The world's most accurate economist breaks down 2 overlooked risks to markets right now - and shares his top advice for investors
- A US-Europe trade war and a turn in global central-bank policy are two of the most underappreciated risks to investors, according to Christophe Barraud, the chief economist of Market Securities.
- Barraud was recently ranked by Bloomberg as the most accurate forecaster of the US economy for an eighth straight year and of the European economy for a fifth.
- He recommends staying invested in the US stock market, but says investors should be on high alert for any changes to policy from the US Federal Reserve.
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Stock-market investors may soon confront two risks that are underappreciated and consequential for their portfolios, according to Christophe Barraud, chief economist of the broker-dealer Market Securities.
Since the US-China trade conflict flared up nearly two years ago, it has impacted members of the financial community from traders to business owners whose supply chains were disrupted. In fact, the 20% leap in the S&P 500 since last August is partially due to progress on the trade front that culminated in the signing of a phase one deal last week.
But the risk to markets from trade is far from erased, Barraud said. Not only are there lingering tensions between the US and China, but a separate conflict could flare up within the next year.
"We could see a lot of game changers, especially with the US election," Barraud recently told Business Insider in an exclusive phone interview.
His prescience on economic developments around the world is second to none. Bloomberg recently ranked him as the most accurate forecaster of US economic data in 2019, the eighth year running. Also, he has been ranked the top economist for euro-area data every year since 2015, and for China since 2017.
Investors aren't yet focused on Trump's reelection
One scenario that investors are not focused on yet, according to Barraud, is President Donald Trump reigniting trade tensions with Europe if he is reelected.
"Right now it's very difficult to say that even if Trump is elected, markets will rally, because we don't know if he will be able to implement another tax cut," Barraud said.
"But we're almost sure that he will be more aggressive, at least with Europe, because it's the only top trading partner with the US that refused to sign a deal," he said.
For the first time, investors consider the 2020 election instead of trade as the biggest risk to markets, according to Bank of America's latest survey of fund managers released Tuesday. Multiple analysts previously expressed their concerns about a Democratic victor who unwinds aspects of Trump's tax reform and other policies viewed as business-friendly.
But in Barraud's view, Trump's reelection will not be a silver bullet because he might fuel a trade conflict with the euro zone - a region that accounted for 16% of global gross domestic product in 2018 according to the World Bank.
"If, at some point, there is conflict between the US and Europe, it could have a very negative impact on the global economy," Barraud said.
The central-bank risk
In addition to a potential US-Europe trade war, Barraud said investors should have central banks on their radars as a potential source of risk.
The opposite has been the case since last year, when global central banks worked to avert a global recession and pumped liquidity into financial markets. Coupled with progress on US-China trade, this has been another key driver of the stock market's rally.
Central banks could now unnerve markets by merely reducing - not ceasing - their support. And this scenario could be "a big game changer for equities and all assets," Barraud said.
"My guess is that investors are a bit too optimistic concerning global GDP, concerning earnings," Barraud said. "It could be explained by liquidity and the fact that there is little alternative except investing in the US, especially if you are an investor coming from Europe."
To that end, he recommends staying invested in the US stock market.
"We can't be underweight, because the market is just flying due to liquidity," he said.
However, he advises remaining on high alert for any signs the US Federal Reserve is closing the spigot.