3 Black Swans That Every Investor Should Be Aware of for 2017

Hedge against risk and volatility by investing in Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP).

| More on:

It is somewhat surprising that 2016 has ended on a positive note, despite Trump’s surprising electoral victory and the fears of yet another financial crisis emerging at the start of the year. It was the deep slump in commodities, along with the potential of yet another European banking crisis, that triggered many sleepless nights for investors over the course of the year.

Nonetheless, since Trump’s victory, U.S. markets have surged to new highs, commodities–or at least base metals–have rallied, and an increasing sense of optimism for the outlook of the global economy has filled financial markets. There are signs, nevertheless, that the global economy is not out of the woods, and the following potential “black swan” events pose very real threats. 

Now what?

Firstly, political unrest and uncertainty is spreading across the globe.

The rise of nationalism poses a real threat to global stability and the very existence of many global institutions that are taken for granted.

Nationalism has been flagged as a key threat to the integrity of the European Union and caused several distinguished commentators, including Prince Charles, to draw parallels between the rise of the nationalsim and that of fascism in the 1930s. It was those events that eventually triggered a breakdown of the existing world order and thus global war.

Secondly, the rise of protectionism, the end of free trade, and the emergence of trade wars could be of concern.

Protectionist trade policies form a key plank in Trump’s platform. One of the biggest concerns is that the emergence of a protectionist America would trigger a trade war with China and disrupt existing trade alliances. This would have a marked impact on global economic growth and could even trigger stagflation.

Finally, the threat of a hard landing in China still sends shivers down almost every investors’ back.

Despite the surge in economic activity in China being directly responsible for the solid rebound in many commodities, there are fears that it could peter out just as quickly as it began.

Beijing’s economic stimulus has almost exclusively relied on credit, creating a massive trillion-dollar debt bubble that many pundits believe is unsustainable.

The risks that this poses to the global economy are massive.

China is the world’s single largest consumer of commodities, apart from crude, and is responsible for 15% of global GDP, so any hard economic landing would certainly spill over into the global economy.

It appears that Beijing has finally recognized the systemic risk posed by an overreliance on credit to achieve its dogmatic adherence to a 6.5% GDP growth target. President Xi Jinping recently announced that China is not wedded to the target.

Nevertheless, even a modest slow down in China’s growth would have sharp impact on commodities and the potential to trigger yet another slump. This doesn’t bode well for miners such as Teck Resources Ltd. (TSX:TECK.B)(NYSE:TECK) and First Quantum Minerals Limited (TSX:FM), which have benefited significantly from the resurgence in commodities.

So what?

While the likelihood of these events occurring on such a scale so as to trigger a financial meltdown is slim, it is always prudent for investors to hedge against such risks. One of the best means of doing so is by investing in quality companies that have wide economic moats, proven businesses, and that operate in industries with relatively inelastic demand.

A stock that stands out for these reasons and more is Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP). Not only does it own and operate hard assets in oligopolistic markets that allow it to be a price maker to some extent, but those assets remain in demand regardless of the state of the economy. Importantly, most of its earnings are protected from economic slumps because they are contractually locked in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned. Brookfield Inftrastructure Partners is a recommendation of Stock Advisor Canada.

More on Investing

Gold bars
Metals and Mining Stocks

Gold Stocks That Could Soar if the Fed Pauses Rate Hikes

In choppy waters, two gold heavyweights look too good to pass up right now given their lowered entry points, dividend…

Read more »

Clean energy
Energy Stocks

Better Buy: Renewable Energy or Uranium Stocks?

The world is shifting towards clean energy sources, creating investment opportunities in the renewables sector. What's a better bet: environmental…

Read more »

retirees and finances
Energy Stocks

These 3 Stocks Can Help Make You Richer by Retirement

Future retirees can be rich in their sunset years with the help of three distinguished dividend-payers on the TSX.

Read more »

A worker uses the cloud for paperless work. tech
Tech Stocks

Why I Think Constellation Software (TSX:CSU) Stock Has Market-Beating Potential

Constellation Software (TSX:CSU) could outperform the market over the next few years.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background

Got $5,000? These Are 2 of the Best TSX Growth Stocks to Buy Right Now

Canadian investors with some extra cash on hand should look to snatch up TSX growth stocks like goeasy Ltd. (TSX:GSY)…

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

Retirees: 2 On-Sale TSX Dividend Stocks to Buy Now for Passive Income

These top TSX dividend stocks now offer 6% yields.

Read more »

Electric car being charged

Forget Rivian: This Canadian EV Stock Is Cheaper and Safer

If you're still tempted to buy EV stocks, Magna International (TSX:MG) is probably safer than Rivian (NASDAQ:RIVN).

Read more »

Payday ringed on a calendar
Dividend Stocks

New Investors: The 3 Best TSX Dividend Stocks for Monthly Cash

New investors looking for monthly dividend cash are in luck! Here are three attractive Canadian dividend stocks for growth and…

Read more »