The Thinking Ahead Institute (TAI), a not-for-profit research and innovation body that grew out of Willis Towers Watson Investments’ Thinking Ahead Group (TAG), has released a new report, Extreme Risks 2019, detailing the 15 most extreme – i.e. not necessarily the most likely, but the most potentially devastating – risks that could affect global economic growth and asset returns. The top three risks named in the report are – perhaps unsurprisingly – global temperature change, global trade collapse (through rising protectionism) and cyber warfare.
Interestingly, no longer in the top 15 this year are terrorism, insurance crises and deflation.
“Our extreme risks ranking has seen the emergence of a general trend,” said TAG Head Tim Hodgson, “with financial risks falling down the rankings and non-financial extreme risks growing in significance.” Global temperature change, he said, has risen to the top of the list due to the organisation’s assessment of this risk as being increasingly likely and threatening catastrophic impacts – indeed, the extinction of vast swathes of the human race is about as bad as it gets.
“We believe that the world is subject to fundamental changes,” Hodgson went on to say, “which will alter power balances. A complex world can and will deliver extreme outcomes that are hard to imagine when working with a normal distribution. That means extreme events are much more likely than previously thought. To navigate through this complex world, we suggest investors need to be open-minded, avoid concentrated risks, be sensitive to early warning signs, constantly adapt and always prepare for the worst.”
The remaining 12 extreme risks noted by TAI are resource scarcity, a currency crisis, depression (economic rather than personal), infrastructure failure, a banking crisis, sovereign default, stagnation, biodiversity collapse, health progress backfire, nuclear contamination, abandonment of fiat money (i.e. a total collapse of trust in both governments and government-backed currency) and extreme longevity (i.e. where a significant increase in life expectancy overwhelms existing support systems). Cheery stuff!
However, TAI’s assessments are not merely an exercise in doom and gloom – the organisation also offers some suggestion of hedging strategies that institutions, investors and so on can adopt. These include holding cash – as it can hold its real value for long periods despite incidences of deflation and inflation – keeping an eye on derivatives and holding a negatively correlated asset.
“I see extreme risks thinking as an exercise for the mind,” said Liang Yin, Senior Investment Consultant at TAG. “They remind us that it is naive and dangerous to cling to a single vision about the future. Yes, we do not know what the future holds. But our brains are more than capable of imagining multiple versions of the future. As investors we are trying to navigate a highly volatile, uncertain, complex and ambiguous world. The scenarios are most effective when they are used in a deliberately created, interactive environment to make explicit assumptions — and to challenge assumptions — that underpin your investment portfolios or your business strategy.”
So, don’t despair! We have not reached the point of no return.