When thinking about the top risks for investors in 2025, when they are always not the most obvious, we need to look at what is possible even when we can’t see them coming. Tail risks are a form of portfolio risk that arise in the chance of a loss occurring due to a rare event(COVID, 2008 Mortgage crisis). Technically speaking, it is the possibility that an asset performs far below its average past performance. Or when the investment moves more than three standard deviations from the mean than what is shown by a normal distribution. Read below for our 10 tail risks to watch out for in 2025.
1. Geopolitical tensions in Ukraine/Russia, China, the Middle East, which could lead to trade wars and higher inflation.
Conflicts in Ukraine, the Middle East, and strained U.S.-China relations risk disrupting energy supplies, trade, and supply chains. These challenges could drive inflation higher, increase market uncertainty, and slow economic growth.
2. Increasing nationalism, which could also lead to trade wars and higher inflation.
Rising nationalism may fuel protectionist policies, restrict global trade, and trigger trade wars. These actions could disrupt supply chains, raise tariffs, and drive inflation higher, impacting economic stability.
3. The threat of a partial shutdown of the U.S. government, which could lead to a default.
A partial U.S. government shutdown risks disrupting federal services and undermining market confidence. Prolonged delays could escalate to a default, impacting credit ratings and global financial stability. The last significant U.S. government shutdown occurred from December 22, 2018, to January 25, 2019. It lasted 35 days, making it the longest in history. Around 800,000 federal workers were furloughed or worked without pay, affecting government services such as national parks, air travel, and food inspections.
4.The U.S. debt-to-GDP ratio exceeding 100%.
When the U.S. debt surpasses 100% of GDP, it signals that the country owes more than its annual economic output. This can lead to higher borrowing costs, reduced fiscal flexibility, and increased vulnerability to economic shocks, potentially slowing long-term growth.
5. Continuing increases in sovereign debt in most developed nations and China.
Growing sovereign debt burdens in developed nations and China strain public finances, increase borrowing costs, and heighten the risk of defaults. These trends could weaken global economic stability and limit governments’ ability to respond to future crises.
6. The work-from-home movement, which has led to dramatic falls in office valuations and could lead to more bank failures.
The shift to remote work has caused significant declines in office property valuations, impacting commercial real estate. This devaluation could strain banks with heavy exposure to the sector, increasing the risk of financial instability and potential bank failures.
7. Municipal finances coming under pressure in large cities due to the decline in property values of offices and increasing expenses due to the surge in illegal immigration.
Declining office property values reduce tax revenues for large cities, while surging expenses from increased illegal immigration strain budgets further. These factors could lead to service cuts, higher taxes, and financial instability for municipalities
8. Antitrust legislation negatively impacting technology stocks
Increased antitrust scrutiny could lead to regulatory actions that break up or limit the growth of major tech companies. This could reduce their market dominance, lower profits, and negatively affect stock prices in the technology sector.
9. The left tail risk of the U.S. turning protectionist, which could lead to higher inflation and a negative economic outlook.
If the U.S. adopts protectionist policies, such as tariffs and trade barriers, it could disrupt global supply chains, raise the cost of imports, and drive inflation. This would worsen economic uncertainty, potentially leading to slower growth and a bleak economic outlook.
10. The right tail risk of a Mar-a-Lago Accord, which could lead to a weaker dollar and a very favorable outlook for the non-U.S. world and emerging markets.
A hypothetical Mar-a-Lago Accord, involving major global economic shifts or agreements, could weaken the U.S. dollar if it leads to reduced U.S. economic influence. This would likely benefit non-U.S. economies and emerging markets, creating favorable conditions for their growth while challenging U.S. financial dominance.
Predicting tail risks—low-probability, high-impact events—is inherently difficult, but you can always prepare for them by reducing your risk. Depending on your risk tolerance, Inverse ETF’s, Equity linked CD’s and Annuities could help reduce your risk. Having a good financial advisor is important, in correctly identifying the current risks and to making adjustments to the portfolio, to hedge against them. Contact us today for more information and our outlook on 2025!
