Investing in the stock market is full of risks. Some are known risks, such as a decline in GDP growth and its impact on profitability and valuations. Others, meanwhile, are unknown risks such as geopolitical challenges which can severely affect investor sentiment and prompt bear markets.
As an investor, it is sometimes difficult to ascertain which risks are worth worrying about, and which ones are of minor concern. One risk which has come to light during the last couple of years is the potential for a trade war between the US and China. Here's why investors should not place too much emphasis on it when making their investment decisions over the medium term.
Mutually assured destruction
Although there have been tariffs placed on various US and Chinese goods in recent months, the reality is that an all-out trade war seems to be highly unlikely. While there has been some debate about who would 'win' a trade war, in the end both countries would probably lose compared to their starting positions. That's because, ultimately, they would experience a hugely painful period from which it would be likely to take many years to recover.
As a result, the chances of a full-blown trade war between the world's two economic superpowers seems low. Certainly, there have been some tit-for-tat tariffs placed on various goods, but an escalation of the situation seems unlikely to take place.
Risks and opportunities
Risks such as a US-China trade war could present opportunities for investors to take advantage of lower valuations. At the present time, for example, there are fears surrounding global inflation expectations and the potential for interest rate rises. Both of these risks seem to be far greater than the US-China trade war, since they have a good chance of taking place and could also severely impact the outlook for the global economy.
As a result, investing during periods where investors are becoming increasingly nervous about such risks could be a shrewd move. And with inflation likely to move higher in the US as President Trump's spending and taxation plans come into effect, major change could be ahead for the world economy. In response, interest rate rises bring the risk of a general slowdown in economic activity, and this fear could provide wider margins of safety for bullish investors.
Focusing on risks
While there are a wide range of risks present at any time for investors, many of them never come to fruition. As such, it may be useful for an investor to focus only on the risks that seem likely to occur and which could have a major impact on valuations.
Otherwise, an investor is likely to feel constant worry and fear about what could happen, when in reality stock markets have generally risen and always recovered from any events they have experienced.
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