Future where value of growth is declining and value of risk is increasing

Ubiquitous spread of internet, relatively stable geopolitical environment and low inflation (and low interest rate) macroeconomic environment has shaped most of the world in the last 3 decades since the end of cold war in 1991. While 30 years is a brief period in the history of the world but for working professionals of today, this period represents our collective experience based on which we think about the future. What if the future 30 years look dramatically different from the past 30 years?

Relatively benign environment with few geopolitical tensions among large countries, continuous rise of globalization leading to prosperity in emerging countries led to a stable inflationary environment in most of the advanced economies in the world. This led Central Banks to reduce interest rates, and in fact hit the pedal to the floor (going to almost zero) after the 2008 financial crisis in the US. In summary, cost of capital became cheaper in a stable world environment. While businesses with some kind of seed funding have always started, this period represented the growth of venture capital that grew in importance relative to other means of funding for young businesses. Since the capital was very cheap, large investors looking for returns had few avenues. Excessive emphasis was placed on higher growth while the value of risk declined. What if 8 out of 10 businesses failed? So what, remaining 2 gave such outrageous returns that they covered up for the failures and then made some. In short, consequences of failure had reduced.

Come 2022, the world is starting to look different. All the key factors that supported high growth environment of the last 3 decades are not stable anymore. We are still in the very early stages of these mega changes, but it helps to think about the underlying factors that might make our world look very different in the next 1-2 decades.

“The old world is dying, and the new world struggles to be born; now is the time of monsters.”- Antonio Gramsci

Geopolitical environment

Phenomenal rise of China, war in Europe, declining influence of the US in global matters, rising influence of emerging countries such as India, polarizing democracies across the world are creating risks that were non-existent in the last 3 decades. Yes there were conflicts across Middle East and terrorism affecting many countries but these did not result in the massive geopolitical tensions that could upend the entire supply chains built over the last few decades. The possibility of you waking up in the morning to a major conflict in some part of the world has gone from almost zero to significantly high.

High inflationary environment

The crazy levels of inflation seen across most of the advanced economies has forced central banks to increase interest rates. As happens with any major change, in the early stage everyone expects things to go back to the ‘old normal’. History has repeatedly shown however that major changes lead to a ‘new normal’. This new normal of sustained higher interest rates (relative to seen in the last 10-15 years), stubborn inflation due to supply chain shocks resulting from geopolitical struggles results in very different kind of economic environment.

Climate change related unknowns

While we have historical reference to the above risks of geopolitical tensions and high inflationary period, climate change related risks are an uncharted territory. With more frequent and harsher heat waves, floods, storms, all agree that climate change is here but what all it can lead to is still in the realms of imagination. May be things get really horrible in some parts of the world, may be things don’t get as bad, all businesses have started to seriously consider this risk to their businesses.

Sustainability conscious consumption patterns are further likely to moderate high growth seen in the last few years. Right now, these patterns are individualistic but it is not improbable to expect government regulations in future that mandate sustainable consumption of new goods.

Winners and losers in the new environment

As with any change, a ‘new normal’ results in a different set of winners and losers. This applies to organizations, individuals and even countries. Taking the analogy of T20 cricket, a team successful at making 200 par scores on a flat pitch at Wankhede (Mumbai) stadium might not be as successful on a tricky Melbourne pitch with par score of 160.

While theoretically, it is easy to say that high growth businesses will pivot and adapt to the changing environment, very few are able to do so. Companies are made of people with certain mindset and culture. Mindset of excessive risk taking to chase high growth made certain businesses very successful in the past few years. Not easy to change a mindset that made you successful in the first place. However, individuals and companies that are more conservative in taking risks for moderate growth become more likely to succeed in the new environment.

As with all my posts, I conclude by saying that I am not into the prediction business. What exact events will happen at what time remain completely unknown. The intent of this post is to analyze the fast emerging mega risks that are likely to change the world as we know.?

Disclaimer - Views expressed here are those of the author and should not be considered as views of the employer.