What Are The Biggest Risks For Investors In 2021?
The markets have been choppy this 2021. Just as a consensus builds, the market turns and overturns that consensus. At the beginning of the year, it seemed clear that the world was headed toward greater inflation, more economic growth, and with that, it was believed that value stocks would outperform growth stocks. Some people began to think that inflation concerns were overblown, that the Delta variant of Covid-19 would slow down economic growth and consequently, that growth stocks would outperform. The bond markets threw a tantrum as well. Throughout the year, it has been hard for investors to gain a foothold in the market and get some clarity about the future holds. In this article, we will discuss what the risks are for investors for the rest of the year.
Firstly, there are geopolitical risks. The United States is engaged in an intense rivalry with four revisionist powers that are attempting to upend the US-led world order: China, Russia, Iran and North korea. The standoff with China is the biggest geopolitical rivalry that the United States has and China poses an even greater challenge than the Soviet Union ever did, given the size and dynamism of the Chinese economy and China’s success in becoming a big trade partner of even countries who are on the US side of conflict. The standoff has affected the IPO market, with China cracking down on US-listed firms over worries that the US will use sensitive data gathered by those firms, against China.
Many investors worry that the standoff is leading to a cold war over data, currency, technology, and finance. China has stolen a march on the United States with its Covid diplomacy, further eroding American influence. Fears of a great decoupling have risen as both sides have worked to reshore industries, such as the vital semiconductor industry, upending a century of globalization.
The other risk to the market stems from inflation. There are two schools of thought regarding inflation. The first is the Fed view of inflation, which is that inflation and growth this year reflect the broken economy of last year and do not suggest long-term rising inflation and growth. Frédéric Bastiat would say to think otherwise would be to fall into a “broken window” fallacy: replacing a broken window does not mean there is a sustainable boom in the windows market. On the other hand, many business leaders and investors fear that rising inflation will persist for the next few years and may become a big problem.
Those who think inflation may become a persistent problem look to the global supply chain disruption and the difficulties companies are having meeting the pent-up demand of the pandemic era, as reasons to believe in a return to 1970s style stagflation. This threat only rises as we consider the threat of trade wars, movements toward de-globalization, the effect of ageing populations and populist politics. A return to stagflation is the worst case scenario and would materially affect investor returns in the markets, making investments in gold and silver for, the perfect defence against this scenario.