Tuesday , 21 May 2024

An Analysis Of Global Risks From An Investing Perspective

Each year, the World Economic Forum publishes its Global Risk Report whichrisk is a comprehensive analysis…[of] the world we are living in. Today we analyze the global risks from an investing perspective and arrive at some interesting conclusions.

The comments above and below are excerpts from an article by Sven Carlin (InvestivDaily.com) which has been edited ([ ]) and abridged (…) by  munKNEE.com (Your Key to Making Money!)  to provide a faster & easier read.  Register to receive our bi-weekly Market Intelligence Report newsletter (see sample here , sign up in top right hand corner). It’s free, so what the hell. Sign up for it, try it out and if you don’t like it, unsubscribe. It’s that easy.

Global Risks

The greatest risks are very different from continent to continent (figure 1), and the likelihoods and potential impacts of these risks vary (figure 2).

Figure 1: Global risks per continent. Source: WEF.
Figure 2: Likelihood and impact of global risks. Source: WEF.

Let’s take a look at these risks by region from an investment perspective.

North America

The main risks for North America are cyber-attacks, data, and fraud theft, followed by extreme weather events.

Cyber-attacks happen more often here but aren’t a reason to be worried as when these attacks happen, the original state of what is attacked is quickly restored and the level of protection increases thereafter. Some short-term panic sales might arise, but it is better to see these attacks as investing opportunities as it is very difficult for hackers to do damage for prolonged periods.

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Risks transform quickly into an investing opportunity as cybersecurity companies gain more business. For those interested, there is also an ETF (NYSEArca: HACK) that invests in cyber companies.

Figure 3: Top 10 holdings – Hack ETF. Source: HACK ETF.

Similarly to cyber-attack risks, the risk of extreme weather events can be an opportunity. With current grain prices at multi-year lows, a good way to de-risk your portfolio is to look into food related investments.

Insurers can also be a great investment as those insurers that have a well-diversified portfolio can survive hurricanes, tornados, and droughts. While when these events happen on a large scale insurers can lose a year of earnings, in the long-term they’ll be less impacted.


In Europe, risks come from involuntary migrations, unemployment, and potential fiscal crises. These risks are very different than those in North America and can have significant long term impacts with the long-term impacts coming mostly from unemployment and fiscal crises which are interconnected.

Countries with high unemployment rates, like Portugal, Spain, Italy, and Greece, are also the sources of potential fiscal crises that can create a chain reaction and hit the European financial sector.

Figure 4: European unemployment. Source: Eurostat.

Such high levels of unemployment inevitably impact fiscal budgets, increase debt burdens, and sooner or later lead to crises. Fortunately for Europe, there is a strong counterweight coming from Germany and the UK, but with the BREXIT unraveling, we might see more turmoil in Europe in the coming years. At the same valuations, North America is a better bet for investment opportunities.

Latin America 

Latin America and Africa are plagued by the failure of national governance and unemployment. However, the Latin America ETF (NYSEArca: ILF) is up 50% from its January 2016 lows.

Figure 5: Latin America ETF. Source: iShares.

Given that 2016 will still be a contraction year for Latin America, the current risk reward situation isn’t the best as stock prices could go higher but they could also return to this year’s lows if there is a delay in the expected future growth.

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The World Bank doesn’t expect Latin American growth to reach 1.7% until 2018, which is relatively low. Therefore, investing in Latin America should be done only at very low valuations and positive cash flows that mitigate future risks.

Asia & The Rest of the World

The Middle East, North Africa, and South Asia see the most risks come from water crises and unemployment. This is logical given the huge demographic challenges those countries face, but increases in population bring increased demand which is good for investments. By being bold and investing in those areas we’ll contribute to a better environment for all the people in these regions.

The main risks for Central Asia and Russia are energy price shocks that can limit Chinese growth or keep Russia in a recession given its high dependence on oil prices. However, higher energy prices that would affect China would be beneficial to global commodity producers which would again rebalance the global effect.


What is important to know is that the risks described above change over time.

Figure 6: Evolving global risk landscape. Source: WEF.

In the last decade, risks have shifted from mostly economic to societal and environmental. This isn’t such a bad thing for your portfolio as the potential impact of chain reactions is smaller.

The main message is that as risks shift from one category to another or from a continent to another, we can rebalance our portfolios accordingly and increase our returns. Risks usually affect the market as a whole and create amazing buying opportunities as many companies see their stock prices decline while their businesses remain intact. By patiently waiting and watching what is going on in the world, it isn’t difficult to act when such opportunities arise.

What do you think about the above article? Have your say in the Comment Section below.

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