Coronavirus – The Next Black Swan?

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It wasn’t until the Global Financial Crisis that the term ‘Black Swan Event’ came into popular use in financial circles. A Black Swan Event is one which catches people by surprise and which has a major impact. The term originates from the discovery of black swans, which were thought not to exist. They were discovered in Australia by Dutch explorers in 1697.

The Global Financial Crisis (GFC) was certainly one of these events. The speed with which financial institutions and economies collapsed was both surprising and devastating. The impact was like a high magnitude earthquake, sending shock waves around the world which are only now dissipating.

The questions on everyone’s lips now are firstly, will we see a similar impact from the spread of coronavirus, and secondly, if this is a possibility, how should we prepare for it?

There is no doubt that a far-reaching epidemic of coronavirus will have an impact on economic growth. For a county like New Zealand, where our biggest export industry is tourism, the effect could be hugely destructive with an almost immediate impact and a long recovery time. Economic growth underpins share prices. When companies are struggling and profits are low, share prices drop. Not only that, but an epidemic creates fear. We all know that investment cycles are driven by fear and greed. It doesn’t matter where the fear comes from. If people are feeling fearful, they will hunker down. That means they protect themselves and their financial assets by bringing them into a safe zone.

We won’t know for some weeks whether coronavirus will be contained. Given this uncertainty, it is timely for investors to review their investment strategy – to have safe investments for the short term and to be prepared to hold on through turbulent times for the long term.

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