Coronavirus – a black swan event?

When the COVID-19 pandemic struck, the severity of its impact on global societies and economies was shocking. Yet critics are insisting that the repercussions could (and should) have been foreseen. Does this make it a ‘black swan’ event?

Originally coined by financial theorist and writer Nassim Nicholas Taleb, the term ‘black swan’ has come to denote any event that:

• Is extremely rare
• Has a severe impact
• Is unpredictable (although some may claim in hindsight that it could have been predicted).

Historic black swans

Examples of black swans from history include the Spanish flu outbreak (1918), Wall Street Crash (1929), ‘Black Monday’ (1987), the terrorist attacks on the World Trade Center (2001), the SARS outbreak (2003) and, more recently, the global financial crisis (2008).

Black swan – or not?

While it may seem a textbook case on the surface, some are arguing that COVID-19 does not constitute a black swan event. Severe impact? Undoubtedly. Rare? Perhaps. But unpredictable? Maybe not.

History shows us that significant outbreaks of infectious diseases do happen. What’s more, Bill Gates, George W. Bush, Barack” “Obama – and Taleb himself – have all previously issued dire warnings about what could happen if we failed to prepare for future pandemics. Can we really say, then, that the coronavirus pandemic was completely unpredictable?

The COVID difference?

Those who say it is a black swan event have pointed to the unique brutality and speed with which the virus spread around the world and hit financial markets. In the words of one financial commentator: “It has been incredibly fast-paced, faster than ’29, faster than ’87. The speed and ferocity has been utterly breathtaking.”
Even so, Taleb himself suggests that coronavirus does not fit his description of a black swan event. Yes, it has had a severe impact on the global economy and people’s lives. But there are also multiple examples of serious global outbreaks from the 21st century alone – Ebola, SARS and the H1N1 influenza pandemic all spring to mind.

Weathering the storm

Black swan event or not, you can rely on us for advice and guidance on weathering any storms that lie ahead.”

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Are you on your best investor behaviour?

In uncertain times, where we’ve witnessed periods of stock market volatility, it’s easy to let emotions influence investment decisions, but a good strategy for investors to adopt is not to react hastily. Human instinct is to be responsive, so traversing these behavioural biases can be challenging, but once mastered, resisting the urge to flight can be rewarding.

Unlike prehistoric times, when the fight or flight reaction meant the difference between life and death in the face of a carnivorous dinosaur on the prowl, survival depended on quick pattern recognition and decisive action. As an investor, controlling these hard-wired behavioural biases and learning to resist the urge to panic, can bear fruit.

Take stock market volatility in March this year as an example. Retail investors sold investment funds worth £10bn in just one month3, with many selling just as the stock market was falling to its lowest level in eight years. In doing so, they missed out on the subsequent market bounce of almost 30%. If hindsight is a marvellous thing, by its very definition, foresight is insight gained by looking forward. In other words, when it comes to investing, look forward, because markets tend to bounce back over time, though it can’t be guaranteed.

Different drivers

A number of factors lead people to respond differently to market occurrences – what your objectives are, your risk tolerance,” “beliefs, preferences, emotions and past experiences, can all result in different investor behaviour. One event, such as a market fall, can lead to different behaviours; ceasing investing until markets stabilise, selling in case it’s the beginning of a market downturn, or contrarian investors may see the correction as an opportunity to invest. Some beliefs could lead to successful investment outcomes, others could result in behavioural biases that are counterproductive and endanger the prospect of successfully achieving your objectives.

Managing behavioural biases

As humans, we all suffer from some biases. The best defence mechanism to safeguard from knee-jerk reactions and defend against the influence of your biases, is to follow a robust, objective and disciplined process, and that’s where we come in. In addition to having a well-thought-out investment process, investing with a clear idea of what you want to achieve, will determine how we structure your investments. Whether you are building your retirement nest egg or a fund to put children through university, you have a better chance of achieving your goals if they are used to frame all investment decision-making.

Foresight
You can rely on us; we take the time to understand your objectives, apply a rigorous investment process and advise you on the investment strategies and products most appropriate for you.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Where now for the global economy?

With the release of Q2 data over the summer, the full extent of the impact COVID-19 has had on the global economy became apparent, as a succession of countries reported record falls in output, with lockdowns causing inevitable and acute economic disruption.

Although uncertainties surrounding the pandemic are still inflicting economic stress across the globe, there are signs that the worst may be over. Many economists believe the sharpest declines are now consigned to history, but the likely pace of recovery remains unclear.

On home shores
Preliminary Q2 gross domestic product (GDP) statistics show the UK economy was hit particularly hard, with a 20.4% reduction in output in Q2 compared with Q1. The country’s largest ever quarterly decline pushed the UK into its first technical recession since the financial crisis.

Around the globe
Output across the Eurozone shrank a record 12.1% during Q2, with Spain suffering the largest decline, its economy shrinking by 18.5%. France and Italy were also badly hit, with quarterly declines of 13.8% and 12.4%, respectively.

Preliminary estimates for the US suggest the world’s largest economy shrank at an annualised rate of 32.9% in Q2, the sharpest decline since government records began in 1947.

In Japan, the world’s third-largest economy, GDP fell by 7.8% in Q2, which represents the fastest quarterly rate of decline since” “comparable figures were first recorded back in 1980.

A tentative recovery?

Despite Q2 data for advanced economies painting a bleak picture, a recovery of some sorts may be in the offing. In the UK, the Office for National Statistics said the decline was concentrated in April at the height of lockdown, with the economy bouncing back in June as restrictions eased.

Recovery seems underway in China; the economy returned to growth during Q2, the world’s second-largest economy growing 3.2%. This follows a historic 6.8% Q1 slump, China’s first contraction since at least 1992 when records began.

The International Monetary Fund (IMF) predicts the global economy will shrink 4.9% this year, a downgrade from previous projections. This downgrade reflects the likelihood of social distancing restrictions persisting for a longer period and the subsequent impact on consumer spending. Voluntary social distancing by people wary of exposing themselves to the risk of infection is also expected to make consumers cautious.

“The strength of this recovery is highly uncertain”

Next year, the IMF predict the global economy will expand by 5.4%; however, they stress there is a higher-than-usual degree of uncertainty surrounding its predictions. IMF Chief Economist Gita Gopinath commented: “The strength of this recovery is highly uncertain. On the one hand, you could get positive news, you could have better news on vaccines and on treatments and greater policy support, and that can trigger a faster recovery. But on the other hand, there are important downside risks, too,” “which is that the virus could come back up. You could have financial tightening that could lead to debt distress. So, there are both upsides and downsides.”

It seems the only real certainty at the moment is that these are likely to remain uncertain times. Rest assured, we remain on hand to navigate any uncertainty together.”

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.