The top 10 financial markets at risk and why

Financial markets include Hong Kong, China, Brazil.

The art of investing relies largely on the ability to be able to spot and manage risk. Whether you’re looking for an asset fund in emerging markets, are investing in currency or are a UK trader with an eye on live commodity prices, it pays to know where in the world is most at risk.

The future of the markets is notoriously tough to forecast but learning the lessons of the past – and being able to spot how these trends emerged – can at least help investors to make informed decisions about where to put their money.

It’s with this in mind that investment bank Nomura Holdings has devised an ‘early warning system’ to highlight the countries most at risk of suffering a financial crisis.

Hong Kong tops the ‘at risk’ list

The early warning system flagged up Hong Kong as being the economy that is currently the most at-risk – with China in second place.

The top ten were:

1. Hong Kong
2. China
3. Thailand
4. Brazil
5. Colombia
6. Philippines
7. Chile
8. Singapore
9. Malaysia
10. Turkey

How the early warning system works

Singapore-based analyst Rob Subbaraman teamed up with analyst Michael Loo using data going back to the early 1990s. They picked out five indicators that are most likely to point to a crisis in the next 12 months.

Those were:

• The ratio of corporate and household credit to GDP
• The corporate and household debt-service ratio
• The real effective exchange rate
• Property prices
• Real equity prices

Nomura’s most recent update covered the 12 quarters up to and including the first quarter of 2017. With each of the five factors analysed for each of the 12 quarters, countries had a maximum score of 60. In its recent study, Nomura’s early warning system gave Hong Kong a score of 52 and China 40.

What does the early warning system show?

Below Hong Kong and China, the next eight in the list are all emerging markets and six of the top ten are also in Asia. Both factors hint at geographic and economic trends that traders should be aware of – although it’s important to note that the factors merely show the evidence of conditions that could lead to a crash, not necessarily hard and fast proof that it will occur.

However, given the influence China has – especially with close links to economies such as Australia – it’s clearly concerned far beyond the countries involved.

The report’s authors wrote: “The world’s second-largest economy, to which the rest of Asia is very exposed, is flashing several signs of vulnerability.

“Whether China is willing to tolerate some short-term pain for long-term gain, by persevering with deleveraging, closing zombie companies and letting markets play a more decisive role, remains to be seen. The one thing that is clear is that the longer China delays, the bigger the risk of disruptive adjustments from which the contagion to the rest of Asia could be substantial.”

They added: “Both Hong Kong and mainland China have large credit and real property gaps. Because the Hong Kong dollar is linked to the US dollar, (interest rates are) also at risk of rising sharply were the Fed (US Federal Reserve) to accelerate its rate hike cycle.”