We have carried out a systematic review of global risk sources using our five-step structured risk assessment approach. Although global inflationary concerns are often quoted as the most pressing risk source, our assessment suggests otherwise. A more significant potential damage to pension fund balance sheets can be expected from a possible global trade war and more lasting consequences of the Covid-19 pandemic.
The significant and rapid shifts in the economy due to the political and social transition in the population of major economies and the response to Covid-19 pandemic have increased the volatility of financial markets, product prices and relative strengths of industries. Unsurprisingly, these changes have also resulted in new sources of investment risks, while at the same time deflating some existing ones. Although our approach to identifying and managing sources of risks has always been a continuous (ongoing) one, the sheer pace of change over the last year required a complete review of risk sources in Mira ABM – our scenario analysis and stress testing agent-based framework.
The aim of the series of Risk Wire issues is to give the reader an overview of the impact of the five main risks on the financial assets as assessed by MIRA ABM. The five main risks are:
- Supply-driven Inflation (covered in this report)
- Global Sovereign Debt Crisis (part II)
- Global Trade War (part III)
- Residual Covid-19 impact (part IV)
- Oil Price Collapse (part IV)
Sharp price increases, such as these, raise a question of sustainability. Prices in mid-supply chain that are 40-50% higher than six months before mean that further downstream (closer to the consumer) companies experience lower margins, unless of course they are able to increase the end-consumer prices.
The real question is whether the prices increases are temporary, driven by a supply-demand disbalance, or they are more permanent in nature. To answer this question, we need to understand the key causes of the price increases. Of course, Covid-19-induced supply chain disruption could be blamed for all of the price hikes, which would mean that the price hikes are definitely temporary. But how do we explain then price increases in many industries that have not experienced any supply chain disruption?