OPINION: Chronicles of the Black Swan and the Chinese virus

By Chris Harmse Time of article published Jan 27, 2020

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JOHANNESBURG - The term Black Swan originates from the (Western) belief that all swans are white, because these were the only ones accounted for. However, in 1697 the Dutch explorer Willem de Vlamingh discovered black swans in Australia, an unexpected and unpredicted event in (scientific) history which profoundly changed zoology. 

Black swans also occur in financial markets.

The financial crash of the US housing market during the 2008 crisis is one of the most recent and well-known black swan events. The effect of the crash was catastrophic and global, and only a few outliers were able to predict it happening.

Black swan events can cause serious damage to an economy, because they cannot be predicted.

The outbreak of the coronavirus in China last Wednesday quickly returned into a nervous selling of risky assets on global financial markets as the fear of a Black Swan event that could push the world economy into a recession overshadowed all rational behaviour.

Together with the news that the Chinese economy had grown by only 6percent in 2019, fears of a collapse of the world second biggest economy and also most Asian economies overshadowed all other global economic events like the Davos summit. On Friday afternoon it was feared that already dozens of people are dead in China.

The US State Department had ordered non-emergency personnel out of the city of Hubei, whilst the Chinese authorities had imposed indefinite travel restrictions in 10 cities and thereby affecting 30 million people.

Unprecedented sell-offs of bonds saw equity prices tumble during Wednesday and Thursday, and on most global bourses the total increase for the year so far was wiped out within two days.

In Hong Kong, the Hang Seng index lost more than 4percent and by Thursday already traded -1percent down since the beginning of the year.

The MSCI emerging markets also had lost 2.8percent. In London the FTSE 100 had decreased by -1.35percent and in the US even the Dow Jones Industrial index (-0.12percent) and the S&P500 (-0.3percent) had stopped their more than two weeks bullish trend.

Despite the uncertainty around the possible longer term effects of the coronavirus, equity markets in general recovered quite strongly on Friday again. Hopefully it remains only a sudden overreaction of markets and that the pandemic can be avoided.

In South Africa the inflation numbers for December antatsSA last Wednesday. The CPI had increased by 4percent in December, up from 3.6percent in November. For the year the inflation rate came in at 4.1percent, 0.7percent down from the 4.7percent recorded for 2018. The sell-off of shares on the JSE was aggressive and with a bigger overreaction than on other developed and emerging markets due to the Chinese virus. The Alsi was sold down by 3.5percent during the first four days of last week.

This in fact wipe out the total gain of 3.2percent during the first three weeks of January 2020, as the index closed at 56894 on Thursday against the 57084 close on December 31 last year. The Alsi improved somewhat with 366 points or 0.64percent on Friday, but still closed down 3percent lower than the end of last year and had decreased by 2.9percent alone last week.

The Industrial 25 index lost last week 2.8percent, the Resource 10 index traded down by 4.2percent, whilst Financials lost 1.32percent and property had decreased by 2.3percent.

The rand exchange rate surprisingly stood its ground last week. The rand/$ was stronger by 4 cents R14.42 late Friday evening. The currency was flat against the pound at R18.85 and against the euro gained 12 cents to close on R15.91. Resource prices also came down strongly due to the coronavirus.

Dr Chris Harmse is an economist and chief investment officer.


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