Resource scarcity is the top extreme risk that would have the highest impact on global economic growth and asset returns, according to a biennial report from Towers Watson.
Towers Watson's top 15 list is a significant overhaul from the 2011 list. An economic depression was the only extreme risk in the top five both years; it dropped to fourth this year from the top spot in 2011.
Despite the U.S. going to the brink of default earlier this year, sovereign default dropped to No. 7 from No. 2 in 2011. Rounding out the top five after resource scarcity are economic stagnation, global temperature change, economic depression and global trade collapse. In 2011, hyperinflation, banking crisis and currency crisis followed depression and sovereign default.
It is the first time that stagnation, global temperature change and global trade collapse have made the list, which was started in 2009. Other new extreme risks to the rankings were deflation (ninth), health progress backfire (10th), nuclear contamination (11th), extreme longevity (12th) and terrorism (14th). In a reversal from the first two reports, deflation takes a spot on the list from hyperinflation, which was ranked third and second in the previous reports, respectively.
According to the report, Towers Watson recommends holding cash, derivatives and negatively correlated assets as broad hedging strategies against extreme risks.
“The starting point to building a robust investment portfolio and reducing (but not eliminating) tail risks is to introduce greater diversity. The next step is to explore some hedging strategies,” said Tim Hodgson, senior investment consultant and head of Tower Watson's Thinking Ahead Group, in a news release.