Black Swans in share markets: Coronavirus (COVID-19) pandemic, which has caused nearly 70,000 deaths worldwide, is not the only event in recent memory that shook the share markets across the globe. In the past too, there have been such unexpected events, which crashed financial markets in India and elsewhere. According to a recent Ambit report titled ‘Black Swan and Markets’, almost every decade brings a market cycle and the reasons of each cycle could be “varying, underlying operating principles seems to be the same – Greed, Fear, Liquidity, Leverage & Speculation.”
Risk guru Nassim Nicholas Taleb, the author of the book ‘The Black Swan’, defined a Black Swan event as a highly improbable event with three principal characteristics: (a) Pre facto considered to be a highly improbable event; (b) Outcome of the event has a massive impact, and; (c) Post facto an explanation concocted to make it less random and more predictable. According to his theory, black swan is an event that no one saw coming. In an interview with Bloomberg last week, Nassim Nicholas Taleb said, “It was not a black swan. It was a white swan. I’m so irritated people would say it is a black swan,” while referring to coronavirus.
“There is no excuse for companies and corporations not to be prepared for that. And there’s definitely no excuse for governments not to be prepared for something like this,” Taleb added.
The domestic equity market benchmarks Sensex and Nifty have fallen nearly 35 per cent from their respective peaks of 42,273 and 12,430, hit during the start of this calendar year 2020. As the coronavirus spread its wings, following a global rout, Indian stocks markets too started witnessing a steep fall. However, markets reacting to economic fallout from the coronavirus is not new; there have been four other major ‘Black Swan’ events in the past three decades which made Sensex decline up to 58 per cent.
- Harshad Mehta scam: Harshad Mehta scam had a shattering impact on the economy of the country. Mehta, a stockbroker, was charged with numerous financial crimes and found involved in a massive stock manipulation scheme that took place in the Securities Scam of 1992 worth around Rs 4,500 crores. His firm brokered transactions between banks. In that year, BSE Sensex crashed 45 per cent, and it took 18 months to recover.
- Asian currency crisis: The Asian currency crisis started in 1997 on financial contagion and struck most of East Asia including the Republic of Korea, China and Thailand. In a span of 15 months, the 30-share index Sensex tumbled 38 per cent, however, the index took eight months to recover from bear market.
- Dot com tech bubble: In the year 2000, the dot com tech bubble burst with domino effect across the globe. It sunk S&P BSE Sensex a whopping 57 per cent from its peak in a period of
14 months. However, markets took more than two years (26 months), the longest ever time, to recover from this crash.
- US Mortgage and credit crisis: The global financial crisis of 2008 was the worst and biggest credit crunch since the great depression of the 1930s. During that year, the Wall Street benchmark index, the Dow Jones Industrial Average crashed 20% in the month of September which was one of the biggest monthly falls ever witnessed in the American stock markets. As the famous quote reads, “When America sneezes, the world catches a cold”, the Indian equities were also badly hit, where the S&P BSE Sensex tanked 27 per cent in the same period to 9,748 points from 13,418 points.
The Ambit report highlighted, “On average the peak to trough fall is 50%, it usually takes 14 months for markets to fully bottom out and takes 18 months on an average to fully recover to previous peak.”