Mohamed El-Erian, President of Queens' College, Cambridge, predicts that credit risk will replace interest-rate risk as the major concern in 2024. With the end of the aggressive Federal Reserve rate hiking cycle, uncertainty surrounding economic growth and debt supply will take center stage. El-Erian believes that the global economy will face a tougher year in 2024 compared to 2023. While the Fed will have less influence on interest rates, volatility will persist due to the tug of war between debt issuance and a softer economy. The recent rally in 30-year bonds highlighted the need for stability in the Treasury market. El-Erian emphasized that regular large moves in the Treasury market are detrimental to its functioning and the broader economy. Additionally, he mentioned concerns about the low issuance in other markets due to market volatility and uncertainty about buyers. Overall, El-Erian expects credit risk and debt supply to be significant factors impacting the global economy in 2024.
Risk.net's top 10 investment risks for 2024 include mounting government debt, the rise of AI, a credit crunch, and regulatory overkill. The article also mentions specific financial instruments such as Index CDS, Single-name CDS, Credit options, Index stock options, Single-stock options, FX forwards, FX options, Inflation swaps, Interest rate swaps, and Interest rate swaptions. The article also references specific dates, such as May 22 and Oct 21, and discusses the potential impact of repo roll risk on the US Treasury basis trade. The article mentions the US Basel endgame and its impact on clearing with operational risk capital charges. It also highlights the uncertainty surrounding the use of repo to monetize liquidity books in Europe. The article discusses the challenges faced by Europe's lenders in the banking book and provides links to other related articles on Risk.net.
In a webinar, structured credit experts discussed the outlook for structured credit markets in 2024. High inflation and rising interest rates were identified as the top challenges in the mortgage-backed securities and leveraged loan markets. There is uncertainty in the market regarding the future direction of rates and the speed at which they might come down. Buy-side firms consider inflation the biggest risk to their businesses. The possibility of inflation remaining sticky throughout 2024 was discussed. Firms are putting more emphasis on inflation in their risk modelling. The steep run-up in interest rates has increased the emphasis on stress-testing. The collapse of several regional banks in March 2023 was a liquidity crisis. Bank regulators have proposed stricter capital requirements for banks with at least $100 billion in assets. Climate risk is beginning to impact company valuations and credit. Artificial intelligence and machine learning are being used in structured credit markets. Prepayment modelling is ripe for AI and machine learning applications.
Sanlam Investments sees several critical risks and market contradictions that could lead to investors experiencing disappointment and a market derating in 2024, according to Ralph Thomas, Sanlam Investments’ head of balanced funds. The first risk identified was that inflation could become stickier than investors expect.
Lombard Odier's article examines eight key risks for investors in 2024. The risks include geopolitics, threats to the tech sector, inflation, credit events, public debt sustainability, real estate market shocks, bursting of the tech bubble, financial system stability risks, and public health crises. The article provides an assessment of each risk and its potential impact on the global financial markets. It emphasizes the importance of monitoring emerging risks and remaining vigilant to unexpected developments.
Lionel De Broux, chief investment officer at Banque Internationale à Luxembourg, discusses the market risks investors will face in 2024. He believes the US economy will not experience a recession and that Europe is staving off a recession. De Broux emphasizes the undervaluation of climate risks and the need for immediate attention. He does not anticipate a rate hike by the US Federal Reserve and warns that a rate hike would be a major shock for world markets. He suggests that the European Central Bank should cut rates to avoid a recession. De Broux does not believe there is a tech bubble currently, as the market is discerning and conducting thorough due diligence. He sees limited risk of major defaults or credit events in the short term. He expresses concern about the return of large pandemics and the impact of climate events on financial assets. De Broux suggests that Trump's policies may negatively affect the export sector and the cleantech industry. He notes that additional defense expenditures may create new industrial champions in Europe but could result in weaker economies and cutbacks on climate change commitments.
Economic headwinds and the interest rate environment in 2023 increased financial stress on portfolio companies, leading to heightened litigation risk in 2024. Interest rate increases, tight liquidity, inflation, and increased costs related to ESG and regulatory compliance have put portfolio companies in unsustainable financial positions. This has resulted in disputes and litigation, which is expected to continue in 2024. While relief on the interest rate front is expected with the Federal Reserve cutting rates, it may not be enough to prevent disputes and litigation. Difficult financial conditions strain a portfolio company's ability to fund its operations, leading to disputes over valuation and dilution of existing investors. Breach of debt covenants with lenders and bankruptcy also pose challenges and increase the risk of litigation. Aggrieved investors, lenders, and stakeholders may pursue claims for liability against sponsors and managers. Lessons from 2023 can help managers and portfolio companies protect their investments and avoid litigation in 2024.
This week's Finimize weekly chartpack covers various topics. It highlights the potential risks in the commercial real estate market due to the rise in interest rates, with $660 billion in commercial real estate debt set to mature in 2024. It also discusses the possibility of a lost decade in the stock market and provides insights into clean energy spending, which is predicted to be double that of fossil fuels in 2024. Additionally, the article explores the concerns of Man Group about US stocks and the shrinking supply of US stocks due to buybacks and mergers and acquisitions. The content is provided for informational purposes only and does not constitute personal investment advice.
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