Risks to be taken into account when investing in 2022

Macroeconomic, financial and political risks to be taken into account in 2022. What should financial market players keep an eye on next year?

Trading in the financial markets is all about interpreting and evaluating the global economy. As financial markets are interconnected, what happens in one part of the world or with an asset can impact the entire market.

As an example, consider the price of oil. A sharp drop indicates a drop in demand, and therefore a potential recession. As such, stocks would reduce any gains and commodity currencies would be sold. In addition, the price of oil has an impact on inflation expectations, and central banks will therefore modify their monetary policies accordingly.

It is therefore useful to prepare for the next stock market year and to examine what are the potential risks that could affect the financial markets. Here are three categories to consider: macro, financial and political risks.

Macroeconomic risks

Topping the list in the macro category remains the global COVID-19 pandemic. The scientific world has evolved quickly enough to provide effective vaccines against the virus, but variants are emerging. Investors saw the potential impact on financial markets in December when the price of oil slumped more than $ 10 on news that a new variant, called Omicron, was spreading faster. In other words, the pandemic is not over, but the world is better prepared to deal with it.

Other risks in this category are the effects of the climate change transition, current supply constraints, a potential erosion of the labor market and, why not, a hard landing of the Chinese economy.

Financial risks

Equally important are financial risks. For example, next year investors should be aware of possible liquidity disruptions due to economies not functioning at their full capacity. Also, the big central banks are preparing to tighten monetary policies (some have already started, like the Bank of England or the Bank of Canada), and there is therefore a risk that financial conditions will tighten suddenly, jeopardizing progress. achieved so far.

A challenge for the next year is whether real returns will move up into positive territory. As the chart above shows, they have stabilized after each crisis, and with inflation in the United States peaking in four decades, real returns will struggle to turn positive again.

Political risks

Finally, the political risks must not be ignored in 2022. First, there are elections in Italy, Spain and France. Second, the Russia / Ukraine confrontation could escalate. Third, the rise of populism around the world should also be taken into account.

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