An Examination of Corporate Risk Due to Global Uncertainty
In many ways, it’s gotten a lot easier for businesses to expand thanks to the continual development of technology. Despite a lot of progress on that front, global uncertainty remains a significant topic of concern. It’s difficult for any organization to prepare for global uncertainty caused by political instability, travel limitations, bad weather, supply chain disruptions, among other things. With so many other things for business leaders to contemplate, keeping tabs on each and every possible disruption is practically impossible. Risk management strategies don’t necessarily work well against the unforeseeable, something which impacts corporate risk assessment.
Globalization: A Blessing and a Curse
Globalization has allowed national economies to coalesce into an immense interconnected global economic system. It has led to tremendous growth in international business and trade. According to the 2019 World Trade Statistical Review, this has resulted in a 26% increase in global trade and Gross Domestic Product (GDP) between 2008 and 2018. As 2019 was drawing to a close, the United States’ economy had grown at a healthy rate while the China economy expanded faster than any other manufacturing economy in the world. The only topic of major concern replaying on a continuous loop in the media was the escalating trade tensions between both economic giants. Little did anyone in the business world know but a catastrophe of global proportions was headed our way.
On December 31, 2019, the World Health Organization (WHO) China Country Office was first informed of the first coronavirus cluster. Identified as a new type of coronavirus (novel coronavirus, nCoV) by the Chinese government, it was allegedly isolated on 7 January 2020. Over the following couple of months, the rest of the world hoped for the best as the Chinese government seemed to put all of its resources into trying to stop SARS-CoV-2 from spreading further. It wasn’t until March that Western economies such as the United States and the U.K. started to feel the pressure. In April 2020, The Brookings Institution expected global trade to decline by between 13% and 32% as the pandemic ravaged the world. Sure enough, global trade declined by 18.5% during Q2 2020, nearly paralyzing normal social life and economic activity globally.
With 2021 less than a month away, organizations in the United States and throughout the world have slowly learned to adapt to what has been dubbed “The New Normal.” Along with adaptation, we’ve learned a lot of valuable lessons as well. The most crucial lesson of all being how vital it is to be aware and agile enough to pivot if and when another major crisis hits.
Keeping a Finger on the Pulse
On February 25, 2020, Geospark published its first detailed analysis pointing out major considerations concerning various Asian countries as the pandemic gained speed. For example, China was beginning to feel the full brunt of COVID-19 as quarantines were issued, triages were set up, and International travel nearly ground to a halt. However, Hyperion’s Pulse A.I. seemed to pick up anomalies in the region as early as December 31, 2019, that resembled the February 23, 2020, Pulse Trend. Geospark Analytics also included information about the outbreak in our Daily Report on 31 December 2019.
Only 23% of Business Leaders List Political Risk Among Their Top Three Concerns
With as much that goes on throughout the world politically, why is that only 23% of business leaders show concern about political risks? Examples of only two geopolitical situations show us how potentially drastic things can get.
Pandemics are few and far in between — hence the term “100 Year Pandemic” — but political instability can be detrimental to businesses as well. Local and global political conflicts can negatively affect an organization no matter its size. For example, the New York Fed reported in May 2020 that American businesses lost $1.7 trillion in market value due to the trade war between the United States and China. The report pointed out how trade-war announcements — many of which took place during policy statements and press conferences — induced abrupt declines in market price. In turn, investment rates and returns on capital drastically fell as well. The New York Fed’s study model revealed that policy announcements alone caused a 6% drop in equity prices in 3,000 companies. When combined, their initial market capitalization was worth $28 trillion which resulted in the $1.7 trillion loss.
In August 2018, the BBC reported that China issued a statement announcing new tariffs on 5,200 U.S. products if the White House followed through with a 25% tariff on $200 billion worth of Chinese goods. This was but one example of policy statements made by both economic giants that caused havoc on global markets. Over the course of the trade war, numerous enterprises ranging from small farms to large companies have lost money, been forced to lay off workers, or folded altogether — and all behind political chest-thumping. And when tariffs involve thousands of products, swaths of companies across several industries are affected directly or indirectly.
If the trade war wasn’t enough, political unrest in Hong Kong has posed its own set of risks to companies globally. Economic revitalization minister Yasutoshi Nishimura from Japan told The Japan Times that discord between the U.S. and China over Hong Kong presents a risk to the global economy if the city stops being an international financial hub.
The article stated: “U.S. President Donald Trump stepped up his rhetoric against China on Friday, threatening to strip Hong Kong of some of its privileged trade status, without giving a time frame. Tensions between the two countries are already deteriorating over the origins of the coronavirus pandemic and how the Trump administration characterizes China’s role in its spread.” Nishimura continued by saying that the global economy could be significantly affected by any escalation of political conflict between the U.S. and China. This would result in more nations inclined to adopt protectionism — a vicious cycle that will be difficult to stop.
Nishimura hopes that Japan, China, and Hong Kong will do more to strengthen domestic demand to reduce their reliance on exports. Japan has since started such efforts subsequent to its past trade conflict with the United States.
Keeping a Finger on the Pulse
On June 9, 2019, Geospark Analytics reported that Hong Kong’s Pulse had dropped significantly lower than the global average since the protest began. It was projected that Hong Kong’s Pulse would steadily drop below orange. Geospark Analytics assessed that it’s unlikely there will be a successful change in the regime as China pushes to gradually consolidate power. We also projected short term investment losses due to commerce disruptions, as well as both governments escalating their protest crackdowns. In July 2020, Reuters reported that Hong Kong’s Exchange Fund posted an investment loss of $1.37 billion (HK$10.6 billion) in the first half of 2020.
Hyperion is an applied machine learning platform developed from decades of direct mission expertise and state-of-the-art data science. Tailored to be topic and region agnostic, it captures pivotal events, apprehends long-term trends, and diminishes analytic bias. To start putting your finger on the Pulse with the help of Hyperion, contact us today.
