Tracking Black Swans in Asia

Black Swans are unpredictable and extreme events that can have severe and adverse impacts on stock markets. Ten black swan events have hit the Asian equity market since the new millennium, differing in terms of the magnitude of the downturns and the duration of their recoveries. While we are in the midst of the Covid-19 pandemic, there are lessons we can draw from the past.

Looking back at the last 10 events, it took on average around 12.8 trading days to recover from every 1 percentage point of drawdown. Of course, the average hides a myriad of variations. For example, back in 1997, the Asian Financial Crisis triggered a 44.3% sell-off in the MSCI AC Asia Pacific index (“the market”), which subsequently, took around 245 trading days for the market to recover to its pre-crisis level. In 2000, the market fell 51.9% during the Dot Com Crash and took 687 trading days to recover. To date, the 2008 Global Financial Crisis had the most devasting impact on the market, with a 59.0% drawdown and the longest recovery duration of 2,264 trading days. See Fig. 1.

Fig. 1: Every crisis comes with a recovery1

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Every recovery is dynamic and will be determined by a combination of factors including the nature of the crisis and the response from policy makers. Nevertheless, investors can take comfort that every crisis comes with a recovery. During uncertain times, there is a danger that investors sell at the bottom. Take a long-term perspective to investing. While prices fall, it can be an opportunity for investors to take advantage of assets at better prices.

Markets are likely to remain volatile during this Covid-19 outbreak. We remain hopeful that as we see signs of progress in containing the virus in major economies, the significant monetary and fiscal support provided globally, will help to stabilise economies and asset markets.