Stock Market Interpretation: Two Key Risks

China's stock market fell sharply this summer, with the euro area almost falling apart and commodity prices continuing to fail.

2015 can be described as an unpredictable year. Unexpected events and market reactions have left investors off the normal track.

Britain withdrew from the EU: British Prime Minister David Cameron has promised to renegotiate the terms of the EU membership and will hold a referendum not later than the end of 2017 to decide whether to stay in the EU or withdraw from the EU.

However, Cameron has prepared for a referendum in the summer of 2016, making 2016 a key year for Europe and Britain.

Rising inflation: after the low inflation rate, the central banks in Europe almost invested everything, but this didn't really work.

Banks are unanimously predicting that consumer prices will continue to rise slowly in 2016.

Low inflation means that wages or company sales will not go up too much. Consumers and enterprises may delay purchases, which will slow down the overall expenditure. Therefore, generally speaking, low inflation is not healthy for the economy.

More importantly, very low inflation raises the risk of retreat into deflation, while deflation can make one.

Fall into depression.

However, market watchers believe that inflation in Europe may rise much faster than expected in 2016.

The labor market in the United States and the United Kingdom is tense (short supply), El Nino causes food prices to rise, oil prices rebound and other factors will become a factor.

The faster rising factor.

Recent surveys show that the number of British backed European companies has increased significantly, making the British pound and British companies vulnerable to the referendum.

Considering that the EU is the largest in Britain.

The withdrawal of the EU could hamper trade, damage the long-term growth of the UK economy and let Britain enter the depression.

Morgan Stanley said Britain's market capitalization shares are most vulnerable to the outcome of the referendum because they are more dependent on domestic and euro area economies, while international large cap companies can better cope with the euro retreat storm.

JP Morgan predicts that if the result of the referendum is to withdraw from the EU, then the exchange rate of the pound against the US dollar may fall from the current US $1.5 to US $1.4.

Morgan Stanley analysts said: "the rapid rise of inflation will cause such worries that central banks are lagging behind the situation, and the market is beginning to adjust the rapid reduction of the liquidity of the central bank, which will bring downward pressure on stock market valuation."

When stock market valuation is at a low level, investors' risk aversion is strongest, which indicates investors' concerns about the economy and market prospects.

However, this time is also considered to be the best time to enter the stock market and pick undervalued stocks.