Sleepwalking with the 2019 Global Risk Report

The Global Risks Report 2019, published by the World Economic Forum, was released on January 15, 2019. It is the perfect report to read on a dreary winter afternoon and checks in at a light 114 pages and comes complete with graphics that Edward Tufte would no doubt approve. With the overall theme of “Is the world sleepwalking into a crisis?” the report covers the likelihood and potential impacts of important global risks that face us in the future. This report, as with others in the series (this is the 14^th annual risk assessment), surveyed global leaders between the dates of September 6 to October 22, 2018. The global leaders surveyed are from business, government, civil society and thought leaders.

My first observation is that the identified risks tend to be backward looking. Or maybe it is more accurate to say that they are driven by current events and the news cycle of the day. And given that the risks are identified by survey creators and assessed by respondents, no matter how astute they may be, this is no surprise. And after all, many current events may indeed be very likely to occur or have a high impact if they do occur, so maybe this should not be a surprise.

Looking at the survey’s past results, we can see a pattern of the Top Risks by Likelihood and news events of the recent past. In 2009 and 2010 during the height and immediate aftermath of the Great Recession, three of the top 5 risks identified by likelihood were Economic, with a collapse in asset prices as the most likely. Meaning that the event that just occurred was indicated as the most likely to occur again. This was followed by chronic disease. Not coincidentally, the Swine Flu pandemic was at its height in 2009-10, so clearly, impactful current events were on the minds of survey respondents as likely risks for the future.

In 2011 the top 2 events were Environmental, with Storms and Cyclones followed by Flooding the top responses. In this case, the events of 2010 turned out to be predictive of weather events of 2011 (remember, respondents predict the next year in the latter part of the previous year, so events of 2010 are influencing predicted risks for 2011). The earthquake and tsunami in Japan (the costliest natural disaster in history), flooding in Thailand (the costliest flood in history) and Hurricane Irene all occurred in 2011 as well as several other floods that rank very high in terms of disaster costs. And there have been many disasters since, so the theme of natural disasters ranking high on the list is not likely to change soon. And in 2016 and 2017, large scale involuntary migration was respectively the first and second top likely risk identified by survey respondents, with the Syrian refugee crisis dominating the news of the time. 2018 and 2019 are no exception with cybersecurity, weather events and climate change having been major events of the past 2 years.

Exhibit 1: Top 5 Global Risks in Terms of Likelihood, Years 2009-2011 and 2016-2019

Source: 2019 World Economic Forum Global Risks Assessment, Figure IV, Page 6. Due to space constraints, years 2012 – 2015 have been removed from the original graphic.

Short term risks identified by participants also mirror current events. Exhibit 2 shows the top 10 short term risk. The top three of these are very much rooted in the news of the day, with Brexit, and the US/China trade war being topical examples that have impacted global markets and may indeed continue to do so. And while cyber-attacks involving thefts of data and personal identity thefts are certainly costly for the companies and individuals that are victims, they don’t tend to impact global markets (at least not so far). But they are in the forefront of risks for anyone doing business in the 2019, and thus a top consideration on this list.

Exhibit 2: Short-Term Risk Outlook, % Respondents Expecting Risks to Increase in 2019

Source: 2019 World Economic Forum Global Risks Assessment, Figure IV, Page 6

Participants also were asked to identify the top risks by impact – risks that, if they occurred, would be anticipated to have the most significant impact on the global economy. These tend to be, in my opinion, more forward looking especially as we move on from the last crisis. From 2009-2014, these risks, similar to the risks in Exhibit 1, were dominated by past events. Economic risks were at least two of the top 5 risks identified. But from the years 2015-2019, only a single economic risk is identified, while geopolitical, environmental and societal risks far outweigh economic risks in the minds of respondents. Here it can be argued, especially in recent years, that the Risks by Impact actually do inform about participants expectations of the future rather than what is top of mind from the past. Given that world economies have moved on from the financial crisis, it is sensible that survey participants begin to consider threats from other sources.

Exhibit 3: Top 5 Global Risks in Terms of Impact, Years 2009-2011 and 2016-2019

Source: 2019 World Economic Forum Global Risks Assessment, Figure IV, Page 6. Due to space constraints, years 2012 – 2015 have been removed from the original graphic.

While my personal inclination would be to include at least a single economic risk in the top five risks for the future in 2019, they are not considered amongst the most impactful by survey participants. But the impactful events identified truly have the capacity to wreak economic havoc on the world and in some cases, already have. Environmental events disrupt supply chains, trade and local economies on a regular basis, and longer term the effects may be devastating, particularly for coastal communities. On a more tangible front, the report references a study by First Street Foundation[1] found that $14.1Bn have been wiped off home values in costal areas of Florida, Georgia, New Jersey, New York, North Carolina, South Carolina and Virginia.

But the headline risks identified in the front of the report obscure some of the important and provocative risks identified deeper within the text of the paper. There is an interesting section on biological threats that societies are facing that are either naturally occurring or manufactured. While naturally occurring biological threats in the 21^st century (like SARS, MERS, Zika and Ebola) have been relatively benign from a mortality standpoint (compared to historic infectious outbreaks), they have been economically costly. And the report points out that we are ill equipped to handle serious biological threats should an outbreak become more widespread.

There is also a section that is essentially a thought experiment of what some of the dramatic and impactful risks that society may be facing. From introduction to the “Future Shocks” section in the report:

“As the world becomes more complex and interconnected, incremental change is giving way to the instability of feedback loops, threshold effects and cascading disruptions. Sudden and dramatic breakdowns—future shocks—become more likely. In this section, we present 10 such potential future shocks. Some are more speculative than others; some build on risks that have already begun to crystallize. These are not predictions. They are food for thought and action—what are the possible future shocks that could fundamentally disrupt or destabilize your world, and what can you do to prevent them?”

While each risk in the section is thought provoking, the topics in the Future Shocks that I found most interesting include:

• Weather Wars – An idea that weather manipulation could be used to disrupt agriculture or planning.
• Open Secrets – The use of quantum computing to render our current digital cryptography obsolete.
• Against the Grain – Food supply disruption as a result of climate change, trade wars or other avenues.
• Emotional Disruption – Use of AI to push desired triggers in emotionally receptive individuals.

While the survey responses generally receive the most coverage in the media, the deeper sections can serve to inform ones perspective on risks faced in our global economy. While I don’t suggest than any advisor position their client portfolios for the coming “Weather Wars”, I do believe that thinking about these risks is a useful exercise. From there, mitigation, migration and capitalization strategies can be developed to help the astute advisor properly position a portfolio when risks begin to come to fruition.

When taken as a whole, the report is a very useful read into the risks facing our planet. Risks go far beyond the economic that we generally consider in financial markets. They delve into risks to our quality of life, to our societies and social fabric and to our physical and emotional well-being. In the end, all risks are likely to manifest economically, but some may be harder to see than others.

I encourage readers to go beyond the “top risks” sections and go deeper into the report. Even if you find some of the ideas hyperbolic, I think that there is enough of use to make the read worth your while.

[1] First Street Foundation. 2018. “As the Seas Have Been Rising, Tri-State Home Values Have Been Sinking”. First Street Foundation. 23 August 2018.