WITH the return of the highly unpredictable Donald Trump as US president next month, how should anyone manage risks?
Risk is the possibility of an event or condition which, if it occurs, would negatively impact our well-being.
We scan risks in to try to avoid or mitigate them. Those who have wealth care most because they have most assets to lose.
Risk cannot be eliminated, only managed or hedged.
In a static zero-sum system, one man’s risk is another man’s opportunity. You squeeze one side of a balloon, it will expand on other sides. However, the balloon may burst or leak, so such risks are not improbable.
In a dynamic environment, the balloon is ever expanding, and any action by one party could affect not only other parties, but also the balloon (system as a whole) itself. There are always costs to hedging risks, and if you choose the wrong hedge, you could lose even more.
The World Economic Forum’s Global Risk Report 2024 (published in January), based on a global risk perception survey of 1,500 experts, is remarkably comprehensive in laying out the fears of a rapidly accelerating technologically changing world beset by climate warming and conflict.
In the short term (two years), the top risks ranked by severity are misinformation and disinformation, extreme weather events, societal polarisation, cyber security and interstate armed conflict.
Over a 10-year horizon, top risks include extreme weather events, critical change in Earth systems, biodiversity loss and ecosystem collapse, natural resource shortage, and misinformation and disinformation.
Surprisingly, involuntary migration, interstate armed conflict and geoeconomic confrontation are ranked seventh,15th, and 16th respectively over the next 10 years, whereas at the end of this year, migration, nuclear war risks and tariff confrontation all surfaced as headline concerns affecting elections and geopolitical tensions.
As polarisation occurs, misinformation and disinformation by warring factions caused a huge loss of trust in governance, resulting in populist and “strong men” leaders who promise to stabilise life for the confused electorate.
Trump is promising to end the Ukraine war and seeks to have transactional deals, using the threat of tariffs on allies and enemies alike.
Even as the fate of Ukraine and
In a static zero-sum system, one man’s risk is another man’s opportunity
The big picture depends on whether Trump can stabilise the Us-china geopolitical rivalry
The global risk picture looks fraught with shocking events and dramatic turns almost daily
Gaza/syria depends on the outcome of who is really winning in armed conflict, with Europe being the biggest economic victim in terms of growth, the big picture depends on whether Trump can stabilise the Us-china geopolitical rivalry.
The United States leads in gross domestic product (GDP) at market currencies at US$29.2 trillion against China’s US$18.3 trillion, together accounting for 43.2% of 2024 global GDP of US$110 trillion.
In purchasing power parity terms, however, China leads with US$37.1 trillion, whilst United States has US$29.2 trillion, both accounting for 37.3% of world GDP of US$185.7 trillion.
India is ranked third at US$16 trillion and Russia at US$6.9 trillion, whereas in market currency terms, India and Russia are ranked fifth and 11th respectively.
With technological, military, economic and financial dominance, the United States still has a deciding edge in terms of power say, even as China has emerged as the leading manufacturing and trade power.
As Trump has clearly recognised, American power rests on the mighty dollar, a position that the United States must defend.
The irony is that the more the dollar is weaponised, the more its global users feel uncomfortable for fear of sanctions, freezing, confiscation or medium-term devaluation.
The recent Cf40-peterson Institute of International Economics conference showed how rational, scholarly and professional economists are trying to figure out ways to manage trade and tariff tensions on both sides, even as political rhetoric is reaching alarming levels.
One of China’s most respected economists, Prof Huang Yiping, explored potential outcomes, from fighting a full-blow trade war, China buying more from the United States, voluntary export restraints, to decoupling in selected sectors and yuan appreciation (Plaza Accord II).
The Peterson trade economists are predicting that tariffs will cost the United States in terms of higher manufacturing and import costs, with impact on inflation. If a full-blown trade war occurs, the world could be sent into a protectionist recession. If you want to be scared by nuclear war, read the just published US Defence Department’s China Military Power Report 2024.
How are financial markets reading and hedging these global risks? The US stock market is at all-time highs, with the Nasdaq index up 29.1% year-to-date (y-td), whilst the Dow Jones Index is up 15.3%.
Bitcoin is up 137.9% y-t-d, whereas gold surged over 28%.
In other words, with huge uncertainty in the geopolitical situation, financial markets have become speculative, as investors seek higher risk short-term returns, even as the US Federal Reserve (Fed) has cut interest rates four times since September but hinting only limited cuts next year.
Since the Fed has begun cutting interest rates, the S&P US Bank index has delivered returns of 35.67% y-t-d.
Singapore bank stocks are up over 40% y-t-d, with dividend yields of around 5% per annum.
So, risk-adverse investors holding bank stocks have been rewarded just as much as holding frothy tech stocks.
In sum, the global risk picture looks fraught with shocking events and dramatic turns almost daily. Trump2.0 will add to the bumps. And yet, the largest economy in the world is still printing money to finance its trade and fiscal deficits.
Thus, in dollar terms, investors are stuck between greed and fear. As long as the Fed has to cut interest rates to reduce the US fiscal burden, global investors will continue to bet on the financial sector leverage play.
Will it all come to grief? The American economist Herb Stein said, “if something cannot go on forever, it will stop.” But the music will not stop because reserve currency central banks can go on printing money to finance unsustainable fiscal deficits. So, enjoy the frothy music while it lasts.
IT turned out to be a good year for the markets amidst the shifting macro expectations and lingering geopolitical uncertainty. Global equities gained about 20% in US dollar terms to-date (as of Dec 17) with the United States taking the lead, followed by Asia ex-japan.
Notably, the S&P 500 hit fresh highs and breached the 6,000 mark at one point. Bonds also witnessed positive returns albeit to a much lesser extent compared to equities.
In particular, high yield credits outperformed investment grade bonds.
Commodities-wise, gold registered stellar returns of nearly 30% for the year but oil prices were lacklustre due to sluggish demand growth.
As we move into 2025, the global economy is expected to witness resilient growth albeit with some moderation. This should provide a solid foundation for investment opportunities. While the disinflationary process may be bumpy and experience some fluctuations, the overarching trend points towards continued monetary easing across major central banks.
The combination of stable economic growth and accommodative monetary policy should create a favourable backdrop for risk assets.
US equity momentum
US market leadership is likely to persist, driven by advancement in technology and artificial intelligence that will support corporate earnings growth and returns despite the current rich market valuation.
With the mega-cap technology (tech) stocks accounting for a significant portion of the S&P 500, we expect their strong cash flows and resilient growth prospects to lend support to the broader market.
Beyond the mega-cap tech, there are also pockets of opportunities in high-quality companies from other non-technology sectors.
Notably, US president-elect Donald Trump is expected to implement tax cuts and deregulation that should lift corporate earnings.
Potential sector beneficiaries would include financial and industrial stocks.
Resilience in Asia
No doubt, the incoming Trump administration will likely be more positive for the United States than the rest of the world.
While Trump’s trade policies may pose risks to Asia, domestic-oriented economies such as India and Indonesia should be better positioned to withstand the external uncertainties.
The anticipated resilience in Asean’s growth should also lend support to related markets including Singapore and Malaysia in the region. Separately, China’s weakening economy remains as a downside risk. The recent slew of support measures could provide a backstop for the country’s growth and hence market valuation.
Notably, the Chinese government is planning to raise its budget deficit to 4% of gross domestic product in 2025 with the increased fiscal spending to help stimulate consumption and support growth. The policymakers are adopting “moderately loose”
Global economy expected to witness resilient growth albeit with some moderation in 2025
US market leadership likely to persist, driven by advancement in technology and AI
monetary policy for the first time since the global financial crisis in 2008. As China navigates its economic challenges, its policies may indirectly benefit neighbouring economies through increased trade and investment opportunities.
Fixed income for stable carry
With central banks expected to lower rates, the environment is supportive of fixed income investments. However, we expect carry to be the primary driver of returns, given the lingering inflation and interest rate uncertainties.
Notably, quality credits are expected to provide stable carry returns amid the contained risk of recession and default, making them an attractive choice for investors seeking reliable income. By focusing on higherquality bonds, investors can benefit from the additional yield pick up over risk-free rates without significantly increasing exposure to credit risk.
Duration-wise, investors can consider investment grade bonds with tenure of between five and 10 years. However, we would suggest to focus on shorter-dated bonds in the high yield segment.
Not without risks
Despite the constructive outlook, investors continue to face a complex landscape marked by several key risks. Trade tensions continue to escalate, particularly between major economies, leading to uncertainty in global supply chains. As countries increasingly prioritise domestic industries over international trade, it can hinder economic growth and limit investment opportunities.
Geopolitical uncertainties, including conflicts and shifting alliances, add another layer of complexity, potentially leading to market volatility and impacting investor sentiment. The increasingly polarised world could result in a slower disinflation process, leading to higher than expected inflation and consequently, interest rates.
Meanwhile, rising fiscal deficits across major economies may trigger another rate tantrum and sell-off in risk assets, especially if bond vigilantes were to reduce their government bonds in response to fiscal policies they deem to be irresponsible.
Diversification is the only free lunch
As Nobel Laureate Harry Markowitz once said, “Diversification is the only free lunch” in investing. While a diversified portfolio may deliver lower returns than a concentrated portfolio in the short term, it could lead to better risk-adjusted returns over a longer period of time.
Hence, maintaining a “core” diversified portfolio remains essential for optimising returns over time. A well-balanced portfolio that includes equities and fixed income, as well as gold, can help mitigate risks while capitalising on growth opportunities across different regions and sectors.
For some investors, this may even include increasing exposure to alternative assets such as hedge funds and private assets, which can provide lower correlated returns than traditional equities and bonds.
We have updated our Strategic Asset Allocation for investors across different risk profiles in alignment with the revised capital market assumptions of major asset classes. We reiterate the importance of maintaining a strategic exposure to gold given its diversification benefits where applicable, especially with the world gradually looking to shift away from dollar dependency.
The precious metal not only serves as a hedge against inflation and currency fluctuations, but also serves as a safe haven during periods of heightened geopolitical tension.
The strategic asset allocation approach positions portfolios to better navigate the complexities of the current market environment, ultimately aiming for optimised returns over the longterm. Nevertheless, it is crucial that investors continuously review and evaluate their preferences and risk tolerance
- TAN sri ANDREW SHENG Banker and academic
Like mahjong: The current world situation is like the Chinese game of mahjong which has four players with a limited number of chips. If one player is the persistent winner, he or she ends up with all the chips and the game ends.
Winners and losers in the global economy of 2025