With stock prices already under severe pressure and declining globally, one or more growing risks could intensify the downdraft. Among these are falling profit margins, interest rate hikes, high corporate debt, an illiquid corporate bond market, and rising interest rate volatility, per a report by London-based multinational banking giant HSBC, as summarized by Business Insider. In particular, "a significant miss to earnings estimates [would] derail the equity bull market," the report says. Below are the top 10 risks for the world economy and world securities markets, as seen by HSBC.
10 Market Risks
- Falling U.S. corporate profit margins
- Interest rate hikes by the Federal Reserve
- Record high U.S. corporate debt
- Illiquidity in the U.S. corporate bond market
- Rising interest rate volatility
- Extreme, costly climate events
- A eurozone crisis
- Europe needs negative interest rates to fight recession
- End of trade tensions
- Structural reforms in emerging markets
Significance for Investors
"Corporate profit margins [in the U.S.] are at an all-time high and consensus expects them to move up further. But rising costs, including wage growth, trade tariffs and financing costs could bring them down next year," HSBC warns. They add, "Faster than expected wage growth could cause a significant miss to earnings estimates and derail the equity bull market." Goldman Sachs also has flagged a sharp deceleration in S&P 500 earnings growth as a major headwind for the market in 2019, per an earlier Investopedia article.
Record high U.S. corporate debt and falling credit ratings among investment grade companies in the midst of rising interest rates promise to push down profit margins, HSBC observes. Worse yet, this may be a recipe for widespread corporate bankruptcies and a perhaps a new financial crisis, as detailed in another Investopedia report.
"Corporate bonds remain a structurally illiquid asset class," HSBC also warns. As a result, in a sharp selloff, willing buyers may be scarce, sending prices crashing and yields soaring. If that were not enough, central banks around the world are reversing policies that had kept interest rates low and stable, a risk that others have noted, as reported by Investopedia. "If fixed income volatility does rise, vol is likely to pick-up in other asset classes as low and stable long-end rates have been a key determinant of performance of risky assets," they assert.
The final two risks that HSBC lists actually would be positives. If emerging market countries adopt "structural reforms to address their imbalances, boost productivity, and improve efficiency," their bond markets and currencies should rally. If trade tensions between the U.S. and China are resolved, that would be a boost to growth in China and elsewhere, and spark a recovery in the Chinese yuan.
With stock prices already in a tailspin, and fears of an oncoming recession rising, the market may not be able to digest more bad news. If several of HSBC's warnings come to pass, the impact may be devastating.