Markets over the last year or so have certainly seen high levels of volatility, with the like of the FTSE 100 breaking above 7,000 for the first time at the end of March last year then shedding £74bn at the end of August due to China slowdown and commodity price-related fears.
Performance of indices since 2015
Source: FE Analytics
The start of this year was also turbulent, with markets falling due to continued woes surrounding the macroeconomic backdrop.
Recently though, indices appear to be in better health as the oil price has slowly begun to increase and fears surrounding four impending rate hikes from the Fed have largely been put to bed.
When markets are stable though, it is often the case that investors will focus less on potential headwinds on the horizon, whether they’re medium-term concerns or themes that could play out over a few years.
As such, FE Trustnet asked a panel of investment professionals which negative scenarios could play out over the next few years and why it is prudent for investors to keep a close eye on them:
Brexit
The impending EU referendum has divided investors in terms of how much it could impact markets. In an article published last month, manager of the ConBrio Sanford Deland UK Buffettology fund Keith Ashworth-Lord (pictured) said that a Brexit would cause some short-term volatility but is ultimately nothing to worry about, arguing that it could actually bolster the strength of the UK economy. 
Others, however, including SWMC UK’s manager Brian Cullen, believes that an exit from Europe could be far more detrimental to the domestic economy.
“It is a big risk. The one thing I wouldn’t agree with is the people who have said, ‘oh well, whichever way the vote goes it doesn’t really matter’,” he said.
“I do believe it’s quite important in the sense that the impact on the confidence of both businesses investing and consumers can be quite substantial.”
Tristan Scrivens, director of Elm Financial Management, says that the fact the result could go either way is a reason for UK investors to remain cautious.
“The usual argument is that Europe is already doing business with us so they’ll continue doing business with us, but I think you’ve also got to have the view that when Scotland were thinking of leaving the UK, you found that a lot of companies threatened to pack up and relocate,” he pointed out.
“It’s a loyalty thing as well. I think certain countries might be annoyed by a Brexit and therefore cut back in certain areas and say ‘do you know what? We don’t need you. We’ll find business elsewhere’, almost as an ‘I told you - you shouldn’t have left’ move.”
“It is a worry. It’s a tough call as well because it really is a split opinion.”
An EU break-up
The European refugee crisis hit headlines in 2015 with more than a million migrants crossing into Europe last year alone, most of whom are fleeing from the conflict in Syria. This has divided opinions across the EU in terms of how and where to resettle them - Jason Hollands, managing director of Tilney Bestinvest, believes that this could result in a larger-scale break-up of the Eurozone.
“There is a scenario where this is promoting a lot of anger and domestic opinion in many European countries including in Germany and that could give rise to support for parties that want to leave the EU,” he explained.
“You’re seeing it in France, you’re seeing it in Germany. Not within the year, but I think this could play out to an eventual collapse in the Eurozone.”
Greece
Within the eurozone, AXA Wealth’s Adrian Lowcock says that last year’s Greek crisis could rear its head in the future.
“The financial situation in Greece isn’t particularly strong. The bail-out they’ve had and the agreements they’ve adhered to are tough for them to meet, then you add in things like the humanitarian immigration crisis, you add in the weaker global growth which we’ve seen come in and is predicted to continue, and it means that Greece could always come back and therefore we could see a re-run of last year,” he warned.
At the start of last year, Greek prime minister Alex Tsipras rejected an extension to the country’s $270bn bailout programme, which heightened fears that the country could leave the EU and negatively impact its GDP and the strength of the euro.
While Lowcock says that the issue has quietened over recent months, he says that debt agreements in the region still need to be resolved.
Continued low interest rates
While the European Central Bank has adopted ultra-loose monetary policy over the last year including keeping interest rates low, many investors began to worry about a divergence in policy due to the Fed’s plans to continue rate hikes in the US.
However, Hargreaves Lansdown’s Laith Khalaf says that while the continuation of low interest rates initially sounds like a positive factor, he says that it could have a detrimental effect on economies over the longer term.
“There are lots and lots of people borrowing money at the moment who have not had much experience borrowing at higher rates. We haven’t had a rate rise for almost 10 years and lots of people got on the housing ladder in that time and have never experienced interest rates going up,” he explained.
“The longer we have low interest rates, the more people that’s going to be the case for and that means that people become too complacent with borrowing and end up over-extending themselves so that, when there is a rate rise, it hits them quite dramatically.”
China
China was one of the most talked about headwinds of last year, with sentiment surrounding its growth slowdown listed as one of the biggest contributors to the mass market sell-off of 2015.
Again, sentiment surrounding China as a global headwind has varied over the months, with Rathbone’s David Coombs telling FE Trustnet during the throws of last year’s sell-off that the slowdown wasn’t an issue that overly concerned him.
“I don’t understand why the fact that China is slowing is creating this effect. Everyone knew China was slowing. Most big corrections are due to a shock and I don’t know what the shock is here,” he said.
While Chase de Vere’s Patrick Connolly says this issue is no longer at the forefront of some investors’ minds, he points out that China is still the world’s second-largest economy and says that any negative news from the region could hurt markets once more.
“China is still expected to be a big driver of global economic growth. If the numbers coming out of China suggest that’s not going to happen, then sentiment as we’ve seen in the past will very quickly turn negative which will impact on markets all around the world,” he said.
“It tend to come in fits and starts. A lot of these headwinds tend to get forgotten about until something happens again, so some more disappointing numbers from China would get it back in the headlines again and on people’s minds again.”
