Coordinated liquidity measures and quantitative easing may have to return and banks could take another hit to their balance sheet because of the sovereign debt problems in the euro zone, according to Ashok Shah, the CIO at London & Capital.
A lack of clarity from policy makers will continue to undermine investor confidence at a time when markets already "fear insolvency or debt restructuring in a disorderly fashion" within the euro zone, Shah told CNBC.
"There is a risk that the sovereign debt crisis could morph into another run on undercapitalized banks in Europe," Shah said. "The IMF can support liquidity but do nothing about solvency."
With swap spreads negative in the U.S., UK and Japan, Shah says this is not just a euro zone problem and is increasingly worried about the politicians' response to the crisis.
"Wealth redistribution policies and the prospect of exiting quantitative easing are a big risk for the U.S. and UK," he said.
"Rising nationalism in euro zone will thwart co-ordination efforts and there remains a risk of overheating in China and India," Shah added.
The regulatory response is a big concern for Shah. He fears Basel III could impose draconian provisioning on the financial industry and push return on equity down to a utility-like 10 percent.
That could be exactly what the politicians want from the banks as policy makers in Europe push for a transaction tax ahead of the G20 meeting in Seoul.
Bull Market with Bear Phases?
Hopes are rising that growth in the U.S. and BRICs (Brazil, Russia, India and China) could help offset the problems within the euro zone, but Shah is still worrying that a strong recovery could be hindered.
Despite Shah’s wall of worry he sees reasons to be cheerful and is questioning whether we remain in a bull market with bear phases.
"Emerging markets remain strong with healthy internal and external balance sheets. The growth momentum is intact," he said.
Shah believes global equities look attractive despite the headwinds.
"Relative and absolute valuations look good with many stocks benefiting from competitive devaluations of their governments," he said.
"There is even a chance the financials could be entering oversold territory," Shah added.
He pointed those looking for optimism towards the corporate bond market.
"Balance sheets have improved and debt levels have declined. The low rate environment is positive and the credit upgrade cycle is intact," he said.