Is the global outlook getting bleak(er)? If you look at stock prices this week, the answer could be no. In America, inflation has just hit a staggering 7 percent and the Federal Reserve is preparing to tighten monetary policy.
But US stock markets remain buoyant, along with most other world indices – not to mention tensions over Ukraine and Taiwan and soaring oil prices.
However, if you look at sentiment among the so-called Davos elite – the business leaders who typically attend the World Economic Forum’s annual meeting in this high-altitude Swiss ski resort – you might be feeling more concerned.
Every winter, the WEF polls its members on perceived risks and has just released the latest poll ahead of its virtual meeting next week. This shows that only 16 percent of Davos residents see the global outlook as “positive” or “optimistic”; the rest are “concerned” or “concerned.”
No wonder, one might think given the Covid trends. More notably, however, just a tenth of Davosers forecast an accelerating global recovery, while a similar proportion fear catastrophe – and four-fifths expect a “consistently volatile” scenario or a “broken trajectory”. This is shockingly grim, even with the caveat that this survey is often bearish because it focuses on risk.
The detail about what frightens the Davos elite is doubly striking. A decade ago, the issues that concerned them were more related to economic, technological, or political issues such as “fiscal imbalances,” “oil price spikes,” “financial collapse,” “cybersecurity threats,” or “interstate conflicts” (the polite term for the War).
To some extent, these remain concerns. “Geoeconomic confrontations” (ie trade wars and other clashes) are currently ranked as the 10th most common global risk. “Debt crises” come in ninth place. And a complementary, more detailed survey of world leaders shows that 14 percent of Davosers are concerned about an “asset bubble” bursting in the next two years (albeit the 10th concern in a list of 10).
But they are less worried about a bubble than about “cyber security failures” or environmental or social problems. And in the broader outlook, five of the top 10 global risks are linked to green themes such as “climate failure,” “extreme weather,” and “biodiversity loss.” The rest is social in nature and includes “erosion of social cohesion”, “livelihood crises” and “infectious diseases”.
In addition, the list of societal concerns reveals issues that have never appeared in this ranking. For example, about 26 percent of respondents now worry about “deteriorating mental health” — a higher proportion than expressing concern about debt and fiscal or cyber risks. In other words, if the WEF poll is correct, then residents of Davos today are overwhelmed with human-to-human and human-to-nature problems that most of them were never trained to analyze.
So what should investors conclude? One (cynical) interpretation of the results is that they merely reflect a general howl of fear, not a sober risk assessment. Corporate CEOs, like the proverbial generals, tend to fight the last war or worry about issues that are in the news.
The focus on environmental and social issues in this WEF survey – which is reflected in surveys such as that conducted annually by AXA life insurance – is therefore likely to be skewed by the recent Glasgow climate talks and the Covid-19 pandemic. But that doesn’t necessarily make it a good guide for ranking future risks.
On the contrary, if you look back over the past two decades, the Davos Consensus has sometimes got the world wrong: the 2007 risk survey, for example, focused on oil prices and a Chinese economic slowdown, not the financial collapse; his 2020 counterpart worried about climate change but barely mentioned the risk of a pandemic. There’s a reason some hedge fund traders joke that a smart way to trade the markets is to sniff the mood in Davos and then go the opposite way.
Another issue that could also skew the survey: disorientation. Today’s corporate leaders have spent their careers assessing specific economic risks, such as rising interest rates or oil prices. If necessary, they also think about politics. However, many of the new social and environmental problems are unknown. This could explain why the survey reveals such high levels of general anxiety; and why this is so at odds with the experiences of many business leaders today. Next week’s corporate reports in America are expected to show that earnings have surged in nine of the 11 sectors.
However, there is another explanation for what is going on: that the Davos elite are right to be concerned and the stock markets are wrong. A decade of ultra-loose money has created a dangerous level of complacency about risk, be it economic, environmental, or cyber.
That’s not a conclusion most investors want to hear. It also doesn’t mean markets are on the verge of collapse — at least not while Goldman Sachs’ index of financial conditions is at record levels. But I think it’s partly correct. Flawed or not, investors would be foolish to ignore the tone of this report. And the people of Davos are probably wrong when they put the bursting of an asset bubble so low on their list of concerns.
gillian.tett@ft.com
