Coronavirus – Black Swan Event and its impact on financial markets

Sanjiv Mehta  |  2020-03-02

This event highlights the importance of financial planning where liquidity for contingency is the first step and equities are allocated only for long term goals.
Corona virus which was first reported by China in January 2020 has now spread to 42 countries and might be declared as a global pandemic and therefore is being regarded as a black swan event. A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity and their severe impact.

Currently, there is still lots of uncertainty about how the virus will be contained. If it continues for some time, it will cause a slowdown of the global economy. Financial markets worldwide have gone down in the last 3 days with Dow Jones in USA going down by 11%, Nikkei in Japan by 9%, Sensex in India by 7% and DAX in Germany by 10%. Oil prices have also fallen with Brent at USD 51 per barrel.

If we look at similar crises in the past, SARS is a good example. The full form is severe acute respiratory syndrome and it is a contagious and sometimes fatal respiratory illness. SARS first appeared in China in November 2002. Within a few months, SARS spread worldwide, carried by unsuspecting travellers.

SARS showed how quickly infection can spread in a highly mobile and interconnected world. On the other hand, a collaborative international effort allowed health experts to quickly contain the spread of the disease. There has been no known transmission of SARS anywhere in the world since 2004.

Same coordination to contain corona virus is now beginning to emerge with WHO connecting with health care agencies of several countries. However, it has a much higher transmission rate as compared to SARS. Similarly, the central banks might be getting ready for a coordinated rate cut to support the economies.

In the near term, markets will be very volatile and unfriendly. Afterwards, depending on the success of containment measures, economic fundamentals might reassert themselves. This black swan event shows the importance of our holistic financial planning where first liquidity is ensured for contingency and equity and other volatile asset classes are allocated only for long term goals so that there is resilience to withstand adverse events of this scale too.