Is a global financial crisis just around the corner?

It's almost ten years since the start of the global financial crisis. While the banking system has generally improved and is now built on stronger foundations, there are a number of risks facing investors which could cause share prices to decline over the medium term. For example, Brexit, US spending plans and their potential impact, as well as geopolitical tensions could all send stock markets lower in future years.

///>

Brexit difficulties

Already, there are signs that Brexit is causing some economic difficulties in the UK. Inflation has risen to 2.3%, which is slightly higher than wage growth. This is causing some stress for retail shares, as well as pushing house prices lower for the first time in almost five years.

Looking ahead, there is potential for the situation to worsen. Since the UK and EU are interdependent, a recession in the UK would be likely to cause severe economic distress for Europe. In turn, due to the EU being a major consumer market for global companies, it would make a major impact on stock markets across the globe.

While Brexit is a risk which has been known about for some time, its effects are a known unknown due to the lack of historic precedence. As such, investors may wish to seek stocks with wide margins of safety at the present time.

US spending plans

While higher inflation is already present in the UK, the rest of the world may experience higher price rises due to the effect of Donald Trump's fiscal plans. He is seeking to reduce taxes and simultaneously raise spending on defence and infrastructure. The effect of this is likely to be a higher rate of inflation, which could easily be exported across the globe.

While the Federal Reserve's interest rate rises may provide a check on rising inflation, the reality is that there is always a time lag after changes to interest rates. Therefore, it may be difficult for the Federal Reserve to keep inflation at modest levels, while not hurting the employment and GDP growth rate.

Geopolitical difficulties

While the challenges in Asia and the Middle East are not new, they have the potential to become more significant over the medium term. History shows that share prices have generally reacted unfavourably to tension and the use of military action. As such, if events in North Korea or in Syria escalate, stock markets across the globe may come under severe pressure. The macroeconomic outlook could worsen if confidence evaporates, which may lead to a sustained period of economic weakness.

Alongside US spending plans and Brexit, geopolitical tensions have the potential to cause a global financial crisis. Therefore, it seems more important than ever for investors to seek wide margins of safety and high-quality companies when investing their hard-earned cash for the long term.

Finding the right stocks

Of course, finding stocks that are worth adding to your portfolio is a tough task, which is why the analysts at The Motley Fool have written a free and without obligation guide called 10 Steps To Making A Million In The Market.

It's a simple and straightforward guide that could help you to unearth the best risk/reward opportunities on offer at the present time.

Click here to get your copy of the guide - it's completely free and comes without any obligation.