As we are closing in on the dawn of 2016, many investors are asking themselves, quite legitimately, “What might happen next year to what I have?”

No, it doesn't look like “risks in 2016 are tilted to the downside.”

At present, many think, or want us to believe, we will see relative weak, but still stable global growth next year. The big question is of course “What if that doesn’t happen?”

For those who believe in business cycles (as I do) it is an undeniable fact we are at present in the latter stages of the current cycle when we project it against historical data.

Central banks, the Federal Reserve included, dispose today only of “limited” ammunition to fight any unexpected serious disruption in their projected growth-paths when leverage levels everywhere remain way too high.

This means that any shift in sentiment caused by an unexpected shock could have substantial market as well as economic implications, which arises immediately the million dollar question, am I, as an investor, prepared the withstand any of such kind of shock and its implications.

When I look at the risks that are out there, I always must think back at what the Prussian (German) Field Marshall Helmuth Karl Bernhard Graf von Moltke said: “No operation extends with any certainty beyond the first encounter with the main body of the enemy,” with for all investors the “enemy” means of course a bundle of risks that are out there.

With what we know today and beginning with what could turn out to be good news in 2016, albeit nothing extraordinarily, there are chances we could see in the U.S. a capex recovery in case we would have only a very gradual Fed tightening/normalization process.

We could also see, albeit to a much lesser extent, Emerging Economies (EM) start growing again, albeit only slowly because nearly everything will depend on how China gets its act together, but which, if that should occur, could ignite a non-negligible reversal of the very weak capital flows into EMs as a whole and which then would at least slow down, but also rather substantially the ongoing hemorrhage in commodity prices.

Of course, we aren't there yet...

About what could go wrong there are many things that could cause havoc, of which we look here at a few of them?

• As, globally speaking, policymakers appear running out of policy options, or are either unwilling or unable to adopt new policies to stimulate growth then the big question becomes what could happen if there aren't any obvious viable/serious options left?
• Besides, markets will also have to face the risk of more frequent “flash crashes," which cause markets to stop/or to nearly function, and because of that prices swing dramatically (volatility), which in turn impact the value of assets significantly, and make it, last but not least, very difficult to buy or sell as liquidity evaporates suddenly. This kind of risk, it must be said, is generally underestimated or not taken into account by most of non-professional investors.

The risk such situations could occur has increased substantially because:

• the size of dealer balance sheets has decreased substantially, which is a consequence of the shifts in financial regulations that have been introduced after the 2008 financial crisis;
• the shift from human to automated trading;
• and the list goes on from a supply led oil price increase because, for example, of geopolitical events, which are in the cards at a moment there will be fewer excess barrels especially in H2 of 2016, to a UK vote for a “Brexit” out of the European Union, or a resurgence of eurozone periphery issues that are at risk because of the possibility of erratic cross border capital flows and contagion across the periphery, but this time core countries included, which is one of the most feared outcomes of a eurozone break up or of a country exit scenario, and then the really feared China’s corporate traditional industrial players, led by State-Owned-Enterprises (SOEs) that could show rising defaults, and so on.

All that said, recent news out of China is, once again, not encouraging.

• China’s currency, the yuan (CNY) hit its lowest rate against the dollar since August 2011;
• China’s FX reserves fell another $87 billion in November, which raises the specter of further depreciation of the yuan (CNY) down the road;
• Chinese imports and exports remain in contraction territory.
  

Unfortunately, in 2016 there is lot that could go wrong and very little that could get better.

Being prepared for the worst could be not such a bad idea, but, unfortunately, that’s easier said the done.

Yes, as Milton Friedman said, “There is no such thing as a free lunch.”

Etienne "Hans" Parisis is a Belgian-born bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.