MENU

The True Danger To Worry About In These Volatile Times

The stock market seems like a dangerous place to be in these few weeks. Markets across Asia have started 2016 poorly and this includes the Straits Times Index (SGX: ^STI); as of the time of writing (3:30 pm), Singapore’s market benchmark is down by 7.3% to 2,673 points from its close at end-2015.

From my perspective, the two main issues that appear to be major concerns for the market at the moment are China and the price of oil. Investors are worried about the slowdown in China’s economic growth, the seemingly inept management of its stock exchanges, and how crashing oil prices may dampen the outlook for the global economy.

However, I don’t think China’s economy and the price of oil are the true dangers that investors should be worried about. Instead, there is an underlying risk that investors should really look out for: The stability of society.

A slippery slope to social unrest

There are many countries that depend heavily on oil as a source of revenue for their respective governments. Back in 2013, Bloomberg had made forecasts for some countries on oil exports as a percentage of their GDPs (gross domestic products) in 2018.

Plenty of things have changed since 2013, but the forecasts still show something interesting: Many countries, including Singapore, had been estimated to have more than 30% of their GDP coming from oil exports in 2018. With oil prices having fallen so drastically since (from over US$100 per barrel in mid-2014 to around US$30 now), many countries may be facing huge budget deficits in the current year and more.

Many episodes of social unrest seen during the last two decades – such as the 1998 Indonesia riots and the Arab Spring in the Middle East that originated in 2010 in Tunisia – had occurred at least partly as a result of the severe economic hardships that the affected countries’ citizens were suffering from.

Thus, if there is a prolonged environment of low oil prices, some heavily-oil-dependent countries might reach a point where social unrest starts to manifest. And if that happens, especially with the larger nations, the unrest could well spread across the globe.

Getting the risk about oil right

To an investor, low oil prices might be easily countered by, say, avoiding oil-and-gas related companies. But, if a country is heavily dependent on oil, its entire economy might be at stake if there is widespread social unrest. And as mentioned, there is a risk of the unrest diffusing to other countries, especially for those that have close economic or cultural links to the affected country.

Investors might want to be mindful of the possible development of such situations.

For more (free!) investing tips and tricks and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.