• Economy -> Markets and Finance

• 0 Comment

What are the biggest risks facing the financial markets today and how can they be mitigated?

Hermina Lillecrap

Well, there are several risks facing the financial markets today. The first one is the uncertainty surrounding global trade, which is a significant risk to investment returns. The ongoing trade tension between the US and China has resulted in an economic slowdown, and the potential impact of Brexit on the global economy remains uncertain. This political and economic uncertainty is alarming for investors, and it's more difficult to predict the future returns of investments. Besides, geopolitical risks, such as war or terrorism, can disrupt the economy and impact market performance.

Another risk is the increasing corporate debt, which can lead to a financial crisis. In the last decade, corporate debt doubled globally, and its quality has deteriorated considerably. Rising interest rates could make it harder for companies to repay their debts, and default rates could increase rapidly. Furthermore, the risk of a recession is high, and many central banks can't lower interest rates like they did in previous recessions.

A third risk is cybercrime. As companies and investors rely more on technology, the risk of cyberattacks that expose sensitive financial information is increasing. Data breaches can cause significant financial loss and erode investors’ confidence in the markets. In 2019, data breaches cost companies an average of $3.86 million per breach, and that number is expected to rise in 2020.

So, how can these risks be mitigated? I believe that there is no single solution to these issues, but a combination of measures could reduce their impact. In the case of global trade and geopolitical risks, diversifying investments across different markets and using currency hedging strategies can help mitigate the impact. It's also essential to keep up with global economic and political developments to make informed investment decisions.

Regarding increasing corporate debt, transparency and disclosure of companies’ financial information are vital to gauge their financial health. Investors should carefully analyze the credit ratings of companies and their debt profiles before investing in them. Additionally, monitoring interest rates trends and managing debt levels proactively can prevent potential insolvency.

Finally, cybersecurity is an ongoing concern, and it's essential to invest in robust prevention programs and incident response plans. Regularly auditing and testing the system's strengths and weaknesses can prevent cyberattacks, and educating employees about cybersecurity best practices is also essential.

In conclusion, financial markets face several risks today, but investors can mitigate their impact by diversifying investments, monitoring market and economic developments, analyzing credit ratings, and investing in good cybersecurity practices. As always, informed decision-making based on careful analysis is key to success in financial markets.