they do not alarm global financial markets, the update said.
Meanwhile, a hypothetical second Trump administration could bring a different dynamic to the broader global geopolitical scene, with more emphasis on domestic US issues.
The potential for the tech bubble to burst was the second medium risk, with the sector being a key driver of the equity market returns in 2023.
Current revenue and earnings growth expectations for tech stocks are around twice those of the general market. If the macroeconomic backdrop deteriorates and confidence in achieving these is challenged, or if interest rates do not start to fall as expected, the absolute and relative valuation premium could narrow, posing a clear risk to the broader market, the bank said.
The third medium risk is financial system stability, with non-banking financial institutions, including pension funds, private equity, credit and hedge fund managers, which tend to be less-well regulated, picking up exposure including that of commercial real estate, Lombard Odier said, with the potential vulnerabilities that could pass shocks to banks.
The potential for a recession or inflationary rebound was categorised as low-medium risk, while a major default or credit cycle event was classed as low risk.
A real estate market shock emanating from banks was also categorised as low risk, as was a debt crisis from public finances, and a new public health risk such as another pandemic.
(Writing by Imogen Lillywhite; editing by Brinda Darasha)
