How investors should navigate a 'polycrisis'

In what felt like a fitting end to 2022, the Collins Dictionary chose ‘permacrisis’ as the word of the year – a term describing “an extended period of instability and insecurity, especially one resulting from a series of catastrophic events”. 

And as Rosie Carr noted in her column last week, the World Economic Forum (WEF) has popularised another doomladen buzzword: the ‘polycrisis’. Polycrises arise when concurrent shocks and interconnected risks combine to create a crisis even worse than the sum of its parts. Ominously, the WEF warns that “as volatility in multiple domains grows in parallel, the risk of polycrises accelerates”. 

The WEF also highlighted grounds for optimism in the year ahead, thanks to resilient labour markets, China’s reopening and consistently slowing inflation. But after the sustained turmoil of the past few years, we might find that a ‘polycrisis mentality’ lingers long after economic data improves.

A recent report from Ipsos argues that the past few years have forced us to adapt to rapid change, creating the uneasy sensation of “walking on quicksand”. In the face of constant disruption, our old ways of thinking are suddenly less helpful: the report argues that people are turning to new behaviours, influenced by ‘existential fear’ plus a desire for security and control. Although this might sound like a drift into pop-psychology, it could offer a novel explanation for some knotty economic trends. 

Geoff Mulgan, professor of collective intelligence at University College London, thinks that the gravity of our current polycrisis (which, after all, spans war, climate, health and finance) risks obscuring a crisis “of our collective imagination”. He argues that the political turmoil of 2022 created a consensus that the UK needs competence – and “the more boring the better”. Although a return to stability is certainly welcome, Mulgan warns that competence alone is not enough. Crises demand agile and imaginative leaders.

The desire for safety could have policy implications. Ipsos research argues that this sense of existential fear might see voters turn towards the state for help overcoming feelings of powerlessness. This could trigger a burgeoning level of public support for interventions ranging from economic safety nets to protectionism and even windfall taxes.

A polycrisis mentality could also offer an insight into the unusual state of the UK labour market, too. Ipsos research suggests that the past few years left people questioning the meaning of life – and many have concluded that the answer isn't ‘work’. This may have manifested itself through ‘The Great Resignation’ (see chart) and even ‘quiet-quitting’. 

This state of polycrisis will impact markets, too. Research from Fidelity International argues that “the impact of the events of the past year will be felt long into the next one”, leaving investors to navigate an “unusual crisis-driven cycle in 2023”. Chief executive Anne Richards expects financial conditions to tighten further as policymakers continue their battle against inflation, meaning a hard landing could result. 

Richards thinks that “for equities this will be expressed in lower corporate earnings”, while in debt markets, rising default rates and downgrades could be a risk. Higher rates are not the only headwind: the report also warns of the risks of deglobalisation and geopolitical uncertainty, which could exacerbate the challenges facing asset markets in 2023. 

Though talk of ‘polycrises’ may be everywhere, it is worth noting that the atmosphere at Davos is not always a good predictor of market performance. Research from the Financial Times’ Alphaville found that the mood was pessimistic in 2008 and 2001, and markets did indeed fall. Sentiment was also gloomy in 1996 and 2018, years when markets performed far better – even world leaders at the WEF don’t know what will happen next.