Geneva-based Lombard Odier has highlighted the eight top risks for investors in 2024.
In a newly released report, Lombard Odier's global CIO Michael Strobaek as well as head of investment strategy, sustainability and research and CIO EMEA Dr. Nannette Hechler-Fayd’herbe highlights some of the top concerns investors should be monitoring.
«With global equity markets hovering around new all-time highs, investors are questioning what could go wrong in 2024. We examine eight key risks, with the caveat that big disruptions often come from overlooked or hard-to-model areas,» the report said.
1. Geopolitics
Classified as medium risk, Lombard Odier named geopolitics the first concern for investors. According to the bank, «the world has become more belligerent» with sources of continued tensions found in the Ukraine war, the Middle East and Taiwan. Nonetheless, it is of the view that geopolitical risks are «contained» based on historical context while perceived market risk according to the VIX index remains low.
«As long as conflicts remain regionalized and do not pose global issues, they do not alarm global financial markets,» the bank said. «But the willingness and/or ability to escalate current regional wars look relatively contained, in our view, despite rhetoric that may suggest the contrary.»
2. Economics
On economics, Lombard Odier sees a limited probability of a US recession, though it warns against discounting recession risks due to the still inverted yield curve.
«We believe that the probability of a US recession is just 10 percent, compared with a 70 percent chance of a soft landing and a 20 percent likelihood of either mild stagflation or an economic re-acceleration,» the bank said.
3. Credit Cycle
On the credit cycle, Lombard Odier expects «gradual credit deterioration» in the coming years.
«Strong investor demand for yield should continue, outweighing slowly deteriorating credit fundamentals, keeping spreads from widening much. We expect default levels to be similar to 2023, likely in a 2.5-3.5 percent range on a par-weighted basis, and overall manageable.»
4. Real Estate
Banks’ exposures to commercial real estate remain manageable, according to Lombard Odier. While some lenders may need to book additional loan provisions, it takes the view that those are earnings rather than a capital issue.
«However, fast-changing customer and depositor behavior can lead to unexpected consequences, as seen in March 2023. Given poor disclosure, including outside banks, there is also a risk of surprises and potential contagion.»
5. Tech Bubble
«Historically, the S&P 500 has shown a trend towards mean reversion and we would anticipate either market breadth to increase or the degree of tech outperformance to subside going forward,» the report said.
According to the bank, the first scenario could coincide with favorable overall equity dynamics while the second one is more worrisome for investors. Should the macroeconomic backdrop or confidence in earnings growth worsen, Lombard Odier expects the absolute and relative valuation premium could narrow, posing a clear risk to the broader market.
6. Financial System
While Lombard Odier believes that the banking systems of North America and Europe remain strong, it is less confident about non-bank financial institutions such as pension funds, private equity, credit and hedge fund managers.
«These institutions have often picked up activities abandoned by banks given the impact of regulation. The transfer of balance sheet risks – including books of life insurance policies and collateralized loan obligations – to these institutions and their increasing share of total financial assets is a source of potential concern.»
7. Public Finance
The report highlights the potential for some volatility in US bond markets due to the levels of public debt relative to GDP, which will reach 160 percent based on the latest projections from the Congressional Budget Office.
«However, we view a US default as very unlikely. The interest rate on US debt is likely to remain below the economy’s growth rate, allowing some modest fiscal deficits to be sustainable,» it said. «The starting level of taxes relative to GDP remains the lowest among G7 countries, meaning the US could raise taxes if concerns on its debt sustainability should escalate.»
8. Another Pandemic?
Based on an analysis of novel disease outbreaks in the last 400 years, the chance of another pandemic that is similar to coronavirus is 2 percent in any given year.
«Statistically extreme events are therefore not as rare as we think,» Lombard Odier said. «The increase in the world’s population, international travel and climate change, the destruction of animal habitat and the increase in human-animal interactions are major factors contributing to the increased risk of a new pandemic.»
