Tail-risks are the new black swans as the next big threat to investors, PGIM says
Institutional investors may not be ready for so-called “tail-risk” that threaten market function in times of stress.
Introduction
PGIM surveyed institutional investors around the globe to identify tail risks with a perceived low likelihood of occurrence, but potentially high impact and a low level of preparedness. Our survey aims to provide insights on where these risks may present a weakness for institutional investors, to discuss lessons learned from the past, and to offer insights on how to best prepare for severe risks.
The predominant concerns of institutional investors center around:
- The relationship between the US and China
- Questions about market function in times of stress
- The pervasive role of technology within the financial markets — and where it can go wrong
In the news
End games: Liquidity Crunch Tops Tail-Risk Fears
Daleep Singh, PGIM Fixed Income Chief Economist speaks with Investor Strategy on market liquidity crisis as the worst-case scenario.
Investors fear liquidity crisis, military conflict, cyberattacks, PGIM tail-risk survey finds
Institutional investors know the risks of unlikely but devastating “black swan” events, but many are ill-prepared for the ones they fear the most.
About Our Methodology
The study gathered the views of 400 institutional investors globally from defined benefit pension funds, corporate pension funds, sovereign wealth funds, central banks, endowments and foundations. The online survey was conducted by CoreData Research between June and July 2022, along with eight qualitative interviews conducted globally across a similar mix of institution types. Investors evaluated the following possible tail risks according to likelihood, severity and preparedness:
- A second global pandemic causes another shutdown
- The European Union (EU) breaks up
- North Korea collapses and reunites with the South
- Iran re-enters the global economy and becomes a major contributor to energy supplies
- A global economic slowdown forces central banks to revert to ZIRP (zero interest rate policy)
- The US 10-year Treasury reaches double-digit yields
- A eurozone economy defaults on its debt
- China’s real estate bubble pops and drags the global economy into recession
- Nuclear accident
- Nuclear attack occurs in a major economy
- Bank regulation is loosened, allowing traditional lenders to compete with private credit providers
- Satellites are disabled, causing a global disruption in GPS and telecommunications
- The US and China ban bilateral trade
- Cyberattack disables a major financial platform or government agency for a significant period of time (e.g. SWIFT, NYSE, IMF)
- Cryptocurrency causes a global financial contagion
- Global collapse of the internet
- Northern Ireland and Scotland break away from the UK
- A military conflict in the Taiwan Strait or South China Sea
- An unexpected liquidity crunch in capital markets (US Treasuries, commodities, etc.) results in a market crash
Institutional investors surveyed are from six countries: US, UK, Germany, Australia, China, and Japan. Respondents are aged 30-70 and have been in their current role for at least one year. The investors surveyed are responsible for managing total assets of over $12 trillion. Almost all (94%) investors are from firms with at least $1 billion in current AUM. A further 2% are from US endowments & foundations with current AUM of at least $250 million.
The study was blind with no mention of PGIM or Prudential. Respondents were offered an incentive to participate (a financial payment, charitable donation or tracked planting of trees).
