With the future being unpredictable, considering different scenarios that stray from the expected norm is crucial for risk-averse investors. In a recent analysis, State Street Global Advisors looked at so-called Grey Swan events, scenarios that typically have a very low likelihood of occurring yet carry the risk of broad investment implications, and identified six of them for 2024.

The first scenario that Lori Heinel, Global Chief Investment Officer at State Street, talks about is the increased regulatory scrutiny on the big tech companies or the Magnificent Seven amid antitrust discussions. According to the CIO, this could impair the operational efficiency and business models of these companies, decreasing investor enthusiasm.

The second Grey Swan State Street names is adverse credit developments in the non-bank financial sector amid anticipation of a soft landing for the global economy. The rapidly growing non-banking financial sector could involve hidden leverage and liquidity mismatch, says the asset manager. “The opaqueness of some markets could generate panic that ripples across other sectors at just the ‘wrong’ moment,” cautioned Heinel. As a result, investors might dump debt securities and there could be a downward price pressure.

Geopolitical tensions in China, conflicts in the Middle East, and a slew of elections across the globe boosting oil, gold, and the US dollar higher is the third Grey Swan.

The fourth Grey Swan, according to State Street, pertains to Japan. If the country sustains inflation near the 2.0% level, the BoJ would raise policy rates by 150 basis points over the next 18 months, as per the scenario. As a result, the yen would appreciate dramatically and breakthrough 100/USD. State Streets’ CIO elucidates, “So the yen at 100 is not nearly as extreme an outcome as it may seem at first glance. It would simply mark a return to the average that prevailed in the decade pre-Covid.”

The fifth Grey Swan depicts the positive effects of green transition and deglobalisation. There are chances of faster implementation of these forces due to the Ukraine war and the US-China tensions. Moreover, rapid technological advancements, especially AI, have a positive impact on the overall economy. “For investors, the implications of this scenario unfolding would likely drive a focus on growth assets, in particular those that are leveraged to the AI boom and green transition,” Heinel explains.

The last Grey Swan shows the disruption of the entertainment industry and financial services by digital assets. “We imagine the embrace of the technology by a well-recognized artist energizing retail investors to accelerate their adoption of digital assets as a means to invest and trade in experiences,” predicts State Streets’ Global Chief Investment Officer.

View the complete article here.