A ‘perfect long storm’ is changing the structural shape of investing 

By Carly Fields

 

Investing for the future in all markets has become a much more complex game, more complex than it was pre-pandemic and more complex than it was four weeks ago, according to Tharman Shanmugaratnam, senior minister and chairman of the Monetary Authority of Singapore.

Speaking at the IMAS-Bloomberg Investment Conference, Shanmugaratnam said that while it is an era with “immense opportunity for investment in innovation and structural transformation”, investors face risks and fragilities without precedent in the last 75 years. 

“I would describe it as a ‘perfect long storm’, shaped by the confluence of several forces.” Those forces are made up of the war in Ukraine, the real risk of stagflation in many parts of the advanced and developing world, the increasingly urgent climate crisis, pandemic insecurity, and enhanced fragility coming out of divergences in growth and wellbeing, both within societies and across the world. 

“These are each major risks and sources of fragility. Together they define a perfect long storm. I say long storm, because this is not just a perfect storm in the traditional sense where you have a confluence of one-off, conjunctural factors. These are structural shifts. They're not cyclical or random shocks. They're structural shifts, interacting with each other, that are going to be with us for some time."

Russia is, he continued, going to be “diminished” under any scenario

War good for no-one

Detailing each of the five ‘fragilities’, Shanmugaratnam said that there is no realistic prospect of a trajectory with a good outcome coming out of the war in Ukraine, or one that leaves any major country better off than before. “It is only a question of how bad the outcomes will be,” he said. “The situation will likely get worse before it can get better, but none of the trajectories is going to lead the world to a better place.”

Russia is, he continued, going to be “diminished” under any scenario. “Its economy will likely go through a severe slump. It will have diminished stature, economically as well as politically, and it will be more isolated.” The combination of weaker investments, weaker access to technologies and a ‘brain drain’ as younger Russians leave is described as a powerful negative for any economy. 

Macroeconomic risk, the second fragility referred to by Shanmugaratnam, is characterised by higher-for-longer inflation which is now a “near certainty”. This, he said, complicates what was already an extremely difficult task for central banks, particularly in the advanced world – the task of balancing growth and inflation considerations. 

In this unprecedented situation, he warned that economic models are “not going to be very useful in projecting outcomes”, because they do not deal well with supply side disruptions. Therefore, markets including shipping need to plan for a range of scenarios, but “tilted very much towards the downside: higher and more persistent inflation and slower growth”. 

The unpalatable fact is that in the short term, Europe and the world are going to require increased reliance on fossil fuels to provide for energy security

Climate realities

The climate crisis – the third fragility – recognises that it is no longer possible to make the adjustments needed to tackle the climate crisis without ensuring energy security. “The unpalatable fact is that in the short term, Europe and the world are going to require increased reliance on fossil fuels to provide for energy security.” Shanmugaratnam warned that we “can't be purist about this, because if sharply higher energy prices or disruptions threaten social and political stability, the world is not going to be able to address its longer-term challenge, which is our foremost challenge, of tackling climate change”. Countries therefore must double down on efforts for a longer-term transition to cleaner energy and a sustainable future. 

The fourth fragility of global health security is a “real challenge that we have to prepare for”. Acknowledging ‘Covid-fatigue’, Shanmugaratnam said that the pathogens are still coming. “It's already baked into the system – in fact, the risks have been accentuated by global warming, the loss of biodiversity, deforestation, and increased human incursions into the natural world. The rate of zoonotic spillovers, spillovers of pathogens from the animal world into human life, has increased and they are out there. No one knows exactly when the pandemics will come, but they will come. They are happening more frequently, and can be as severe or more severe than Covid-19.” This means that a collective effort is needed within societies as well as globally to be better prepared for the next pandemic. 

 

Growth rollback

The fifth challenge of less inclusive growth, within and across nations, could lead to a reversal of gains made in the developing and emerging world over the past 20-30 years. “We have now a real risk of rollback coming out of each of those other structural shifts – geopolitical instabilities, higher food and energy prices and slower growth, and the fact that both climate change and pandemics will hit the poorest and the most vulnerable countries the hardest,” Shanmugaratnam said. These challenges make it much harder for developing countries to converge with the advanced world. That raises the prospect of “renewed divergence”, which will be a challenge for the whole world because it will have “many ramifications, including forced mass migration, and we will be losing a major opportunity for global growth because the big opportunity has been in the developing world”. 

To address these fragilities, Shanmugaratnam encouraged a new era of investment in energy, climate and pandemic security, and investments in the developing world with vastly scaled up public and private sector collaboration. “Governments are not going to be able to afford the scale of investment required. If you just take climate change alone, we know that it's going to require roughly US$3.5 trillion per year over the next 30 years to invest in the infrastructure and innovations required for a more sustainable future.”

There is, he continued, a strong case for the public sector to incentivise the private sector by putting “skin in the game” to mitigate risk for private investors, by having a clear and predictable plan for carbon taxes and pricing, and by regulating industry to tackle emissions.

But, he warned, that markets should not wait for governments to lead, and governments must not solely rely on the markets to solve these challenges. “It requires public sector participation and, especially, clarity of tax and regulatory frameworks,” he concluded.