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Where it will arrive "black swans" in 2017
Material posted: Publication date: 31-12-2016
In 2017, the world's stock markets will be again under pressure due to issues in the United States, China and the European Union. What threats face by a Russian investor and how to protect themselves from them?

The main risks for the Russian investor in 2017, will be associated with geopolitics. In the first half threat will come from the US, which is quite a difficult situation in connection with the coming to power of Donald trump. The new President will be very difficult to realize their ambitious campaign promises in life because of supporters he has, even among Republicans, not so much. Besides, he tries to recruit to his team of specialists, candidates may choose not to approve the Senate and Congress of the United States.

If the economic program, trump will be insolvent — the market will begin to rethink the situation. After all, investors have managed to lay their strategies for the development of big business, tax cuts and increased government spending in the United States. They counted on rising inflation in the country and quickly got rid of the Treasury bonds (Treasuries), hoping that the fed will raise rates in 2017, some more actively than previously expected. But soon, instead of the growth of stock indices, which has been the last five or six weeks we can see a diametrically opposite picture: the sell-off in the stock market and the flight of investors into defensive assets. The us economy risks falling into recession for the period from the second to the fourth quarters.

The second and most important risk factor next year, it is possible to call problems of the Chinese economy. For the first time, they have become a headache for investors in August 2015. Then the Chinese market fell almost 40%, and the us — somewhere in the 15%. Then stock markets around the world have suffered because of China in January 2016 — it led to the fall of stock indices by 10-15%. Now China is on the verge of a new collapse, which could happen in the next one or two months. In the Chinese bond market observed a massive sales — investors withdraw capital from the country in connection with the weakening of the yuan. China's national debt reached almost 250% of GDP. For ten months of the current year the country brought $530 billion In November this year, the outflow of reserves was the highest since January — from $69,06 billion to $3,052 trillion. Earlier, the IMF has identified as the critical level of $2.8 trillion.

Last year, the Chinese economy has stayed afloat only thanks to massive loans in the country. If you look at the volume issued during this time loans to China — it beats all records for the last decade. The growth in house prices in all provinces of China ranged from 40 to 70%. In 2015 the volume of net domestic credit amounted to 133 trillion yuan, which is about $20 trillion. In 2016 this figure has grown even stronger. This is just a menacing figure. This indicates a giant debt-fueled bubble. As you know, the more loans banks give out, the more then will be late. This week the people's Bank of China was forced to tighten lending standards and to introduce a ban on the purchase of a second apartment. Shares of mortgage companies and developers have already responded to these innovations by reducing the cost. And it is possible that this is just the beginning. Moreover, no analyst will not be able to assess the extent of the Chinese problems, even approximately, because up to 50% of the total financial sector in China works in the shadows.

The third threat, which will be relevant in 2017, is the problem of the European Union. We see that the skeptics are gradually strengthening their positions in the region and this increases the probability of collapse of the EU. The exit from the European Union some other country will become a real stress for stock markets around the world. On the first plan, however, next year will see the problems of the European banking system. We are talking about Italy, where on balance the banks about $350 billion of toxic assets is about 28% of the total. In Greece and Cyprus share of problem assets in the banking system and it reached 40%. This means that in 2017 there is a risk of another "haircut of deposits" in Cyprus and the new hype surrounding the recapitalization of Greek banks.

Which of the following negative factors will surface quickly — will depend on the dynamics of the debt market. If the yield on us sovereign bonds will continue to grow and investors will have to sell them in Europe we will also see sales in the debt market. It threatens to collapse the whole pyramid. After all, a reliable government bonds, such as American or German, is the most liquid in the world assets they are buying for the long term, provide for the purchase of stock, new bonds, etc. When such bond falls as collateral, it is usually advised to bring money, or to sell these securities.

And to take the money now nowhere: the global financial system is experiencing a severe shortage of dollars. Dollar rates are now on a three-year high worldwide. Most Central banks do not have open swap lines with the fed. They can't take American dollars physically. If tomorrow they suddenly need this currency, they have only one option: to sell U.S. Treasuries. This is exactly what makes now and both China and Saudi Arabia, and Russia, and a number of other countries. Against this background, any panic could trigger chaos and a collapse in the stock markets.

Russia is now almost no country-specific risks — act only on external factors. That is, any geopolitical risk, which is implemented in the world in 2017, will hit primarily by developing countries, including Russia. However, it is important to note that the Ministry of Finance this year has placed OFZ nearly a trillion rubles — this is a hot speculative capital. If the world will begin a massive sale on the bond markets, then foreign investors will get rid of the Russian OFZ. And when will the powerful outflow of the OFZ, as we saw in 2014, the ruble may significantly sink.

With all these risks to a private investor it makes sense to invest in the currency by buying equal shares of dollars and euros. I would pay attention to gold, which is now a blueprint similar to the dynamics of the last year. Then gold fell for six consecutive weeks before the fed's rate hike, and then it was growing for three months, rising eventually to 25%. Now I expect that in the first half of 2017 gold will rise by 10-30%, depending on the situation in the world. And when the stock market will correct — it makes sense to buy shares of Russian exporters, who will benefit from the devaluation of the ruble and possibly surpass inflation.

Vasily Oleinik


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