What are the most significant risks to your money over the next couple of years?
According to a survey of World Economic Forum members, infectious diseases and livelihood crises top the charts of the most critical threats to the world – and your wealth – in the next two years.
In this blog and video, why the economic impact of the Covid-19 pandemic, as bad as it was, and is still likely to be in the future, isn’t necessarily the one to watch in the years ahead.
I’m going to share what I believe are the biggest risks to your money that you probably aren’t thinking about just yet. Keep watching until the end, where I’ll share a couple of tips for addressing those risks.
More than 650 members of the World Economic Forum have shared their thoughts on the risks likely to pose a critical threat to the world during the next two years. These views come from a variety of sectors; business, government and academia. Some very smart people are behind these forecasts.
Key risks identified by the World Economic Forum members are infectious diseases (in other words, more epidemics and pandemics), and livelihood crises, along with extreme weather events and cybersecurity failure. These risks were highlighted in the latest World Economic Forum annual risks report.
Let’s start with infectious diseases, more epidemics and pandemics.
Clearly, Covid-19 has been extraordinary, both in terms of the health impact for society, but also the broader lockdown measures we’ve experienced and the impact on the global economy. It’s the first time in my life that I’ve experienced a global pandemic of this magnitude.
I know historically we’ve had bigger and more severe pandemics, certainly the HIV/AID pandemic which peaked between 2005 and 2012 and resulted in approximately 36 million deaths worldwide. But that didn’t disrupt wider society anywhere near as much as Covid.
Of course, the big one in the last century was Spanish Flu at the end of the First World War, killing 20-50 million people worldwide, infecting approximately a third of the world’s population at the time. And with an estimated 10 to 20% mortality rate. These global pandemics happen and, I expect, we will see more of them in the future.
That prediction, which is supported by the views of the World Economic Forum members, is the result of several factors.
Firstly, a growing global population, with greater concentrations of populations living in dense cities. Secondly, our relationship with wildlife and the environment, a consequence of a growing global population and industrialisation. And thirdly, the ease and relatively cheap access to global travel, making it far too easy to spread a new virus across the world.
Nassim Taleb wrote about Black Swans in his book of the same name and there’s been some debate about whether Covid-19 was truly a Black Swan.
Economists and investment managers talk about the risk of epidemics and pandemics all of the time. These are nothing new. But now we’ve all witnessed the disruption of Covid-19 first hand, it will be less surprising to see the next one. And the next one. And the one after that.
On the plus side, Covid-19 has afforded an opportunity to witness what works and what doesn’t work.
Future infectious diseases are likely to be met with a much swifter and stricter lockdown approach, as seen in China, which does for now appear to have bounced back much faster from its initial brush with the virus. The development of RNA-based vaccinations also offers some hope for future pandemics, with the ability to rapidly develop, manufacture and distribute an effective vaccine.
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The World Economic Forum risks report also points to the devastating impact of Covid-19 on many livelihoods, with global lockdowns resulting in rising unemployment and business failures. It’s also contributed to rising levels of inequality and the threat of civil unrest.
One of the sponsors of the report is Marsh, an insurance broker. Carolina Klint, risk management leader, Continental Europe, at Marsh said:
The pandemic has accelerated trends that have been coming for a long time
And this is my central thesis around Covid, that it’s served as a catalyst for so many of the changes that were already happening, albeit at a much slower pace. The working from home revolution, for example, has been pushed forward by 5-10 years by the emergence of Covid.
Other risks identified in the report, looking ahead to the medium-term, include burst asset bubbles and debt crises.
I know a lot of investors right now are very concerned about asset bubbles.
Ultra-low interest rates and monetary easing including printing money has pushed bond yields down to extremely low levels, inflating the price of bonds, but also contributing to higher equity market valuations, by virtue of the discounting used with low-interest rates.
When every investment asset class is expensive, where do you allocate your money? It’s a tough question and one with no easy answers.
And on debt, yes, clearly this is a huge issue too.
I’ve seen the past week the ugly head of the European sovereign debt crisis rear up again, after Europe kicked the can down the road on the last few occasions. The entire world now has such massive debts that there is no easy solution in terms of addressing them. Something big will be needed to restructure those debts and bring the global economy back to some form of normality.
Longer-term, WEF members were concerned about the use of weapons of mass destruction and of state collapses. Saadia Zahidi, managing director at the WEF, said:
As governments, businesses and societies begin to emerge from the pandemic, they must now urgently shape new economic and social systems that improve our collective resilience and capacity to respond to shocks while reducing inequality, improving health and protecting the planet.
That to me is the key word in all of this, as we consider the variety of risks identified in the report – resilience.
That resilience can be led by governments and businesses, but ultimately is something we all need to develop at an individual level.
Despite these risks the world and to our wealth, despite what I guess can feel like a rather negative outlook, there is some optimism out there.
Another report sponsor was Zurich Insurance, and their chief risk officer Peter Giger spoke about his optimism for rebuilding the world economy post-pandemic. He said:
The history of the economy suggests that every major structural change has led to higher employment.
That expectation of higher employment as the world recovers from Covid isn’t necessarily the traditional employment we’ve been used to in the past.
Keep in mind that the shape and nature of employment continues to change, driven by emerging technologies including advanced robotics and artificial intelligence. What served individuals and the economy in the past will not be the same in the future. I’ve no doubt about that.
The risks report from the World Economic Forum comes ahead of a virtual Davos Agenda event next week.
Clearly, business and political leaders can’t meet face to face in Switzerland this month, as they would usually do at Davos, but the conversation continues using remote technology. They do plan on a physical meeting in May, assuming that’s possible, which is scheduled to take place in Singapore.
Now that you’re familiar with the risks identified in the report, what can you actually do about them? A couple of suggestions from me.
Firstly, think back to the early weeks and months of the pandemic, in fact to your entire pandemic experience. What would do differently if you experienced this all over again?
I know for a growing number of people, the pandemic has prompted them to reconsider their living arrangements, with an exodus from city to country, and the desire for more space, both indoors and outdoors. A good question to consider is, are you living in the right place to address these future risks?
Secondly, how does your financial resilience look right now?
It’s often said that the best time to fix the roof is when the sun is shining. I’m not suggesting for a second that the sun is shining in an economic sense right now, but, if you’re in the fortunate part of society that hasn’t suffered too much in financial terms throughout the pandemic, this could be the opportune moment to fix your metaphorical roof.
Repaying debt, bolstering cash reserves and investing for the future, as well as diversifying your investments and your sources of income are all sensible steps to consider right now.
Thirdly, please do turn your attention to your health and wellbeing.
We know during this pandemic just how variable the experience has been from a health perspective, with those already in poor health, or overweight for example, far more likely to become seriously ill from the virus, requiring hospital treatment or dying. As well as making our finances more resilient, we can make ourselves more resilient to some of these risks by working on our health and fitness, by becoming more robust, in a physical and mental wellbeing sense, to overcome future challenges.
Do you agree with the risks identified by the members of the World Economic Forum? What action will you take in light of these emerging challenges?