Home / Analysis / US politics, more global conflicts top risks for instos

Not every risk is out in the open, and Allspring Global Investments is keeping a close eye on those that some segments of the market struggle to price – including a US government shutdown and a war on the Korean peninsula.

While a Russian military conflict with NATO remains the top risk to markets – especially if Russia resorts to the use of nuclear weapons – new threats loom in the form of China further decoupling from the West, a global recession and a prolonged US government shutdown.

“The US government’s funding expires on September 30,” Allspring’s Investment Analytics team writes in the latest Allview Market Risk Monitor. “Without a continuing resolution or passage of a budget, the government will run out of money and will be required to suspend or shut down all non-essential services.”

The US government shutdown five years ago saw 380,000 employees furloughed and 420,000 ‘essential’ workers having to continue working without pay, and the Allspring team believes that prolonged closure of public services could push the US economy into a recession. But while the probability of a prolonged shutdown is high, the global impact is low – unlike China and the US moving further apart.

“Early warnings along this path include: the US mandated divestitures from Chinese military-linked securities; bans on the use of iPhones by Chinese government entities; and US government restrictions on the sale of certain semiconductor chips to China,” the Allspring team writes. “A more aggressive China decoupling could result in significant price declines in US equities within the IT sector as well as continued weakness in Chinese equities.”

Also on the radar for the Allspring team is a waves of defaults in commercial real estate (consensus probability/low impact) and human bird flu pandemic (low probability/extreme impact) which would see, alongside generalised chaos, sharp price declines for leisure and travel names. It’s also keeping an eye on the possibility of a war on the Korean peninsula – kickstarted by frequent missile launches towards South Korea – and Chinese military action.

“China’s desire to expand its influence in the South and East China seas, especially as it relates to the island of Taiwan, is elevating the probability of a military conflict or a military-led embargo in the region,” the Allspring team writes. “Portfolios that are overweight Asian equities could experience extreme levels of volatility if a conflict ensures. Portfolios overweight the hardware segment of the IT sector could also experience challenges given Taiwan’s status as a major hub for semiconductor manufacturing.”