Global Risks 2018

Global Risks Perception Survey

Environmental risks have grown in prominence in recent years. This trend has continued this year, with all five risks in the environmental category being ranked higher than average for both likelihood and impact over a 10-year horizon. This follows a year characterized by high-impact hurricanes, extreme temperatures and the first rise in CO2 emissions for four years. We have been pushing our planet to the brink and the damage is becoming increasingly clear. Biodiversity is being lost at mass-extinction rates, agricultural systems are under strain and pollution of the air and sea has become an increasingly pressing threat to human health. Humanity has become remarkably adept at understanding how to mitigate conventional risks that can be relatively easily isolated and managed with standard risk-management approaches. But we are much less competent when it comes to dealing with complex risks in the interconnected systems that underpin our world, such as organizations, economies, societies and the degradation of the global environment.

Long-standing vulnerabilities

Unsustainable asset prices? The world is eight years into a bull run, with global stock markets hitting all-time high after all-time high. This has raised fears that this is another episode of “irrational exuberance”, that the lessons of the crisis have gone unlearned,2 and that a deep correction may follow. In 2017, the Dow Jones increased by 25%, the S&P500 by 19%, the Hang Seng in Hong Kong SAR by 35%, the Nikkei in Japan by 19%, the DAX in Germany by 11% and the CAC40 in France by 8%. According to one commonly used measure of cyclically adjusted prices (see Figure 2.1), US stocks have only twice in history been higher than they are at the moment: just prior to the crashes of 1929 and 2000.

Figure 2.1: Equities on the Up

Cyclically adjusted price/earnings ratio (CAPE)

Source: Robert Shiller.

http://www.econ.yale.edu/~shiller/data.htm

Bond valuations are even more dramatic. In mid-2017, around 9 trillion US dollars’ worth of bonds were trading with a negative yield, meaning that investors were, in effect, paying bond issuers for the privilege of holding their risky financial instruments. This anomaly reflects the impact of the huge asset-purchase programmes launched by central banks in the wake of the crisis, which seem to have divorced asset prices from assessments of their underlying riskiness. In Europe, for example, during 2017, yields on high-risk corporate bonds converged with yields on US government debt, the global financial system’s risk-free benchmark.3

If there were to be a sharp market correction, the impact on the real economy would arguably be greatest in countries most heavily exposed to sectors and markets in which bubbles have formed—for example, a country economically reliant on exports of a commodity that plunges in value. The impact of confidence and wealth effects means that real-economy impacts would also be felt strongly in countries—notably the United States and the United Kingdom—in which the ownership of financial assets is most widespread.

It is not just stocks and bonds that have seen their prices rise. The International Monetary Fund (IMF)’s index of global house prices is close to its pre-crisis peak again (see Figure 2.2), and signs of stretched valuations are evident in numerous cities including Hong Kong, London, Stockholm, and Toronto. Inflation in all these traditional asset classes has been dwarfed by more speculative assets such as the cryptocurrency Bitcoin, which increased in value by around 1200% in 2017

Figure 2.2: Building High

IMF Global House Price Index

Source: International Monetary Fund (IMF).

http://www.imf.org/external/research/housing

Resilience in complex organizations - By Roland Kupers

Enterprise resilience: the capacity of a company or other organization to adapt and prosper in the face of high-impact, low-probability risks.

“Structural resilience” considers the systemic dynamics within the organization itself.
“Integrative resilience” underlines complex interconnections with the external context.
“Transformative resilience” responds to the fact that mitigating some risks requires transformation.

Some highlights on economic risk -

Economic Storm Clouds reposted from http://reports.weforum.org/global-risks-2018/economic-storm-clouds/

SOURCE - The Global Risks Report 2018 by the World Economic Forum (WEF)

Risk Trends - Interconnections Map 2018

Top 5 Global Risks in Terms of Likelihood

Green is Global Environmental Risk