Risk.net’s top 10 investment risks for 2025

Trade wars, a stock market crash, strikes and riots, political violence: buy-siders share their fears as the year begins

Late last year, for its annual ranking of investment risks, Risk.net asked investors what worries them most. The direction of their thinking shows as much in the answers they didn’t give as in the ones they did.

Gone from the current list are a refinancing crunch, a real estate crash, the possible resurfacing of banking troubles and turmoil in private markets.

It’s clear what’s changed. The US Federal Reserve began a long-expected rate-cutting cycle in September 2024. And with the declining cost of borrowing, so concerns have faded about how banks or private credit firms, mortgage holders or overborrowed companies might come unstuck.

Equally telling is what has replaced these risks on the list: trade wars, a reversal of the stock market after last year’s post-election “sugar rush” and social tensions. Climate risk returns to the rankings after dropping from the Top 10 in 2024.

In each case, the influence of the US president-elect Donald Trump is plain. He makes the list himself in seventh place.

Geopolitical risk and inflation, meanwhile, figure for the third year straight. These risks have also changed, however. Fears relating to the specific conflicts in Ukraine and the Middle East are giving way to a more fundamental disquiet about the changing balance of power in the world.

Abstract worries about the stickiness of inflation are replaced by more distinct concerns about tariffs and a freeze on immigration in the US reigniting a global surge in prices.

For this survey, Risk.net spoke to more than 70 individual investors at hedge funds, asset managers, pension funds and insurers. The research was conducted primarily by interview and supplemented by an online questionnaire.

The scope is broad. We asked participants to list the biggest risks as they see them and left it to individuals to determine how to balance the likelihood of events against their consequences.

Investors were free to express concerns about markets, economics, politics or society, depending on the factors they believe will influence the path of investments in future. Risk.net chose how to group responses.

As always, we welcome your feedback and suggestions.

Jump to category

1. Geopolitical risk | 2. Inflation | 3. Trade wars | 4. Stock market crash | 5. Public debt crisis | 6. Recession | 7. Trump 2.0 | 8. Climate | 9. Social conflict | 10. Artificial intelligence

1. Geopolitical risk

NB Illustration/Eoin Coveney

Familiarity breeds contempt – and the main geopolitical risks currently facing investors are depressingly familiar.

War in Ukraine is now almost three years old. Conflict in the Middle East started more than a year ago. For some, that means concerns are fading.

“The participants are known,” says one risk manager. An end to the war between Ukraine and Russia seems possible. The war in the Middle East has not yet triggered a full-scale regional conflict.

Yet for the second year running, geopolitical risk tops Risk.net’s Top 10, reflecting unanimity about its disruptive potential. Many see inflation – number two on the list – as a key concern, but everyone agrees that geopolitics is an issue.

And although investors’ imminent concerns may be reduced, a deeper sense of a less stable world has taken hold.

One investor describes this as a shift in four dimensions: increasingly confrontational foreign policy; more muscular industrial policy focused on protecting and de-risking supply chains; liberal use of economic soft power; and the fragmentation of global trade and investment relationships to favour allies.

Several participants highlight the shifting balance of global power – in particular, the rise of China.

The Brics nations account for 35% of the world’s GDP, while the G7 countries account for 30%, a hedge fund CIO points out. Six of the world’s largest 10 ports are Chinese. The throughput of Shanghai’s port is more than five times that of Los Angeles.

“Ultimately this will probably lead to conflict,” he says, “probably a conflict with China over Taiwan.” A clash over Taiwan would be a conflict the US would not win, he believes.

President Xi Jinping’s changes to the constitution in China to secure his own authority altered the political dynamic inside the country, says another buy-sider. The regime has become less responsive to popular concerns – “less interested in building infrastructure for the future, and more interested in building [authority] for themselves”, he says. “That makes the world less stable.”

In this “fragile” global context, one chief investment strategist thinks the US presidency of the “less predictable” Donald Trump adds to the potential for a foreign policy “accident”.

None of this focus on the longer term is to say investors are unconcerned about the immediate future. Plenty also see the potential for existing conflicts to intensify. The US, UK and France allowing Ukraine to strike Russia with long-range missiles that they supply is a step towards internationalising the conflict, says a portfolio manager.

“Clearly the euro bloc and the US have been opposed to Russia’s invasion of Ukraine,” says another. “But we haven’t come into much in the way of direct conflict with Russia.”

Almost all the main countries in the region do not want to see a regional conflagration. But that doesn’t mean one won’t happen

Quant fund CIO

Another asset manager thinks “event risk” is heightened in the weeks leading up to the handover of power in the US, going as far as to speculate about something along the lines of a local nuclear strike in Ukraine.

Meanwhile, a Chinese invasion of Taiwan remains a key concern. Such action seems to most unlikely in the short term. But one hedge fund executive points out that the consequences for markets would be “extreme” – far greater, for example, than the effects of the Covid pandemic. Institutional investors in some cases are looking to hedge specifically against such military action, buy-siders report.

As for the Middle East, investors broadly agree that disruption to the supply of oil through the Strait of Hormuz is improbable. None of the key regional actors wants to see such an occurrence. But a quant fund CIO says he’s been surprised by the absence of a strong bid for upside volatility in oil. “Almost all the main countries in the region do not want to see a regional conflagration. But that doesn’t mean one won’t happen,” he says. “I’m sure nobody really wanted World War I.”

2. Inflation

NB Illustration/Eoin Coveney

Across developed economies, inflation dropped to levels close to central banks’ 2% targets in 2024. But is inflation beaten? Investors are unconvinced.

The same long-term inflationary drivers that figured in Risk.net’s Top 10 in past years remain in investors’ minds. A shift towards deglobalisation means China is no longer exporting deflation as it did in the past decade. Ageing populations lead to a relatively smaller working-age population, and so to pressure on wages.

Meanwhile, US and UK inflation both ticked higher in November 2024. “We have seen core inflation stall out,” says a macro multi-asset strategist. “We are no longer seeing the strength of disinflation from consumer goods.”

One macro hedge fund CIO reckons US inflation could reach three or four percent by the end of 2025. “That sounds like nothing compared to what we saw during Covid. But it’s not in the price of inflation markets and certainly not in the price of stocks,” he says.

Investors fear that in the US Trump’s Maga economics will stoke inflationary pressures. “If you think about tariffs, reduced immigration, potentially more growth because of added fiscal stimulus, and maybe even more rate cuts, it seems like inflation is a greater risk now than it’s been for some time,” says a second CIO.

Studies show that American consumers have borne the brunt of existing levies on Chinese goods. Anything close to the mooted 60% tariffs on imports from China would lead to “a hell of a lot of consumer goods suddenly going up in price”, says a chief investment strategist.

Yet investors see the Trump administration’s immigration policy as the most inflationary – and potentially most damaging influence. “Tariffs don’t cause a sustained inflation shock,” says a research director at a European firm. Recent high levels of immigration to the US, though, have arguably been critical in keeping a lid on wages.

The primary concern isn’t just inflation but its unpredictable fluctuations

Quant fund head of research

Roughly 11 million undocumented people live in the US, about 7 million–8 million of whom are working – about 4% of the workforce. “If that goes into reverse and Trump deports 10 million people, that’s going to put very significant upward pressure on wages,” the director says. “It would be more sustained and probably something the Fed would be more willing to take account of. Then you could be talking about rate hikes this year.”

In the longer term, inflation will be “held with a 2% floor, not a 2% ceiling”, the research director reckons.

Could artificial intelligence (AI) confound these expectations? A common argument has been that technology improvements will boost productivity and help keep inflation in check.

But some question whether this will play out as expected. “AI is more likely to be an inflationary force in the near term because of the scale of upfront capital expenditure before projects yield improvements,” suggests a strategist at a global asset manager.

Markets, meanwhile, have been slow to wake up to the chance that inflation might prove sticky. One buy-sider points to the price of US five-year/five-year inflation forwards, which in November 2024 were trading close to the year’s low. “Despite all of the talk around tariffs and fiscal sustainability – when it comes to market pricing, those risks are not really being embedded in securities,” he says.

Some investors say that even should the level of inflation stay broadly contained choppier inflation could still create difficulties. “The primary concern isn’t just inflation but its unpredictable fluctuations,” says a quant fund head of research. “This volatility complicates modelling, disrupts bond markets and creates uncertainty in longer-term yield curves, making it a persistent risk.”

Fears of returning inflation are raised most frequently by investors in relation to the US. But the issue could also prove to be global. Europe might see price rises accelerating once more, say some respondents, leading perhaps to a stagflationary environment of combined inflation and low growth.

The macro hedge fund CIO suggests a surge in wages in Japan – where salaries have not kept pace with prices – could be possible. And if stimulus efforts are successful, China “waking up” might also add to global inflationary forces, he says.

3. Trade wars

NB Illustration/Eoin Coveney

US president-elect Donald Trump has threatened to impose 60% tariffs on Chinese goods and blanket 10–20% tariffs on US imports. He announced last year on Truth Social, his social network, that he would impose 25% tariffs on Canadian and Mexican goods on day one of his presidency. He has threatened tariffs of 100% against the Brics countries if their governments try to displace the US dollar as the global reserve currency.

Such threats are not new, of course. In his previous term, Trump placed 25% tariffs on steel and 10% tariffs on aluminium, which Morgan Stanley estimated covered around 4% of US imports at the time. Trump went on to target about $300 billion of goods imported from China. And China and other US trading partners, such as India and Canada, imposed retaliatory tariffs in turn.

Chief among investors’ concerns about phase two of America First politics is the effect of such trade policy on global growth. A US-based portfolio manager draws a historical parallel with Herbert Hoover’s 1930 Smoot-Hawley Act, which put in place tariffs that arguably contributed to the great depression.

Countries embroiled in a trade row might come to an agreement, says the same PM, but that possibility only creates the likelihood of “bimodal” outcomes that are hard for investors at this stage to account for.

A hedge fund CIO sees tariffs potentially leading to three results, all of them bad for markets. Either tariffs trigger higher prices on imported goods – and therefore inflation. Or they cut into the profit margins of US importers. Or they could trigger retaliation from China that would make it harder for US companies to operate there.

If China is not earning a lot of money in dollars because it’s not selling a lot of stuff to the US, it will not be recycling that money into US Treasuries

European CIO

The risk of retaliation arises most prominently among concerns.

“China could retaliate in a trade war by restricting exports of rare metals critical in semiconductor manufacture,” suggests a quant investor. The semiconductor industry is “ground zero” for many other industries such as consumer electronics and telecoms, he points out. “And you can’t start a new mine overnight.”

China produces about 98% of the world’s gallium, and controls production of 68% of the word’s germanium – crucial materials for semiconductor production. Already, in 2023, the country restricted the export of both rare metals via licensing requirements for exporters.

Elsewhere, investors suggest China might cut its holdings of US Treasuries. “If China is not earning a lot of money in dollars because it’s not selling a lot of stuff to the US, it will not be recycling that money into US Treasuries,” says a European CIO.

A pull-back could cause long-term real interest rates in the US to rise, affecting both US stocks and bonds, he reckons, a scenario “a little bit like a US sovereign debt crisis”. Reduced buying of Treasuries by China investors need not be “super-dramatic” to have an effect, he says.

The ultimate effect of Trump’s trade policy will depend on specifics, investors say. The level of tariffs imposed on the rest of the world may turn out to matter more than tariffs on China, for example, since exporters over time will reroute trade through other countries.

Nor are the likely outcomes black and white. The US has measures in place that could mitigate fallout from retaliatory measures. Both the Biden administration and the last Trump administration acknowledged the vulnerability of supply chains and acted accordingly.

In 2023, for example, the US signed a memorandum of understanding with the Democratic Republic of Congo and Zambia to establish access to cobalt and copper, key elements in electric car batteries.

Some investors think Trump’s first presidency showed that tariffs could be implemented without much of a response. “China struggled to retaliate in any meaningful way to the tariffs imposed,” says a multi-asset fund executive.

Biden also notably kept tariffs on China in place throughout his presidency and increased the rates on about $15 billion of Chinese imports to boost domestic manufacturing in clean energy and semiconductors.

Trade wars could also create opportunities for relative-value investors, respondents point out. Some countries will likely respond to the prospect of disrupted global trade by loosening monetary policy. This creates scope for divergence in global bond markets, says a European asset manager. “It should increase the potential for global sovereign relative value and curve strategies.”

4. Stock market crash

NB Illustration/Eoin Coveney

The trouble with bubbles is they eventually run out of gas. The prospect of such an end to the US stock market’s current effervescence helps place a potential equities crash in fourth spot among this year’s top investment risks.

In the first half of 2024, the so-called Magnificent Seven – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – accounted for more than half the total return of the US equity market, largely buoyed by excitement surrounding AI.

Such a high degree of concentration, combined with inflated valuations – a market that is “priced for perfection” as one hedge fund portfolio manager puts it – has set off alarm bells that stocks could be vulnerable if these companies experience a downturn.

Comparisons with 2000’s tech-bubble burst are rife, as are allusions to the lessons from that episode. Not every company can be a winner – even in a technology revolution. “Chat bots are the new search engines,” says one respondent. Of the many such engines launched in the late 1990s, only Google has prospered, he points out.

Few see current valuations as realistic. “Price is what you pay. Value is what you get,” says a global investment strategist. “What the market cares about is what future cashflows will be. And we think those expectations are too high. That should be investors’ primary concern.”

The top seven US companies by market capitalisation represent roughly 30% of the S&P 500’s total market value. At the same time, the US market accounts for roughly 70% of world equity market cap. That’s leading to portfolios that look very similar, says a buy-side managing director.

Of course, when any one investor suffers losses, others are likely to suffer losses too. In the worst-case scenario, poor performance at one dominant tech company might trigger a wave of selling, losses and – as a result – further selling that would spread across the investor universe.

“The market cap of Nvidia is pretty much as big as the entire German Dax or the French CAC 40. Imagine you have a negative earnings surprise on Nvidia. What do you think is going to happen to the rest of the Magnificent Seven?” asks a head of portfolio advisory.

A quantitative researcher voices similar misgivings. “Much as I admire Nvidia – I think they’ve done great things, and I think they’re destined for a great future – their current valuation of something like $3.5 trillion is just very hard to justify,” he says.

“When an individual company is worth $3.5 trillion, that alone starts to be non-trivial risk. If the stock falls 30% you erase a trillion dollars from equity valuations.”

Arguably, a long period of broadly benign market performance adds another dimension to the risk. Some participants say it has bred a generation of investors with potentially fragile confidence. Setting aside Covid as an anomalous event met rapidly by central bank intervention, “it’s been a very long time since we had a big market correction”, says a chief strategist. As and when hidden buildups of risk inevitably come to light, the strategist says, “investor confidence is going to evaporate”.

That said, few see the market outlook as necessarily bad. Which creates a confounding risk that stocks could continue to rally hard, and cautious investors miss out.

We’ve had two years now of above 20% returns. That’s relatively unusual. But we’re living in relatively unusual times

Director of macro research

By some measures, current valuations, though high, are less extreme than those of the dotcom bubble. The cyclically adjusted price-to-earnings ratio for the S&P 500 is around 38x today, compared with 44x at the peak of the dotcom era.

One chief investment officer sketches a scenario in which the incoming Trump administration implements policies that sharply boost US growth, cutting regulations, reducing waste, and lowering taxes. If fears of mass deportations prove exaggerated and China’s domestic slowdown continues, inflation may remain capped, setting the stage for potential market gains, he says.

“You could actually see quite a hefty bull market bounce.”

A director of macro research warns that if equities surge, overly timid investors could be left on the sidelines. “We’ve had two years now of above 20% returns. That’s relatively unusual. But we’re living in relatively unusual times,” he says.

He talks of the possibility of a turbo-charged “goldilocks scenario” and adds: “I don’t think investors are positioned for that.”

5. Public debt crisis

NB Illustration/Eoin Coveney

As economist Herb Stein said: “If something cannot go on forever, it will stop.”

The post-financial crisis period of money-printing was tolerated by the bond market because there was no inflation, households weren’t spending and banks weren’t lending. A global investment strategist at one investment manager says now it’s different: the bond market is in the driver’s seat, and the US is at risk of a “Liz Truss moment”. The consequences of such an episode would be felt by governments, and investors, globally.

The last time the US ran a primary fiscal surplus was under Bill Clinton, and that was in direct reaction to the 1994 bond market selloff, which prompted James Carville to famously say that if reincarnated he would come back as the bond market because “you can intimidate everybody”. Clinton’s 2000 surplus was $230 billion, 2.4% of gross domestic product.

The ratcheting up of public borrowing in the years that have followed and especially since Covid means if the US government tries to introduce more fiscal stimuli, or something “decorative” to the budget, the bond market will not allow it, says the investment strategist.

Last year, roughly a quarter of respondents to Risk.net’s investment risk survey included risks associated with budget deficits in their top five fears. This year, three in 10 cited concerns that governments, including the US, seem to have no fiscal impulse to curb their debts. There is the added possibility that incoming president Trump’s policies will create a bigger problem for the rest of the world, respondents note.

Because of sovereign debt risk and volatility in rates, investors have already begun expressing a preference for investment grade corporate credit over sovereign debt in Europe, the head of portfolio advisory at an asset manager says.

Nearing $7 trillion, money market reserves worldwide are also close to their highest level ever, data from the Investment Company Institute shows – another indication of a cautious appetite for longer-dated government debt.

Meanwhile, the International Monetary Fund has raised the alarm. It says global public debt was expected to exceed $100 trillion, or about 93% of global GDP, by the end of 2024. That is 10 percentage points of GDP above the figure in 2019.

The chief investment strategist at an investment manager expects term premia in the US to increase this year to around 125 basis points and US 10-year yields over five to 10 years to reach roughly 5%. The strategist predicts continued upward pressure on yields as Trump cuts taxes and struggles to reduce spending.

A buy-side head of macro research agrees that despite tech billionaire Elon Musk heading up efforts on US government efficiency, “everyone’s expecting fiscal deficits to get wider”.

The result could be a bond-buyers’ “strike” in the US, with spillover effects for France and Italy, says the chief investment officer at a macro hedge fund. The need for European governments to increase spending on defence will arguably add to pressures. Such a strike could start with bond auctions with big tails, 10 or 15 basis points, indicating uncertain demand. “That’ll be your clue,” the chief investment officer says. Auction tails are the gap between auction and market pricing.

For some, the only route out of government indebtedness will be “financial repression”. That means central banks will buy bonds, hold rates low and pay interest on reserves or impose restrictions on banks extending credit, to lock up reserves and prevent inflation. “This is essentially equivalent to a wealth tax,” says a portfolio manager at a systematic hedge fund.

The chief investment officer of another asset manager says the fiscal deficit is “unsustainable” and keeps him up at night. “It’s one of those things where it’s not a problem until it’s the most important thing,” he says. “At some point the market pushes back.”

6. Recession

NB Illustration/Eoin Coveney

Recession anxiety has fallen back to sixth place in this year’s poll, down from third spot last year.

The US macro outlook has brightened over the past 12 months. A model from the New York Fed using the slope of the yield curve to calculate the probability of a recession in the US a year ahead, saw its indicator drop from 61% in January to 34% in November. Goldman Sachs, more bullish, recently put the likelihood of recession in the US at 15%.

However, investors worry that markets may be taking a soft landing for granted. About four in five investment managers are expecting such an outcome for the US economy, estimates one buy-sider. “Some people are even moving into the ‘no landing’ camp,” he says. “What if we are wrong?”

Even a 15% to 25% chance of a recession is “a big deal”, says a hedge fund CIO.

A chief investment strategist notes that some indicators of financial strain are rising. “The old saying is that firms stop hiring before they start firing,” he says. “Right now, the market is looking at the fact that jobless claims are staying super low. If you look at other indicators, though, they’re starting to creep higher.”

The Job Openings and Labor Turnover Survey from the US Bureau of Labor Statistics shows new hires edging down through 2024. “In the US, you’re not at huge risk of losing your job. But if you do lose your job, it’s really hard to get another one.” That’s a trend often seen ahead of a more sustained downturn, he says.

The US economy, nevertheless, is broadly seen as resilient. Recession worries are felt more keenly in relation to China and Europe. In Europe, recession could be induced partly by pressure from US tariffs and partly by fiscal strains, say survey respondents. Germany is singled out as liable to a hard landing and subject to potential deflation. The head of macro research at an asset manager believes worries about unemployment in the UK could weigh on consumer demand.

Meanwhile, how sentiment changes towards China during the year will play a major role in markets, predicts a portfolio manager.

Chinese policy is being “held back”, he says, until there’s a better view of the actions the Trump administration will take on tariffs. “There’s a broad range of possible outcomes for growth in China over 2025 and I think that could have a major impact on stock markets in Europe.” Firms in France and Germany are big exporters to China and other emerging markets.

On one hand, China may fail to deliver a level of stimulus sufficient to stem its growth decline. Chinese authorities cut interest rates in September and took steps to redirect loan growth into industrial areas. But measures so far have had limited effects.

China’s economic growth target of around 5% in 2024 could be dropped to 3% in 2025 with deflationary pressure, reckons the head of portfolio risk at another investment firm.

And yet investors are grappling also with upside risk. A regional CIO says if Chinese stimulus efforts turn out to be successful, its stock market will rally. That would put upward pressure on global inflation and could lead to a rotation between developed market and emerging market equities.

The US currently comprises around 70% of the MSCI World index and the CIO points out that investors could then get “caught short” by not having emerging markets investments.

7. Trump 2.0

NB Illustration/Eoin Coveney

The policies of US president-elect Donald Trump figure repeatedly in how respondents describe their most worrisome risks this year – be it in the context of trade wars, inflation, geopolitical risk or public debt. But a broader uncertainty about how Trump himself will behave also comes up often. This year he earns a risk category of his own.

Asset managers are apprehensive about volatility arising from erratic policy switches, and also about threats to US political institutions.

“It’s hard to get away from the fact that Donald Trump is going to be central to the biggest risks,” says the head of multi-asset funds at one asset manager.

Respondents highlight a range of scenarios that could drive volatility, from policies such as 2017’s so-called Muslim travel ban to extreme scenarios like potential assassination attempts on the new US president. Others worry about an administration focused on spin, with no meaningful fiscal policy changes that would reduce US deficits.

The most negative describe Trump as an “existential threat to American democracy”. The influence of “American oligarchs”, says one CIO, could “put an end to the American experiment”.

Even as the precise nature of potential events remains unknown, one asset manager notes that the odds, of “something” happening have increased. Another says: “Who knows what the next four years brings, it just seems like the risk of outsized events occurring is greater.”

Any significant challenge to the Federal Reserve’s independence could undermine the institutional credibility of the US

Head of macro research

One strategist describes a shift from a world in which government policy typically mitigates risk to a world in which policy could be “an accelerant”. A widely voiced concern, for example, has been that Trump might try to influence rate-setting decisions. The strategist reckons that market confidence in the independence of the Federal Reserve could weaken after Powell is replaced in 2026.

A head of macro research notes bleakly that the president can legally remove the Fed chair “for cause”, citing reasons such as inefficiency, neglect of duty, or malfeasance. “It is not implausible that the Trump administration could attempt to make such a case,” he believes.

The courts would likely need to adjudicate, he says, but whatever the outcome, such a saga would be damaging.

“Any significant challenge to the Federal Reserve’s independence could undermine the institutional credibility of the US, potentially driving up term premia and alarming bond investors amid rising public debt levels.”

In the US, a deregulatory agenda may benefit some industries but could also increase risks in areas such as environmental compliance, financial stability and tech oversight. Respondents expect volatility in heavily regulated sectors, particularly energy, tech and financials.

The uncertainty has been evident in the market reaction to Trump’s win. Equity markets surged after the election, with the S&P 500 up nearly 6% in November. The story in bond markets, though, has been somewhat different. Ten-year Treasury yields have trended higher, reflecting worries about the inflationary impact of tariffs and uncertainty about the outlook for government borrowing.

That said, one asset manager reflects that the biggest lesson from Trump’s first term was to not confuse personal politics with market reality.

During the previous Trump presidency, this led to misguided thinking, he says, as investors believed certain policy actions would be bad for markets simply because they found the policies offensive, when in fact Trump’s four years were beneficial for markets.

8. Climate

NB Illustration/Eoin Coveney

For some asset managers, climate will have profound implications for portfolios and strategies and is once again a key risk to be managed in 2025.

“Other risks – wars or tariffs – can be reversed,” says a quant fund PM. “You can’t just get rid of carbon dioxide.”

“The earth is vomiting us out,” says a portfolio manager.

And yet, a different group of investors largely dismisses climate risk, at least as a proximate concern. About a tenth of investors chose it as their first or second risk. Almost none, outside that group, placed it in their top five.

Climate’s presence in the Investment Risk Top 10 has been somewhat erratic, reflecting this polarisation in views. After ranking eighth in 2023, it dropped out of the top 10, only to reappear this year.

In the US, Trump’s re-election has blown up the path to a net-zero economy. In 2017, during his first presidency, Trump famously withdrew the US from the Paris Climate Agreement, and he reportedly plans a repeat withdrawal during his second term.

Not knowing what to expect has thus become thematic for investors. The transition to a net-zero economy will be “disruptive by design”, says one.

Related

Hot topic: SEC climate disclosure rule divides industry 

Proposal likely to flounder on First Amendment concerns, lawyers believe

Such uncertainty adds to the difficulty implicit in efforts to size up the issue. Over the past year, firms like Man Group and Acadian Asset Management have been developing AI-driven quantitative tools to model the effects of the climate transition.

But a lack of data clouds the picture that such models can provide, survey participants report. “Nobody has any idea how to price climate risk,” says a head of investment strategy. The available data is inadequate. If estimates are “even in the ballpark, it’d be surprising”.

With the new US government administration, the market must now also navigate a polarised political landscape, and unclear regulatory outlook.

Last year, the SEC adopted contentious new rules mandating companies to disclose climate-related risks likely to materially affect their business strategies, operations or financial conditions. The largest companies must start disclosure next year and smaller firms between 2026 and 2028.

The rule has sharply divided the financial industry. Critics predict it will face legal challenges “all the way to the Supreme Court”.

The black swan risk we see would be a national repricing of home insurance in response to these higher risks in certain regions

Strategist at a life insurance-linked asset manager

Such a fractious environment could be tricky for consumer-facing companies to navigate, says a senior pensions executive. They will have no choice but to interact with “lunatic fringes” at both extremes of the political debate, he says.

In Europe, a head of quant portfolio management worries that asset managers in the region will struggle to square a continuing drive from policymakers in favour of sustainable investing, with potentially lacklustre returns from greener investments.

Meanwhile, in the US home insurance market, some asset managers reckon a “black swan” event could be on the horizon.

The rising cost of insurance, driven by climate risks like hurricanes, wildfires and flooding has become a growing concern – especially in high-risk areas. 2022 saw a record $132 billion in insured losses from natural catastrophes such as hurricanes, for example.

Investors are monitoring the impact on housing and the knock-on implications for wealth creation and retail investing behaviour.

“We’ve seen hurricanes, we’ve seen fire risk already prompt higher insurance costs in at-risk areas,” says a strategist at a life insurance-linked asset manager. “But the black swan risk we see would be a national repricing of home insurance in response to these higher risks in certain regions. This would worsen housing affordability and keep transaction volumes low.”

Homeowners seeing higher fixed costs each month could increasingly switch investment portfolios to income-generating assets, such as high yield corporate bonds, he reckons.

Another buy-sider expresses similar worries. “I live in Canada,” he says. “I didn’t have to shovel snow all winter last year. At some point, maybe in four or five years, a lot of houses will be uninsurable in the US. I don’t know how the real estate and construction industries are going to take that.”

9. Social conflict

NB Illustration/Eoin Coveney

Many participants in this year’s survey reckon growing imbalances within society – between rich and poor, young and old, native populations and immigrants – will lead to political and, in some cases, social turmoil. The impact on markets is hard to predict, they say.

“You have a massive dislocation between the haves and the have nots,” says a pension fund executive bluntly. The most likely result, participants suggest, is the continuation of a rise in political populism. Strikes, riots and, perhaps, political violence are possibilities.

The tendency and capacity for social media to encourage tribalism has stoked tensions, buy-siders say. People in the US have been “whipped up into a frenzy”, according to a quant fund CIO. “Historically, people rarely held the view that the biggest threat to their wellbeing was other people with slightly different political views.”

A multi-asset fund CIO worries about political assassinations. “It’s quite scary,” he says. The deterioration of public discourse is something “we all have to guard against”.

Many investors that spoke to Risk.net see the potential for a gap to open between young and old. Governments are heavily indebted, and aging populations have failed to save enough, says one buy-sider. Policy-makers are likely to allow higher inflation, he reckons, because inflation is the “politically safe way to bail out on promises to certain groups of the population”.

Rising asset prices, though, will make it expensive for younger people to buy houses, he says. Meanwhile, the younger generation is going to have to provide for those who have saved too little. “The younger cohort is going to be a lot poorer and less happy,” he concludes. “They’ll figure out how politically to tilt the balance in their favour.”

A buy-side strategy head warns that growing wealth disparities mean “a ton of people” will be unable to afford health care or retirement. “Everybody thinks they’re going to see a return to equity and bonds like they’ve seen over the past 10 years. It’s not mathematically possible. Returns have been so much higher than the growth rate of the real economy. That’s got to come down.”

As for what such divergences in fortunes might bring about, further progress seems likely for anti-establishment political parties and policies.

Populist right-wing parties have finished as the leaders in elections in Austria, Italy and France in recent years. In Germany, the AfD triumphed in regional elections last September. The party is polling in second place ahead of national elections in February. Six European Union member states now include radical right-wing parties in government.

Most obviously, in the US, president-elect Trump ran on a campaign of dismantling government bureaucracies reversing policies of globalisation and promising mass deportations of undocumented immigrants.

One asset manager worries about the break-up of the euro due to political instability in France, Germany, Spain and the Netherlands, where incumbent administrations are under pressure from anti-establishment challengers.

Others foresee political unrest in the US, particularly if the Trump administration tries to implement severe budget cuts. There’s no real way to reduce spending other than to slash social security budgets, notes a pension fund CIO.

Some investors, meanwhile, reckon a growing challenge to the liberal pro-globalisation consensus of past years could also come from the left.

A “narrative exists” that’s likely to lead to more union activity, says the pension fund executive. He points to moves to unionise at US companies such as Starbucks and Uber, a string of strikes by US healthcare workers last year, and the first walkout by port workers for half a century in October 2024.

10. Artificial intelligence

NB Illustration/Eoin Coveney

Like all futuristic projections, much of the potential for investment risks associated with the development of AI goes beyond our experience.

Some investors imagine a doomsday scenario, for example, in which AI algorithms trigger a market crisis. Unlikely? Perhaps. Implausible? Maybe not.

The possibility of AI enthusiasm incurring, say, a 2000-style stock market crash is entirely within grasp. But asset managers are also grappling with a different set of near-at-hand risks posed by AI reshaping their industry.

Portfolio managers are using AI to process vast data sources faster, to make better informed decisions and more accurately model risk. Even central banks are using the technology in monetary policy analysis, market surveillance, economic forecasting and stress-testing.

Traditional safeguards may struggle to keep pace with the speed and complexity of these algorithms

Head of advisory services at an asset manager

So far, the humans building these machines remain firmly in the driver’s seat. But as one head of advisory services at an asset manager points out, there could come a point where AI trading algorithms plausibly cause a liquidity crunch – or where a major financial institution is forced to ward off an AI-driven cyber-attack.

“As AI systems grow more autonomous, the risk of such events increases,” he says. “Traditional safeguards may struggle to keep pace with the speed and complexity of these algorithms.”

A near certainty is that regulatory oversight is likely to increase and create an extra burden for certain market participants, in addition to managing existing risks. Government rulemaking about the use of AI by companies that are likely to be big users – most notably financial services firms – will likely be heavy, suggests a senior portfolio manager.

But AI also seems likely to change the asset management industry itself, faster and more dramatically than some expect.

Its impact could mirror the outcome when passive indexing replaced much of active management, reckons one expert. AI could automate many tasks, forcing late adopters to adapt quickly or face disruption, he says. “In finance, there’s a lot of manual work. At the moment, investors pay for that.” First movers will be able to cut costs once machines pick up some of these jobs. “For late adopters, it will be painful,” he reckons.

Other knock-on effects from AI are broader. The technology looks set to revolutionise the job market over the next decade with implications for productivity and growth. If the associated labour market destabilisation is not carefully managed, says an asset manager, there may be a rise in social and political instability. 

Others fear the misuse of AI tools by malicious actors. A flood of AI-generated disinformation, for example, could make it harder for asset managers – let alone the public – to discern facts. 

Meanwhile, the access to semiconductor manufacturing in Taiwan, so critical to the development and application of AI, is a clear potential flashpoint that could spark a US-China conflict, another survey participant notes. Roughly two-thirds of chips are made in Taiwan, and about nine-tenths of the most advanced types of chips used in AI.

The future of the financial system seems sure to be shaped by AI, but how far that future is defined by innovation and growth – or instability and crisis – may be less certain.

Editing: Alex Krohn, Rob Mannix and Louise Marshall