Investors have already had quite a rocky year in 2016, with the market spooked by fears over China at the start of the year and the Brexit vote in June. 
In both cases the market fell rapidly, before picking up gradually as data proved to be better than many were expecting and investor sentiment improved.
In the UK, the FTSE All Share dropped 9.34 per cent in January and February, while it lost 7.01 per cent over the course of two days following the EU referendum. However, the index is up 13.68 per cent over the year to date.
Performance of index in 2016
Source: FE Analytics
Below, a number of fund managers outline other potential factors that could spook the market, as well as current issues that are keeping them awake at night.
Politics and policies
Where else to start than politics – one of the hot topics of the year so far – with the EU referendum dominating the headlines over the summer.
With upcoming elections in Europe and a presidential election in the US in November, it is likely to be the key for investors over the next 12 months.
However, despite these events, it is the politicians themselves and more importantly their attempts to stimulate the economy that Jeremy Lang, founder and partner at Ardevora Asset Management, is keeping an eye on.
He said: “Politicians in Europe, America and Japan are openly talking of using fiscal policy to save the economy. Stock markets have noticed.
“Top-down investors have been placing their bets on a shift to fiscal policy. Some stocks have started to behave as though investors believe a macro policy change is coming. Such moves look speculative.”
While some believe fiscal policy is the next logical step, others are not as convinced and Lang notes that the last time fiscal policy stimulation was used in earnest was back in the 1960s, when the economy was very different.
“I have learnt from experience, knowing when not to have an opinion can be just as important as trying to form one,” he said.
“Forming an opinion is deceptively easy, but forming an opinion on such a particularly slippery topic is dangerous: it is easy to be wrong and it is easy for a potentially flawed opinion to infect other decisions, like whether a particular stock looks good or bad.
“On the topic of fiscal versus monetary policy shifts, having no view is probably the right view for the moment.”
We need to talk about China
As mentioned earlier, the market struggled at the beginning of the year with fears over a slowdown in China and the devaluation of the yuan caused investors to sell out of equities.
Gary Greenberg, head of emerging markets at Hermes Investment Management, says this issue has not gone away.
“Widespread belief China’s GDP growth is driven by an unsustainable expansion of credit, primarily to the real estate sector, is well founded,” he said.
“Many analysts believe real Chinese growth is about 5 per cent, so authorities aiming to hit the official target are compelled to increase the supply of credit to the real estate market, even if this funds loans that are bound to go bad.”
In August, China devalued the Yuan by 2 per cent against the US dollar, sending the emerging markets into a tailspin.
As the below graph shows, the MSCI Emerging Markets lost 9.78 per cent over a six-month period, while the S&P 500 rose 0.85 per cent over the same timeframe.
Performance of indices in the 6 months following the devaluation of the yuan
Source: FE Analytics
Greenberg said: “We see two Chinas: the old, and the new. The old is burdened by an outdated growth model, sustained by debt and subject to reforms – such as the country’s new state-owned enterprise restructuring fund.
“China’s nascent economy – featuring growing healthcare, e-commerce, and advanced manufacturing businesses – is what we perceive as its long-term source of growth, and is where we are invested.”
Bond yields, what bond yields?
“Bond investors face a very difficult investment environment,” according to Arif Husain, head of international fixed income at T. Rowe Price.
“Yields are near record lows, central bank actions have caused widespread volatility, and concerns persist over the prospects for the global economy.”
As the below graph shows, this year bond prices have risen, with central banks including the European Central Bank and Bank of England buying back government bonds forcing investors into riskier assets.
Performance of indices in 2016
Source: FE Analytics
While the MSCI World has gained 25.58 per cent in 2016, global bonds have climbed 29.25 per cent, with many now bordering or in negative yield territory.
“Yields are likely to remain low, protecting existing portfolios against sudden declines in value, but weak US corporate balance sheets could signal volatility,” Husain said.
“It is still possible to make money in this environment, but rising correlations between equities and certain bond assets are complicating matters.
“Investors need to decide whether they want to access the higher yields available from emerging market, high yield, and corporate debt – which means accepting higher correlations with equities; or the greater diversification available from developed market sovereigns – which will mean accepting lower yields.”
The US Trump’s all
Finally, to the US, where the upcoming general election has Colin McQueen, manager of the Sanlam FOUR Stable Global Equity fund, nervous.
“The US election and the prospects of a Trump presidency loom large over markets. The Brexit vote highlighted how current conditions are polarising electorates, with more extreme parties and candidates garnering support,” he said.
While the polls are currently leaning against Trump, “we have seen polls being wrong before”, he adds.
He also notes that though Trump win would undoubtedly cause a sharp sell-off in markets, the actual economic impact will evolve more slowly, with the divided nature of congress hampering US policy flexibility.
Meanwhile, Erik Knutzen, chief investment officer of multi-asset class investments at Neuberger Berman, sees high valuations as the main threat to investors in US equities.
“US equities still look attractive relative to the return outlook from government bonds – but it is the first time in this unusually long cycle our Asset Allocation Committee’s view on this asset class has fallen below neutral,” he said.
“When we look at non-US developed world equities, we see tailwinds from accommodative monetary policy, improving earnings and compelling relative value between earnings and dividend yields and exceptionally low core government bond yields.
“In the US, the case is less clear. The issue is not that current multiples are too high in themselves – a 17 times forward price-to-earnings ratio is in line with historical averages – but that the earnings growth required to satisfy them seems optimistic in the current environment.”