A “black swan” moment is one during which investors panic in response to shocking news – as unexpected as seeing a black feathered creature in a snowy-white flock. As we know, a Black Swan event is a completely random and unpredictable event, which is a big blow to the market because whenever unpredictable events happen, they cause market volatility which have a major impact on market prices. Over the past few weeks, Call Levels has been talking about the 9 Black Swan events that made a huge impact on the stock market through the years. This time, we look forward to focusing on how Black Swan events could affect Singapore equities and Singapore’s financial landscape overall. We would also discuss a few key guidelines to protect your investments in case a Black Swan event were to take place.
#Throwback: How Previous Black Swan events affected Singapore
Looking to the past, there were major Black Swan events which took place that shook the world and Singapore market completely. One of the major Black Swan event was 9/11 which had some very adverse effects on the global economy as well as Singapore. Singapore’s GDP contracted by 5.6% in the following quarter, with a fall by 28% in the field of exports and there was a dismal performance in the manufacturing sector too. To make things worse, the recession spread to the services sector, with industries there registering negative growth of 0.4%. Because of this, the entire economic outlook for the next year (2002) was plagued by uncertainty and it took Singapore another 3 quarters to recover even though the Black Swan event occurred in New York.
Another Black Swan event that took place during the end of the first decade of the 21st century was the global financial crisis that took place with Lehman Brothers in the headlines, reporting $619 billion worth of debt. Even though this took place in United States with the housing crisis spreading within the United States, Singapore was the first East Asian country to slip into recession. There were many citizens who had put their life saving into financial products such as Lehman Minibonds, DBS High Notes 5 and Merrill Lynch Jubilee Series 3 Link Earner Notes and lost their faith from them once their investments soured and it was all chaos as people demanded their money from banks and brokerages that had sold them the products. It took Singapore almost a year and a half to get over the recession after the government spent almost S$23 billion in a Resilience package.
Coming to the latest Black Swan event that happened earlier this year, Brexit has had everyone talking. Brexit has still created a lot of uncertainties that are creating havoc in the market with the Pound seemingly in freefall. This could spell massive losses to Singapore in terms of trade, investments and tourism. Singapore imported about S$30 billion worth of goods last year and with most of the EU’s trade belonging to Britain, Singapore could be hit with massive trade losses. Singapore is one of EU’s largest investors as about 25% of FDI comes from them, but with Brexit, these numbers might be affected significantly. As of time of writing, there has already been a fall by 5% since the Brexit announcement. In terms of tourism, Singapore might expect a major drop in visitor arrivals from UK to Singapore because of the falling pound.
Apart from these, other Black Swan events have also affected Singapore such as the Oil Crisis in 2014 and Black Monday in China in 2015. Such events can leave a major mark on the economy.
How Black Swan events could affect Singapore
What we learned from the few Black Swan events mentioned above was that it’s not necessary that an event has to have taken place in the same country to be affected by it, but major unpredictable events can cause global changes and affect a country in a lot of ways. The crucial factors that go into consideration during an occurrence of a Black Swan are the connection of that particular country to that of the affected country, the volatility that happens in the global market because of the event, and the severity of future uncertainties it brings that go into short-term and long-term decision-making process.
There can be a lot of possible Black Swan events that can leave behind a major impact on Singapore’s economy. Since Singapore has the highest trade to GDP ratio in the world, any natural or man-made disaster such as an earthquake or financial crisis could have a huge impact on Singapore. Secondly, as we mentioned in last week’s article, the United States is just 3 weeks away from receiving a new President and more importantly is in the midst of a declaration of new policies that will frame the economy. If there are significant steps that prevent import/export to Asian countries, Singapore could face various issues as a significant proportion of FDI depends on trade with the US. Also, if things become worse for the US, Singapore could be affected again because of the falling dollar.
As of late, Singapore has been experiencing a slow growth economy and based on industry analysts’ estimates, this is about to continue for a while. In such circumstances, if there were any natural calamities to occur, Singapore’s economy will be on the backseat as there will be a lot of funds that would need to go into welfare and re-development.
But, what we can say is that Black Swan events are completely unpredictable and we don’t know what it may bring with them. Not only can events happening in Singapore be a huge cause for this, but major events all around the world can have a long-lasting impact on the economy and financial landscape of Singapore.
How can you prevent something that you don’t know is coming?
You can’t. But you can always protect your investments. Andy Kapyrin, director of research at RegentAtlantic says that the best way to approach such an event is to not panic at all. 90% of Black Swan events have no lasting impact. The most important thing about a Black Swan event is not the ability to predict the event, but be aware when you’re in a market environment that is more likely to experience a black swan moment, to avoid a bigger or more long-lasting hit.
A few other factors regarding one’s portfolio is to diversify it as much as possible, and try to minimize losses in case of such an event. Diversifying in different industries and sectors can help save a lot of money during such events. Also, while some people see black swans as a hindrance to the growing economy, there are various people who see it as a time to gain. “Buy low, sell high” is a cliché for a reason and it is important to recognize when the markets are crashing and what is the best time to buy stocks. This is the time to pick up good companies because they are going to recover and better for the investor because they might recover at a low price.