Chron­i­cles of the Black Swan and the Chi­nese virus

Pretoria News - - BR - CHRIS HARMSE Dr Chris Harmse is an economist and chief in­vest­ment of­fi­cer.

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 6 per­cent 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 4 per­cent and by Thurs­day al­ready traded -1 per­cent down since the be­gin­ning of the year.

The MSCI emerg­ing mar­kets also had lost 2.8 per­cent. In Lon­don the FTSE 100 had de­creased by -1.35 per­cent and in the US even the Dow Jones In­dus­trial in­dex (-0.12 per­cent) and the S&P500 (-0.3 per­cent) 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 4 per­cent in De­cem­ber, up from 3.6 per­cent in Novem­ber. For the year the in­fla­tion rate came in at 4.1 per­cent, 0.7 per­cent down from the 4.7 per­cent recorded for 2018. The sell­off 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 3.5 per­cent dur­ing the first four days of last week.

This in fact wipe out the to­tal gain of 3.2 per­cent dur­ing the first three weeks of Jan­uary 2020, as the in­dex closed at 56 894 on Thurs­day against the 57 084 close on De­cem­ber 31 last year. The Alsi im­proved some­what with 366 points or 0.64 per­cent on Fri­day, but still closed down 3 per­cent lower than the end of last year and had de­creased by 2.9 per­cent alone last week.

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

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.