Top 20 Risks to the Sharemarket in 2020 – Deutsche Bank

Whilst the irony of the world’s most precarious western bank, Deutsche Bank, listing the top 20 risks for 2020 is not lost, it is certainly a list that calls for pause and consideration.  We’ve added a few observations to the list.

Deutsche Bank’s Top 20 Risks to the Stock Market in 2020:

1. Continued increase in wealth inequality, income inequality and health care inequality
   • Whilst dismissed by many as a ‘bigger picture’, longer timeframe risk, it is interesting that this finds its place in #1.  This year has certainly seen an increase in civil unrest playing out in protests but also in the rise of socialism (which may well play a significant role in the 2020 US elections) and far right political movements as well.  The slow burn of Brexit, it too a symptom of this divide, will materialise in 2020 too.  Read more here.
2. Phase one trade deal remains unsigned, continued uncertainty about what comes after phase one
   • Last night reminds us that any talk of a deal is purely that.  There are much deeper geopolitical forces at play that would indicate no meaningful deal is coming any time soon or ever.  Read more here.
3. Trade war uncertainty continues to weigh on corporate capex decisions
4. Ongoing slow growth in China, Europe and Japan triggering significant U.S. dollar appreciation
   • We spoke just yesterday again about the ‘race to the bottom’ of struggling economies devaluing their currency to improve export competitiveness and raise domestic inflation.  If the Fed doesn’t cut rates to compete, the USD will strengthen and exacerbate their domestic issues.
5. Impeachment uncertainty and possible government shutdown
   • Playing out on your newswire right now.. Watch this space.
6. U.S. election uncertainty and the implications for taxes, regulation and capex spending
   • Add to this an agenda of crashing the markets in an election year to oust Trump and the 2020 US elections could be one of the biggest influences next year.  Recall the alternative to Trump is a very left, very big deficit spending agenda. 
7. Antitrust, privacy and tech regulation
8. Foreigners lose appetite for U.S. credit and U.S. Treasurys following the presidential election
   • With government debt now in excess of $23trillion and interest servicing costs near that of all defence spending, and it may not take an election for foreigners to question the debt they are buying….
9. MMT-style fiscal expansion boosts growth significantly in U.S. and/or Europe
   • With the unsaid hanging of ‘at what debt burden cost’…
10. U.S. government debt levels begin to matter for long rates
    • Highest debt levels in history have to be serviced.  Governments simply cannot afford higher rates.
11. Mismatch between demand and supply in T-bills, another repo rate spike
    • We’ve seen the Fed come to the rescue as banks refuse to lend to each other, such is the nervousness in credit markets.  Their question is ‘to what limit’ as we haven’t even seen an ‘event’ that might make this spike far worse.  How deep are the Fed’s pockets and how quickly can the ‘money printing presses’ go?
12. Fed reluctant to cut rates in election year
    • Trump was calling for negative rates last night.  Imagine the tension between Trump and Powell escalating as the market falters before an election!
13. Credit conditions tighten with more differentiation between CCC and BBB corporate credit
    • As money is deprived of yield elsewhere it will look to more and more risky assets to get ‘a return’.. 
14. Credit conditions tighten with more differentiation between CCC and BBB consumer credit
    • Subprime redux?
15. Fallen angels: more companies falling into BBB, and out of BBB and into HY
    • As with 13. we are surprised this is so far down the list and have spoken at length of the risks in the corporate bond market in this regard.  Many would have this near the top. Last discussed here. 
16. More negative-yielding debt sends global investors on renewed hunt for yield in U.S. credit
    • Last discussed here and the correlation we have seen with the gold price and the amount of negative yielding debt this year has been astounding.
17. Declining corporate profits means fewer dollars available for buybacks
    • We discussed this here recently and it is certainly a big question given how much of the market has been driven by corporate buy backs.  Don’t discount their simply borrowing more to buy more though (which then adds to risk 15 above).
18. Shrinking global auto industry a risk for global markets and economy
    • Yet another tangible measure of economic hardship in a closed loop cause and effect situation.
19. House price crashes in Australia, Canada and Sweden
    • Inflated by Chinese capital outflows which have been largely stymied these property markets are wildly inflated beyond affordability fundamentals and on many analysts ‘watchlist’.  As we know in ‘2 trick pony’ Australia, the knock on effect to our sharemarket and broader economy are very significant.  Last discussed here.
20. Brexit uncertainty persists
    • Few expect the election to be a panacea.  Watch this debacle play out.