From Italy's banks on the brink of default to political risks in Europe, the extreme valuations in growth stocks and a rising US dollar, here are the topics at the top of local fund managers' minds.

Europe

For Prime Value Asset Management joint-chief investment officer ST Wong, Europe is the biggest concern.

The spillover from the stress in its banking system and an escalation of political risks could derail its economic recovery, he said. "Europe appears to be dealing with long-term structural issues from unresolved debt and banking issues.

"In the immediate term, the stronger euro is dampening competitiveness and thereby growth."

Paul Ashworth, managing partner at Cameron Harrison, is also concerned about Europe, specifically the Italian banks, which have a combined €400 billion ($584.5 billion) in non-performing loans. But that official number is the tip of the iceberg, Mr Ashworth suspects. "We would think about double the figure. Either way, the cost is a staggering 25 to 30 per cent of GDP."

Italy's referendum in December on its constitution is also a referendum on Prime Minister Matteo Renzi, Mr Ashworth said. "Should it fail, the government falls, and probably the Italian banking system falls."

Modern economic crises have been sparked by banking crises, Mr Ashworth points out, and the situation in Italy bears all the hallmarks and catalysts to "throw the global financial system into full-blown crisis". 

Valuations

Joel Beebe, portfolio manager at Wingate Asset Management, said his firm was keeping an eye on the dispersion between expensive growth stocks and value stocks, including financial, healthcare and industrials.

"The index may deliver muted returns over the next few years, but we may see a recovery in value stocks and at the same time a de-rating in momentum stocks," he said.

"No one will ring the bell on the day the tide turns, but at least if you're in stocks that aren't overpriced, you will have valuation as a backdrop." In other words, there is little to gain from staying in those momentum stocks whose valuations are stretched, and plenty to gain in the unpopular sectors of the market. 

Growth

Mr Beebe also has an eye on corporate debt levels, which he says are at a 12-year high on a measure of debt to earnings before interest, tax, depreciation and amortisation. That debt has been used to launch company buybacks and acquisitions to achieve growth in the absence of organic growth, but that avenue might be coming to an end.

"Given the amount of issuance in recent times, it is towards the end of its cycle and it becomes increasingly difficult for companies to grow bottom line earnings per share," he said.

Locally, Mr Wong is concerned Australian companies are continually being punished through their share prices to achieve growth.

"[Companies are] being penalised for investing heavily to add new customers, new products or markets," he said. "The underlying theme being a preference for nearer-term profits or to sustain high-dividend payouts to the detriment of longer-term profits." 

Currencies

Andrew Mitchell, portfolio manager at Ophir Asset Management, has eyes firmly on a stronger US dollar, and what effect it would have on emerging markets.

"One consequence of [unprecedented] low rates is that debt has been accumulating in emerging markets and a lot of this is dominated in US dollars," he said.

A stronger US dollar, on the back of rising interest rates, will strain EM financial systems, he said.

"China is particularly a concern, because their banking system is facing an increasing issue with non-performing loans."

Though Mr Mitchell does not believe a crisis is imminent, he is focusing on buying US dollar-earning stocks to protect against the downside risks of a stronger US dollar.

Mr Ashworth said an Australian dollar at US50¢ is a possibility, if capital markets should decide that monetary policy has reached past its effectiveness, sparking a bond rout. The local currency would be a casualty.

"The combination of sharply lower terms of trade and jettisoning of confidence in favour of yen and US dollars will give us the inflation we seek, and offshore competitiveness," he said.