The biggest issue identified by asset allocators for 2014 is the number of European elections. Andrew Bell, chief executive of Witan, for example has highlighted this as a key risk for the year. Voters may use these as protest votes and there has already been talk of the rise of extremist parties in Greece, France and elsewhere.
The Eurozone is currently sustained by a fragile consensus, still riding the wave set in motion by Mario Draghi's 'we'll do whatever it takes to save the Euro' speech in July 2012. It would only take one wonky election to disrupt that consensus. The banks have yet to work through all their problems and there is still a widespread view that the periphery in Europe needs to deflate further. Countries such as Spain appear to be making progress, but can the same be said of Italy? France remains another key risk, with an unreliable leader, an identity crisis and a huge debt burden.
And yet Europe continues to see significant inflows into its equity markets, admittedly from a very underweight position by many asset allocators. This new-found popularity could reverse quickly should problems re-emerge.
Equally, although China appears to be doing better economically, reforming its institutions and seeing stronger growth, its worsening spat with Japan is likely to do neither side any favours. To date, the tensions in the South China sea have garnered relatively little investor attention, but Beijing’s recent attempt to grab control of the air space above the Japanese-administered Senkaku Islands show that its commitment to wresting the islands from Japanese control remains undimmed.
The success or otherwise of Abenomics also presents a risk. If it goes well, and Japan could become another engine of growth in the global economy. If it stalls, Japan is effectively admitting that it is resigned to a permanent deflationary spiral.
These risks come on top of the well-identified risks for next year. The slowdown in Chinese growth looks set to continue, with the real question over whether that slower growth is higher quality or just plain old slower growth. Inflation still looks to be under controlled across the developed world, but any hint that this is not the case could make an orderly slowdown in bond markets disorderly. Deleveraging continues of necessity and that will act as a drag on growth for some time.
Of course, the biggest risks are the unknown unknowns, the black swan events that come out of nowhere, the derivatives transaction that blows a hole in a bank's balance sheet, for example. The real worry is that the benign environment is the consensus view, and that almost never turns out to be the right one.
