Twenty years ago, it was just a board game. Today, the word “risk” is a mantra, as if by merely uttering the word several times across living-room conversations, safe-haven investments will pop out like mushrooms in autumn. The world’s investors are succumbing to nervous exhaustion as each new finding on risk presents a new angle on how every aspect of life is just waiting to gnaw away at your life’s savings.
This month saw the publication of two particularly angst-inducing accounts: “Global Risks 2013” by the World Economic Forum and “Top Risks 2013” by the Eurasia Group. They stand tribute to the notion embedded in investor lexicon: “One man’s cliff is another’s ladder.” On one hand, the reports provide warnings about dangers that can be avoided by better planning or clearer thinking. But at the same time, they also suggest opportunities.
“The perfect storm looms ever closer” (publish on the 10th of January, 2013) explored some familiar problems, such as rising inequality and the fragility of the global economic system. But “Global Risks 2013” focuses on two more unfamiliar threats that lie just beneath the surface of everyday life.
The WEF speculates that “digital wildfires” could wreak global havoc. The internet spreads disinformation like wildfire, and as a result, players render economic decisions faster than you can say “flash crash.” In July 2012 oil prices rose by more than one dollar a barrel when a Twitter user, impersonating the Russian interior minister, tweeted that Syria’s president, Bashar Assad, had been “killed or injured.” In October, NASDAQ halted trading in Google shares when a leaked earnings report led to a 22 billion dollars plunge in the company’s market capitalisation.
These risks obviously need to be accounted for, but digital wildfires may not be quite the infernos that the WEF fears. The liberal nature of the internet is often self-correcting – rumours are quickly corrected as was the case for the insinuation in 2008 when a leading politician was allegedly murdered and the stock market nose-dived temporarily. Companies are now saying, “Fiction: meet fact” with innovative online programmes such as Truth, TEASE and LazyTruth which help assess the credibility of internet-spread claims.
The report is more worrying in its discourse on antibiotics. These wonder-pills that have saved countless lives are now showing signs of having lost potency, largely due to rampant overuse.
In India and Pakistan, strong antibiotics are sold without prescription. In Beijing, where many hospitals make much of their income from selling the drugs they prescribe, a study found that 98 percent of children with the common cold were given antibiotics – which are useless for treating viral infections. With the number of infections that are resistant to treatment by antibiotics on the rise, the marginal increment to the American health bill is estimated at an annual 21 billion dollars to 34 billion dollars.
The Eurasia Group’s survey, by some degree of contrast, focuses exclusively on political risks. As per their outline, the worst risks emanate from the emerging world which has far less experience of managing volatility or coping with crashes as compared with the anti-fragile rich countries which have demonstrated their risk management capacities fairly well.
Now that is an optimistic estimate of the rich world in the backdrop of Spain and Italy pulling the Eurozone into its fourth year of sovereign debt crisis coupled with the US Congress still testing the markets’ patience. But it is true that investors pay too little attention to the risks emanating from the emerging world which is likely to account for three-quarter of global economic growth in 2020. Business-folk often lump very different countries together into a single asset – the quintessential being the BRICs.
Companies too often ignore the detailed knowledge of investees and opt instead for a more regional approach. As the centre of economic gravity shifts towards emerging markets, more investors need to recognise that the emerging world is more complex than it seems.