Tail-Risk Survey Finds Investors Monitoring Geopolitical AftershocksTail-RiskSurveyFindsInvestorsMonitoringGeopoliticalAftershocks

A new survey by PGIM revealed that institutional investors believe geopolitics and economics represent some of the greatest risks to their portfolios over the next three years, echoing the ripple effects created by recent events such as the COVID-19 pandemic and Russia’s invasion of Ukraine. These sorts of tail risks – events with a low likelihood of occurring but high impact if they materialize – often start with smaller events that have the potential to escalate and create new implications for investors to consider. The protests in China over the country’s zero-COVID policy may present such a scenario. Investors have already bid up US-listed shares of Chinese companies this week, anticipating that the protests might lead to looser restrictions on consumers and businesses. Lockdowns in China have stifled economic activity and dragged on global supply chains. Easing COVID rules could alter the outlook for the economy and financial markets. The protests come just weeks after officials signaled support for the zero-COVID policy at China’s National Congress, which at the time dampened investors’ hopes for a rollback.

In PGIM’s 2022 Global Risk Report, we explore the potential market and risk-management implications of tail risks that investors around the world identified as high-impact events, including an unexpected liquidity crunch that causes a market crash, a military conflict in the Taiwan Strait or South China Sea, and a cyberattack on a financial platform or government agency. The survey, which canvassed 400 senior decision-makers whose firms have a combined AUM of more than $12 trillion, also found that Chinese investors have a heightened sense of risk should a second global pandemic prompt another shutdown.