Risks facing the global markets in 2016
Duncan Richardson, News Editor
23 Nov 2015, 10:59 a.m.
The pillars which have supported the global economy since the 2008 economic crash appear to cracking.
Business have taken on debt like never before with the U.S. shale industry leading the way. The falling oil price is now taking its toll. Chesapeake once the largest shale oil producer in the U.S has seen its share price tumble as investors head for the exit. The cost to insure against the company defaulting on its debt has gone parabolic. If oil remains below the cost of production Chesapeake is just one of many shale producers which will default on its debt. The total debt of the 25 companies engaged in the U.S. shale industry is estimated to be $150 bn.
The debt situation in the emerging economies is even worse. With commodities trading at multi year lows, producers who have borrowed in U.S dollars will soon be unable to make their repayments.
Rising borrowing costs will put further pressure on multi-nationals paying out big dividends. Retail investors desperate for yield generally have a large exposure to this sector. The FTSE 100 is overpriced despite suffering a 13% correction in August and trading down 3.5% year to date.
Sovereign wealth funds may be forced to liquidate their equity positions to plug holes in their countries budgets. With the oil price at $40 per barrel both the Norwegian and Qatari wealth fund are running short on cash. This could signal the end of the 20 year flow of petrodollars into Western equity markets.
The OPEC meeting scheduled for the 4th of December and the Federal Reserve meeting which begins on the 17th of December will set the tone and shape for global markets in 2016. If OPEC holds its production and the Fed raises rates global markets will be unable to deal with the consequences following years of cheap money.