Beneath the Calm
The search for the next systemic crisis, that dreaded “Black Swan” event, is a persistent preoccupation for global policymakers and investors, even as the world economy continues to show remarkable resilience to recent shocks. Yet beneath this surface stability lie profound structural vulnerabilities.
The most significant threat is the explosive rise in global debt. Governments alone now owe roughly $111 trillion, amounting to 94.7% of global GDP, a ratio that the IMF expects to reach 100% by 2029. In today’s higher-rate environment, the cost of servicing this debt has become a severe burden, undermining fiscal stability across both advanced and developing economies. A wave of sovereign defaults or a sudden loss of confidence in the debt of a major power could trigger a global credit freeze, bank failures, and a collapse in market trust, echoing the 2008 and eurozone crises, but on a far broader scale.
This debt overhang is the core systemic vulnerability underpinning all others. EPIC Fixed Income products are designed around solvency risk, favouring sovereign and government-owned issuers with strong Net Foreign Asset (NFA) positions, and managing duration carefully to guard against the inflation and rate-hike pressures that typically accompany debt crises.
A second major risk lies in the vast and lightly regulated Non-Bank Financial Institution (NBFI) sector, the so-called shadow banking system composed of hedge funds, pension funds, private credit vehicles, and other leveraged investors. While traditional banks have strengthened their balance sheets since 2008, significant risk has migrated into these non-bank entities. Many employ high leverage and operate with severe liquidity mismatches. A sharp correction in a vulnerable asset class, commercial real estate, for instance, or a sudden spike in funding costs could force widespread fire sales. Such disorderly selling would rapidly drive down asset prices, creating a self-reinforcing liquidity spiral capable of paralysing markets regardless of banks’ improved health.
Protection against an NBFI-driven liquidity crisis requires prioritising cash and highly tradable securities. EPIC’s Fixed Income products avoid opaque, unlisted, or heavily leveraged debt instruments, focusing instead on deeply liquid assets such as US Treasuries and senior secured quasi-sovereign bonds, where capital recovery and liquidity are more assured.
A third risk stems from market exuberance, particularly the extraordinary concentration in AI-driven mega-cap technology stocks. Valuations for these firms have reached historic highs. Should the promised productivity revolution fall short of expectations, or should regulatory or geopolitical headwinds slow adoption, a sharp tech-sector re-evaluation could follow. Any significant decline would erase the “wealth effect” currently supporting global consumption, potentially tipping major economies into recession.
In an equity-driven downturn, investors typically seek a “flight to quality.” Long-duration, highly rated sovereign bonds benefit directly from falling interest rates and heightened risk aversion. Conversely, exposure to high-yield corporate bonds should be cut dramatically, as these instruments behave like equities during market stress and face elevated default risk in recessions, exposures EPIC’s Fixed Income product avoids entirely.
Finally, geopolitical and trade fragmentation compound all other risks. Escalating trade disputes, supply-chain bifurcation, and rising conflict probabilities in strategically critical regions threaten severe supply-side shocks. These could fuel a damaging bout of stagflation, high inflation paired with weak growth, undermining global economic stability.
Hedging geopolitical risk requires a flexible barbell strategy: maintaining allocations to both very short-dated liquid instruments, which protect against inflation spikes, and long-duration safe sovereign bonds, which hedge against sharp growth collapses. Complementing this with exposure to real assets such as gold and commodities provides additional protection against the unique inflation dynamics triggered by geopolitical supply disruptions.
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