Market Risk is the key business challenge

Recent research on 301 cities worldwide reveals that the major risk to future civilisation is in fact us. Market crash and human pandemic are the top two risks worldwide. The header image shows an “artists view” of a volcano in Auckland Harbour. (volcano is #4)

Here is a case study on market crash.
 

Event: Sub-prime mortgage crisis, from 2007
Location: Athens, Greece

Economic cost: Greek GDP declined from $341.6bn in 2009 to $241.72bn in 2014.

Description: The sudden collapse of the sub-prime mortgage market in the US brought down several financial firms, notably Lehman Brothers, and caused a worldwide financial crisis.

Damage: The crisis left Greece acutely exposed and today its economic future remains in the balance. It was forced into a national debt reduction programme, which ushered in a period of austerity. GDP declined by almost 30% between 2009 and 2014. As 45% of GDP is concentrated in the Attica region, which includes Athens, the city suffered particularly badly. Greece’s unemployment rate peaked at 27.25% in 2013; for under-25s it rose to more than 50% nationally, but touched 60% in Attica in 2013.

Insight: The financial crisis revealed the nature of systemic risk in a highly-connected global world, showing how contagion from one market could ripple through the global financial system. There were also lessons for modelling and predictive analysis, particularly the acceptance that there will always be “Black Swans” – rare, big impact events that are hard to predict based on past experience, as described in Nassim Nicholas Taleb’s 2007 book, The Black Swan.

 

city-risks“Lloyd’s City Risk Index 2015-2025 analyses, for the first time, the potential impact on the economic output (GDP@Risk) of 301 of the world’s major cities from 18 manmade and natural threats.”

 
Tamsyn Parker writes in New Zealand that:

The biggest risk to Auckland’s economy is likely to come from a man-made market crash rather than any natural events like volcanoes or earthquakes, new global research suggests.

KPMG New Zealand’s general insurance update has revealed findings from the Lloyds City Risk Index which ranks the economic costs associated with 18 major risks for 301 cities over the next 10 years.

Both Auckland and Wellington were included in the research with a market crash topping the list of what could have the biggest GDP impact on those cities.

Another global crash like the 2008 global financial crisis could potentially wipe US$3,560 million from the Auckland economy…”

 
The top five risks to Auckland’s GDP

• market crash US$3560 million
• flood US$590 million
• oil price shock US$580 million
• volcano US$540 million
• human pandemic US$370 million

source: KPMG New Zealand General Insurance Update

Many have been impacted by the sad news from Paris this week. The top risk factors for Paris – (according to Lloyds) were very similar to Auckland. But see items 6-10.

paris-graph

A terrorism case study ( Mumbai 2008) is used to illustrate the risks involved.
Damage: At least 164 people died and hundreds more were injured. Stock exchanges, commodity markets, money markets and many businesses stayed closed for days, and hotel occupancy rates fell by up to 25%.

 
Returning to the market risk situation. I’m not even sure that we can tell any more what constitutes market risk in any single location because of global trade. My guess is that many big risks have multiple causes and business confidence is one of the key ones for market risk.

To me when 56% of the NZ GDP is being traded on a daily basis that sounds like a very big risk. All of the stories below are indicative of market crash risk and they speak to the issue of business confidence.

I suspect the most important thing about financial risk is the leverage effect. Even small re-valuations can cause very large ripples and when a business epicentre like Silicon Valley is having speed wobbles it would be wise to take note.

Headlines like Square’s IPO: the beginning of the end of the unicorn-driven tech bubble?
Big name VC Fred Wilson says the unicorn party is coming to a close
Marc Andreessen Sold 73 Percent of His Facebook Stock in the Last Two Weeks

are all red flags if I was monitoring market risk.