Daily Management Review

3 main reasons for a crisis in 2018


Ten years after the beginning of the financial crisis in the world economy, everything is pretty good. A steady growth is observed all over the world, and theoretically, more effective regulation should reduce the likelihood of a new banking crisis.

re_birf via flickr
re_birf via flickr
Nevertheless, "great determination" will be required to assert that crises will not become a permanent function of the current financial system that has existed since the early 1970s, said strategist Jim Reid from Deutsche Bank. He studies all possible world events that can become catalysts a new financial crisis, if and when it comes.

ETF Market

The markets are different now. Today investment funds look different than ten years ago. A striking example is rising ETFs.

ETFs have been booming in about 10 years after the last turmoil, as increasingly more investors prefer to pour money in ETFs, rather than in funds associated with high rates and which offer lower returns over the past 10 years.

ETFs were growing fast, yet their stability was not checked by any serious difficulties in the market, which led some experts to doubt whether the sector could manage a significant correction in the market.

This is particularly true given that ETFs will distort markets, prompting investors to invest in large companies - just because they are big names – no matter of the fundamental factors of the market (such as the price-earnings ratio, the return on capital).

World central banks and governments

Global central banks are moving away from an incredibly free monetary and credit strategy which has lasted since the last market turmoil.

The American Fed has raised rates and begins to reduce its balance. In Europe, the ECB begins to narrow the QE. In the UK, the Bank of England may be on the treshold of a first rate hike in more than a decade.

"It is necessary to expect significant consequences of this process, given the increased level of many world asset prices. In any case, we will face an unprecedented situation at the world level, finance can become extremely volatile if we are now at record low levels of volatility."

One of the most alarming factor is that some countries are not able to fight recession, which means that the recession can quickly turn into a major storm.

"Given the levels of public debt noted after the last recession, can politicians act decisively if necessary? Will the next such situation become the one when politicians will find their insolvency that has been manifesting for the last forty-five years? Or, perhaps, they will just implement a harsher tactic and introduce full monetization? The next recession can bring extreme events, given the impasse in politics, which seems to coming to the end, "- said Deutsche Bank’s team. 

European countries, separatism and populism

If 2016 was marked by populism reaching the world political arena, but 2017 was the year of its heyday.

With the beginning of the process of Britain's withdrawal from the European Union and the victory of Trump, populism began to shape the world political landscape for the future.

After the victory of Emmanuel Macron in presidential election, it seemed that the European populism could retreat, but the high result of the party "Alternative for Germany" in the elections in Germany suggested otherwise.

"Despite the fact that the consequences of the latest growth of populism have not yet destabilized the markets, the uncertainty will remain at a high level, while such parties are still major influencers in national elections." Until recently, the only example of the growth of populism was noted in the twentieth century, which then culminated in the Second World War. Therefore, despite the fact that populism has been unpredictable so far, its growth enhances the risks to the modern world as we know it and can evoke a crisis in the financial markets at some point "- Reid said.

source: businessinsider.com