Potential ‘black swans’ for 2022

COVID-19 and its economic fallout have driven dramatic moves in markets for nearly two years. What new ‘black swans’ could the world face in 2022? Marlborough’s multi-asset team have conducted scenario analysis looking at extreme events that, although unlikely, are still plausible. Here are four of the potential wild-card scenarios they have considered that could have a dramatic impact on financial markets in the year ahead.

COVID-19 ‘super vaccine’

Existing COVID-19 vaccines have been invaluable, but issues such as diminishing efficacy and new variants mean we are still grappling with the coronavirus and its economic impact.

However, a vaccine breakthrough that deals with the shortcomings of existing vaccines and allays ‘anti-vax’ fears could bring a sharp recovery in many hard-hit sectors.

A new vaccine breakthrough would not be unambiguously positive for markets though. A sudden wave of spending that hits before supply issues are resolved could exacerbate inflation and lead to interest rate hikes.

Cryptocurrency collapse

The growth of cryptocurrencies has been exponential, with the global market now worth an estimated £2.3 trillion, making this one of the largest asset classes in the world.

However, China has already declared cryptocurrency transactions illegal and US Securities and Exchange Commission Chairman Gary Gensler has repeatedly called for regulation of cryptocurrencies.

A significant regulatory intervention by the SEC, perhaps working with other regulators, could lead to a collapse in the value of cryptocurrencies, whose independence from governments and regulators is a key part of their appeal.

Retail investors account for a significant proportion of cryptocurrency holdings and many are investing ‘on margin’, borrowing from brokers to leverage their positions.

Should the value of cryptocurrencies collapse, millions of investors worldwide would have to repay margin debt. They would be likely to sell other investments, which could have a significant impact on equity markets.

While financial institutions’ exposure to cryptocurrencies remains relatively limited, the greater the proliferation, the higher the risk a collapse would pose to our wider financial system.

A revolutionary clean energy breakthrough

Recessions generally lead to an increase in innovation, as workers are displaced and necessity leads to creativity – and the COVID downturn has been no exception.

At the same time, lockdown restrictions have increased people’s focus on the environment surrounding them, coinciding with a growing media focus on climate change.

As a result, a whole new wave of innovators has produced a proliferation of ideas to generate clean energy, with thousands of solutions currently under research.

A new wave of ideas brings potential for one to produce a revolutionary energy solution. This could fast track the global energy transition to net zero, removing the need for large-scale investment and limiting the global temperature rise far quicker than previously estimated.

This would be a huge positive for the world and provide a major boost for capital markets, although some sectors, for example oil and gas, would be affected negatively.

China debt crisis

China is the engine of world economic expansion and currently accounts for around 25% of global GDP growth.

However, total corporate, household and government debt has reached eye-watering levels – above 300% of GDP, driven by an excessive reliance on credit and wasted infrastructure spending.

Evergrande is teetering on the brink of collapse, with more than £200 billion of liabilities. What if another high-profile Chinese company hit the buffers because of its debts? The ripple effect could trigger a series of major defaults as suppliers and other businesses go to the wall.

As indebted companies go bust, the cost of borrowing in China would spiral upwards and even relatively healthy companies would struggle to borrow. As a result, economic growth in China would collapse. Around the world, business partners of Chinese companies would have orders cancelled or go unpaid for goods already shipped. Meanwhile distributors and retailers would be unable to get the products they need.

The debt crisis spreading from China would be likely to result in a significant correction in global stock markets.

The ‘black swan’ scenarios were also featured in Investment Week, read the full article here.

14/12/21

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This material is for distribution to professional clients only and should not be distributed to or relied upon by any other persons. The Cells referred to are a cell of Marlborough International Fund PCC Limited (the ‘Company’), a protected cell company incorporated in Guernsey and authorised as a Class B Collective Investment Scheme under the terms of the Protection of Investors (Bailiwick of Guernsey) law, 1987, as amended. Investment may only be made on the basis of the current Prospectus, this can be found on the website www.marlboroughinternational.gg. Marlborough International Management Limited is incorporated in Guernsey. Registration No. 27895. Regulated by the Guernsey Financial Services Commission. Licensed under The Protection of Investors (Bailiwick of Guernsey) Law 1987. Guernsey Office: PO Box 146, Level 2, Park Place, Park Street, St. Peter Port, Guernsey, GY1 3HZ. Tel: +44(0)1204 589336.