Rising interest rates, adverse trade actions are Biggest Risks

The biggest risk is the combination of rising interest rates and some untoward action on trade.

The great uncertainty is what happens with trade if we have a trade conflagration in the next few months, which could really hamper the global economy and stock markets.

The key question is whether these bargaining ploys, threats of levying tariffs etc result in real negotiation, which create that win-win situation or do entities, do players get locked in to positions, which mean they eventually have to carry out their threats in which case we are in the lose-lose situation.

There is benefit in India having a good relationship with China and vice-versa because these are two big countries that can do a lot of economic activity together.

One of the reasons the countries are trying to form better relationships with each other is because of the unpredictability of the US administration at this point.

The latest news suggests the US economy is actually strengthening, is doing better, and is actually doing quite well for an economy in its 92nd year of job creation. The Federal Reserve is on a raising path, which it is not going to step off until it feels it is much closer to neutral and most people would say neutral is between 2.75% and 3% at the short end.

There are certainly areas of very high leverage even in the United States. Certain parts of the corporate sector which are highly levered and as much as the interest rates, it is also the easy access to financing, the ability to refinance, to rollover debt which has been very important in the leverage over the last few years.

As interest rates rise, as people start looking at your capacity to sustain interest payments or debt service over time, the ability to borrow also becomes more fragile.

So my sense is the highly levered areas of the US economy may in fact become most stressed as these interest rates pick up, both because it is picking up at the short end as well as if it picks up at the longer end.

But this is something that everybody knows. We know that there are levered entities and this is something that is going to happen.