Themed Watchlist 3: Global Risk
I’m building a themed watchlist based on information from the Met Office that the next two years will be the hottest on record. One thing we do know about warmer weather is it means more rain. I examined some areas we might want to look at for trading opportunities, and in the second piece on the subject I carried out some TA on weather data, which supported the Met Office’s stance.
One very important factor when building a watchlist – and ultimately a portfolio or some positions from it – is risk. That goes beyond the simple trading risks that people talk about, and I covered that in my Exposure, Risk and Hedging out of Hours article. But there is actual physical risk outside of the financial risk, and that’s what I’m going to look at here.
If you think trading and investing involves no leg-work, then give up now. If you don’t research your ideas then you will almost certainly lose. The unexpected is not our friend as investors, but it doesn’t have to be our enemy. However, not knowing about the expected is unforgivable. One of the obvious opportunities, if we are going to have more rain, is from floods. Most parts of England have been hit by floods in recent years, so there’s no need for me to tell you how devastating they are.
The question is where does flood risk stand in a global context against other possible risks? There’s an excellent report on the subject by the World Economic Forum: Global Risks Report 2015. There’s an infographic, which I’ve tidied up a little in terms of presentation, that shows how likely particular risks are, and how damaging they could be in terms of impact. Both Water Crises and Extreme Weather Events are more than likely – and in terms of water crises, high impact as well. So we’re on safe ground (ha!) with floods. The obvious area we should look at there is insurance. Not forgetting of course that the UK government has created Flood Re to basically underwrite flood risk for the insurers, and to limit premiums for the public. This means we are probably better off looking to Europe or America for insurance companies, or ones that have significant risk in those areas.
Another thing I’ve discovered is that Hurricane Katrina was basically an “accident waiting to happen”, according to Prof Carolyn Roberts, water resource management specialist. She cites “a legacy of poor construction and inadequate maintenance”. I happen to know that infrastructure is poor for US dams as well. In some cases there are only one or two people in a whole state responsible for inspecting a huge number of dams, and little interest in maintaining them at a cost. So expect a dam or two to fail at some point. More rain could be a catalyst of course.
Another interesting feature of this Global Risk Landscape is what is not particularly likely and not serious in impact. I put dotted lines around the risks which are not top 10 in either list. Notably: Large-Scale Involuntary Migration, Asset Bubbles, Food Crises and Terrorist Attacks. Obviously asset bubbles are important to us, but we can forget about some of the newsworthy ones and focus on things like Cyber Attacks, State Collapse and Interstate Conflict.
Below is a list of links to related articles I’ve posted here on Master Investor which I refer to:
Generating A Themed Watchlist
Themed Watchlist 2
Exposure, Risk And Hedging Positions Out Of Hours
AKC Compares The Market For Insurers
http://masterinvestor.co.uk/latest/generating-a-themed-watchlist/ http://masterinvestor.co.uk/latest/themed-watchlist-2/ http://masterinvestor.co.uk/latest/exposure-risk-and-hedging-positions-out-of-hours/ http://masterinvestor.co.uk/latest/adc-compares-the-market-for-insurers/
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