Wealth professionals are most concerned about U.S.-China relations, market function in times of stress, and the dependence on technology within financial markets, says an international survey by PGIM. But despite knowing the potential tail risks, just 38 per cent of respondents said they actively monitor them and less than a third have specific risk response plans. “Too often investors are surprised by things that in retrospect were staring them in the face,” says Shehriyar Antia, head of thematic research for PGIM. “The pandemic, the global financial crisis, the dot-com bubble – these events were all foreseeable to different degrees. Financial institutions must either gameplan for the unexpected or expect to be blindsided.” Among the scenarios that the asset managers fear the most are a major liquidity crunch in major markets, especially in a traditional safe haven such as U.S. Treasuries. Military action involving China and Taiwan is the second-highest tail risk among respondents, but also the one they feel least prepared for despite the expected impact on financial markets. There are things investors can do to mitigate the risks from a rare black swan. These include constant monitoring of leverage, collateral arrangements, and liquidity positions through stress testing.
- PWC