The world is a very volatile place today. Conflicts are emerging across the globe. Yet share markets barely seem to react to news of missiles launched and the prospect of a broadening and deepening war. In fact, in the past six months, the most noticeable market volatility wasn’t triggered by military escalation, it came from something far more mundane, Donald Trump reintroducing tariffs. There’s a growing pattern where markets are ignoring the possibility of risk, only reacting once events are fully underway. Markets no longer seem to price in potential disruptions, they wait for confirmation and then adjust.
Trump's introduction of tariffs is a good example. These were flagged months in advance but share markets didn’t react until the day they were officially announced. There’s perhaps a broader behavioural shift at play, the ‘Trump fatigue’ factor. Not long ago markets moved when he spoke but these days it's a little more like the boy who cried wolf. Markets are starting to ignore his rhetoric, which is probably unwise as he will follow through on some of his plans.
The current tendency of markets to disregard the likelihood of an event, in favour of reacting only to the event itself, is fraught with risk. Investment markets are forward-looking mechanisms, supposedly pricing in future probabilities. However, if markets ignore the 10 or 20 risks looming on the geopolitical, economic, and financial horizon just because they haven’t crystallised yet, then we risk compounding the damage when one or more inevitably do.
I am not suggesting markets react every time tensions rise. But a failure to discount for the realistic possibility of disruption leaves investors overexposed when those possibilities become reality. Markets that don’t factor in risk become fragile, not resilient, and we’ve seen what happens when reality finally hits throughout history.
Geopolitical risk is elevated. Russia’s war in Ukraine continues. China and Taiwan sit in a tense limbo. India and Pakistan remain locked in a dangerous rivalry. And the situation between Israel and Iran has intensified. Each conflict is serious. Taken together, they are a real threat to world peace and economic stability. Yet share markets across the world have hardly reacted at this point. This situation encompasses dozens of second and third order effects that can potentially eventuate.
Credit risk is rising globally. Sovereign debt is ballooning. The cost of servicing that debt is rising. Yet equity markets remain priced for perfection, driven by enthusiasm for artificial intelligence, liquidity expectations, and an assumption that central banks will bail out the downside. The AI narrative is compelling and transformative. But it doesn’t negate risk, and it doesn’t prevent shocks. What’s missing in this moment is not growth or innovation, it’s caution. We are not short of reasons to be prudent. We are short of markets acting prudently.
Investors need to recognise that we’re operating in a world where low-probability, high-impact events are not only possible, but increasingly likely. In that world, a margin of safety or buffer against the impact of error isn’t just wise, it’s essential. Investors who understand the risks that exist and account for them accordingly will be far better prepared for their eventuality than those investors who continue to ignore the risks until they occur.
General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.