The number of moving parts in the global economy and world financial markets is more apparent than ever.
In the United States, the fiscal cliff is coming into focus post-election.
And the sovereign debt crisis in the eurozone continues, although it has abated somewhat in recent months.
While the fiscal cliff and the euro crisis have been consistently at the forefront of investors' minds throughout this year, there are plenty of other big risks to markets and the economy as well that haven't garnered the same attention and awareness.
Some of those risks are even to the upside.
BofA strategists Kate Moore, Michael Hartnett, Benjamin Bowler, and Swathi Putcha sent out a research note examining seven of those lesser-known "tail risks."
The team writes, "Though we believe each of the seven is a low probability event – generally a tail risk is considered a 1-in-10 chance – any one could have an outsized impact on portfolios."
Europe makes an economic growth comeback
WINNERS: U.S. tech stocks, eurozone periphery debt, European banks, the euro
LOSERS: German stocks, the Swiss franc
RATIONALE: Not many expect growth to return to Europe next year. ECB chief Mario Draghi said it himself the latest ECB press conference. And BofA notes that only 9 percent of clients expect above-trend growth in Europe in 2013.
However, BofA says, "just as we saw in Asia in 1998 and the US in 2009, once global policy coordination leads to a dramatic decline in bank funding and interest rates a pickup in economic activity is normally not far behind. The one missing ingredient that Asia had during its debt crisis that Europe does not is a much weaker currency."
Source: BofA Merrill Lynch
Wall Street's collateral crunch intensifies due to regulation
WINNERS: Short-dated U.S. Treasuries
LOSERS: Banks, small cap stocks
RATIONALE: Major financial regulatory reform measures like Dodd Frank and Basel III require banks to hold much more capital than they did before in order to have a larger buffer against future shocks. However, those increased capital needs translate directly into demand for safe assets.
In that case, BofA says, "Analyst Philip Middleton notes that there could be $2.4tn of additional collateral requirements...The combined impact of bank demand and depositor demand for “risk-free” instruments pushes Treasury yields (particularly short-dated) to new historic lows."
Source: BofA Merrill Lynch
US employment really takes off
WINNERS: Banks, small cap stocks, value stocks, emerging markets
LOSERS: Gold, blue chip stocks, growth stocks, bonds
RATIONALE: BofA calls the U.S. labor market "the last area of significant weakness in the economy." And with the veil of uncertainty from the U.S. election rising and the fiscal cliff coming into focus, the uncertainty factor could soon recede, leading businesses to hire more and send unemployment lower.
If that happens, BofA says, it "puts upward pressure on wages and inflation" and will force the Fed to begin tightening monetary policy sooner than expected.
Source: BofA Merrill Lynch
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