This year could be rife with surprises, not just at home, but also around the world. That means it’s worthwhile for investors to explore where some of those surprises might come from. This time, it’s likely that these threats will come from more arcane areas of the market and the global economy. Consider China, where bond yields have been tumbling and the Chinese yuan has been sliding against the U.S. dollar for a few weeks now . China’s consumer prices have been slowing. This has been exacerbating fears of persistent deflation in an economy that, despite recent government efforts to stimulate the economy , continues to struggle with overcapacity in everything from housing to cars to solar panels. That is despite the promises of President Xi Jinping to enact bold new measures this year to grow China’s economy by 5% this year, including large-scale deficit spending to prime the pump. China’s markets appear to be somewhat dubious of projected success in that regard. A tale of two notable economies Millions of homes remain unoccupied in China. At the same time surplus autos and solar panels are set to be dumped around the world to ease gluts, assuming other nations don’t erect tariff and non-tariff barriers to doing so. It is doubtful that there are any quick fixes to continued overcapacity in a variety of Chinese industries, just as Japan learned in the 1990s, which led to multiple lost decades of economic growth. This means China has fewer growth levers to pull. While the recent rise in Chinese shares has some prominent investors excited, the go all-in camp of global investors, betting on a resurgence in China’s economy and markets, might have already earned the bulk of their expected returns. On the flip side is Great Britain, which is also experiencing some issues that are not on everyone’s radar. The British pound is struggling against the U.S. dollar. At the same time, debt servicing costs are driving up British bond yields and hampering attempts for the United Kingdom to recover from the lingering effects of Brexit and the Covid pandemic. We haven’t seen the sterling in a true crisis since 1992 when legendary hedge fund manager George Soros “broke” the British pound as it exited Europe’s pegged exchange rate system and plunged in value. It’s rather ironic that two empires, whose fortunes were once linked together, are struggling in the context of a rapidly shifting global economy. Still, they are not the only trouble spots around the globe that could upend financial markets this year. Japan’s economic progress appears stalled. Europe’s inflation rates, like those of the U.S., seem to be stuck. Further, the strength of the U.S. dollar makes emerging markets less attractive to American investors, stunting foreign direct investments into those countries. Countries like Brazil and India, the other cornerstones of the so-called BRIC nations, along with Russia and China, are watching their currencies devalue against the dollar. Possible trouble at home Of course, the S & P 500 , which has just enjoyed the best back-to-back years since 1997 and 1998 , may also be stretched a bit thin and face troubles created here at home. The U.S. stock market could be adversely affected by planned across-the-board tariffs implemented by the incoming Trump administration, while mass deportations could wreak havoc on domestic labor markets. Both of these developments could rekindle U.S. inflation , which was — until recently — thought to have largely been vanquished. While the U.S. remains the strongest economy in the world, events overseas could be tinder to any kindling hiding beneath the surface of our economy and markets. Global currency and bond markets could offer some early warning signs of impending danger, obvious domestic challenges notwithstanding. This year, it may be worthwhile for investors to keep tabs on the threats that could blindside them. The last two years of solid economic growth, accelerating productivity and above-average market returns may have dulled the senses of domestic investors. It might also be time for U.S. investors to look across multiple ponds to make sure offshore issues don’t harm them for the first time in many years. Success often breeds complacency. Or in old-school terms: Never confuse brains with a bull market. It might be time to use our brains to retain an investing edge in what is likely to be an uncertain new year. — CNBC contributor Ron Insana is CEO of iFi.AI, an artificial intelligence fintech firm.
