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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.

Apr 2020 | 2.5 min read

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.

Footnotes

Sources:
¹ Bloomberg, from 29 December 1999 to 24 March 2020. Price return index, in US dollar terms. The MSCI AC Asia Pacific index is an index that captures large and mid-cap representation across five Developed Markets countries and nine Emerging Markets countries in the Asia Pacific region. Past performance is not indicative of future returns. An investment cannot be made in an index. This material represents an assessment of the market environment as of a specific date. It is subject to change and is not intended to be a forecast of future events or a guarantee of future results. Drawdowns are calculated from the start of the Black Swan event to the next bottom. Recovery periods start from the bottom to the pre-crisis index level. Duration of Recovery refers to the “trading days” that the index recovers from the bottom to the previous high. The general concepts shared are for educational purposes only and not for the use in the marketing or sale of any Eastspring investment products. Viewers are advised to be cautious if they intend to invest in any products that are used in the illustrations as the illustrations do not cover the full spectrum of considerations required in making an investment decision.

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