Global investment risk consultancy CheckRisk has produced its annual assessment of the year ahead, just in time for Christmas cheer and best wishes for clients. It’s a scary Christmas card but at least it’s interesting.
The UK-based firm, founded by frequent Australian visitor Nick Bullman, produced its top five risks for 2016 and also a rundown of all the ‘satellite risks’ and some ‘extreme risks’.
The paper says: “We note again that overall we view 2016 as a year of transition. However, the outlook for 2017 and beyond is worsening, and that is cause for concern.”
The top five risks
- Brexit (Britain exiting the EU): The fallout from an ‘Out’ vote would reverberate around the world.
- EU turmoil is CheckRisk’s “Banker” bet for 2016. It seems almost impossible for the EU not to trip up in 2016. There are so many things that can go wrong and the ability to deal with the changing political environment in Europe is limited. The EU moves too slowly and takes too long to reach agreement to react. Can the EU survive such assaults on its core values?
- Interest Rate Shock Risk: Interest rate shock risk, if history has any predictive value, is an each way bet for 2016. If the global economy grows faster than expected it will lead to a much steeper run in interest rate increases. Bond markets could face into a nightmare liquidity trap. If the economy is too slow then a one and done strategy means that the global economy is in serious trouble.
- Terrorist action of significance. An each way bet. The fight against terrorism is getting much more complex, and it seems likely that we will see more terrorist actions. As harsh as it sounds to be considered a risk the attack has to hurt the underlying economy or freedom of movement of the population.
- Oil prices. Despite the negative view of oil prices at present, our view is that oil could move sharply higher in 2016, maybe to $80 or above per barrel. This is also an each way bet.
No list would be complete without the addition of some extreme risks, they say. “We do not lose too much sleep over these, but they are all possible, and antibiotic-resistant disease is something we should all be concerned with as well as insurance company exposure to bond markets.” The top five of these are:
- Antibiotic-resistant diseases. The WHO have made it clear that there already exist diseases that are resistant to the most powerful antibiotics. Staphylococcus aureus (MRSA or Golden Staph) and Neisseria Gonorrhoeae (the cause of gonorrhoeae) are two examples.
- Internet collapse due to viral contamination or overload. There are already numerous examples of internet service disruption. A global attack would cause multiple failures in the financial system, food supply chain, and medical services.
- Food, energy or water supply shortfalls. Note that in China for example water is already a major risk to society.
- Global Temperature change, while not necessarily an issue for 2016 it is clear that the difference between stable temperature changes and a runaway temperature environment may be finer than we anticipate.
- Insurance company insolvency. The banking industry has been forced, post 2008, to recapitalize. Some countries have been more aggressive in that drive than others. The insurance sector is highly dependent on bond yields and bond market liquidity. A failure in bond markets could lead to a failure in the ability to meet solvency requirements at the large insurers.
– Seasons Greetings: from the Team at CheckRisk.