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Covid-19 and black swans

A sobering reminder of the importance of managing risk in any investment decision.

Should you be panicking about the economic impact of Covid-19?

A good starting point in understanding the possible impact of Covid-19 might be to look at the history of recent viral epidemics.



Origin/ countries affected

Number of people infected

Number of deaths


Spanish Flu


Global pandemic, possibly affecting 1/3 of the world’s population at the time

Estimated 500 million people

Between 25 million and 100 million


Asian Flu


East Asia, Singapore, Hong Kong and coastal cities in the United States in summer 1957


About 1.1 million, including 116 000 in the US

1968/69, returning in early 1970/1972.

Hong Kong Flu (H3N2)

First reported in Hong Kong then spread to Vietnam, Japan and Singapore, followed by India, Philippines, Australia, United States, Japan, Africa and South America


Between 1 million and 4 million




First reported in Foshan, China, spread to about 12 countries in North America, South America, Europe and Asia

8 000



Swine Flu


First reported in Mexico, before spreading to the United States and 214 other countries.

100 million

Between 120 000 and 300 000, (12 469 in the US)




First reported in Saudi Arabia, spreading to Arabian peninsula countries.

2 494




First reported in Wuhan, China before spreading to neighbouring countries and then Europe, America and Africa.

Over 90 000 to date

Over 3 000 to date

Note: In the event that the sources below published contradictory figures, we have recorded the highest and lowest figures, effectively widening the estimated range of infections and/or deaths. Sources: The World Health Organisation, The Lancet, Centre for Disease Control, STAT, Encyclopaedia Britannica, Wikipedia, Voice of China Advertorial published in the Business Day March 2020

To put the figures in the table above in context, the World Health Organisation (WHO) estimates that annual global influenza epidemics result in between three and five million people becoming sick every year, resulting in between 250 000 to 500 000 deaths. These are estimates as often flu deaths aren’t always classified as flu deaths but by the underlying illness. The human cost of epidemics varies according to the severity of the virus, the general state of health in a population and the strength of the health systems in affected countries.

The economic impact also varies; the 2002/04 and 2009/10 viruses hardly caused a blip on the world’s stock markets.  This could be due to the fact that in the last two outbreaks, world markets were in recovery mode after relative lows. The low point of the Dot Com crisis was October 2002 and the low point of the Global Crisis was September 2008.

Politically, the Covid-19 virus has appeared at a very inconvenient time. Tensions between the US and China and the forthcoming American general election have guaranteed that a political narrative, not a scientific narrative will dominate. And there is no doubt that the lack of transparency will not be good for either markets or ordinary people trying to avoid becoming ill.

How has Covid-19 played out?

Despite swift and extreme measures taken by government officials since the first reported cases of the illness in December 2019, in Wuhan, Hubei Province in China, the virus has continued to spread. On January 30 2020, the virus was declared a Public Health Emergency of International Concern (PHEIC) by the WHO. This declaration legally allows the WHO to make recommendations on how member countries should handle an epidemic. It also mobilises funding and political support.

Chinese authorities ordered the construction of two specialist isolation hospitals to be built ‘at the fastest speed’. The world watched as the 1,000 bed Huoshenshan Hospital was built between January 24 and February 3, followed by the 1 600 bed Leishenshan Hospital.

It seems as though everyone is either cooking the data, or doesn’t know the data

Almost from the beginning, official reporting on the spread of the Covid -19 virus has been marked by a lack of transparency. The untimely death of the whistleblower, Dr Li Wenliang, and the hasty construction of two new hospitals in China mentioned above, triggered alarm bells. Many wondered if the decision to build such large hospitals in such a short time was a sign that the situation was more severe than publically acknowledged. 

With respect to the China/US battleground for influence, some articles on the topic have been more candid than others, suggesting that loyalty to China might well skew an otherwise rational national response to the virus.

Defending the decision of Ethiopian Airlines to continue an open border relationship with China, management consultant Richard Li wrote in How we made it in Africa that  ‘…‘Africa should not be short-sighted and remember that China has been a good and reliable friend, even in times of great difficulties. Therefore, until WHO declares that travelling to China is unsafe, Ethiopian Airlines should continue on flying to China. Addis Ababa is the location of the African Union headquarters that China built at a cost of $200 million and donated to Africa. Suspending all flights to China will not only be tantamount to closing the door to a great friend of Africa but will also undermine future cooperation between Africa and China’. He went on to write that President Kenyatta, in closing air links with China due to the virus ‘… may be seen as an opportunist and his actions may not be viewed positively since Kenya has been a great beneficiary of its Belt and Road Initiative.’

As the epidemic intensified, the WHO was accused of being beholden to China, and US health authorities have been accused of deliberately avoiding testing patients, in case they test positive. The steadfastness of the decision not to declare Covid-19 a pandemic has also been regarded with distrust.

On February 25 Dr Nancy Messonnier, director of the National Center for Immunisation and Respiratory Diseases, warned that a global pandemic was all but inevitable and suggested the American public brace itself for impact. On the same day, President Donald Trump insisted that everything was well under control and played down the risks. This has led Americans to doubt Trump’s capacity for leadership with respect to the unfolding viral outbreak.

More recently, Trump has been mocked in the press for his understanding of vaccines. Articles published in the Atlantic such as ‘The Official Coronavirus Numbers Are Wrong, and Everyone Knows It’ accuse the CDC of underreporting infections levels. This article also mentions that Italian politicians are urging the Italian government to test fewer people, the implication being that infection figures might improve.

Untruthful/slow/deliberate avoidance of accurate data from governments does not encourage trust and leads people to make ‘survival’ decisions, either for their own health or for their investments.

Economic consequences of Covid-19

The Covid-19 virus could be described as a ‘Black Swan’. This term refers to an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.  

World markets have been very volatile in the period since February 24; we have seen some of the biggest falls in the S&P since the 2008 crisis. In South Africa, the stock exchange has been battered and the rand fell to a low of $/R 15.85 over the last weekend in February. The subsequent emergency rate cut of the Federal Reserve initially strengthened markets, but then caused fresh doubts as investors speculated that the impact of Covid-19 might be worse than anticipated. Other central banks have also pledged action aimed at stabilising markets rattled by the outbreak as pressure builds on them to ease monetary policy to safeguard their economies.

What does this mean for you and your portfolio?

No one can predict when pandemics will happen and what impact they will have. In our view, portfolios must be constructed after taking personal risk tolerance, personal health, the size of your portfolio, future goals, geographic considerations, currency volatility, sector-related risk, political risk and black swan events in mind. We would suggest that a more nuanced approach to risk management than merely ‘buying the dips’ as recently proposed by the President of the United States of America is called for.

In our view, the only way to ‘black swan proof’ your portfolio is to diversify your assets across the asset allocation spectrum, across different geographies, and in different investment vehicles. We believe that diversification and asset allocation are the only two free lunches in the investment world, domestically and globally. 

One of the few investment guarantees is that there will always be black swans; Covid-19 is just the most current. Such events serve as a sobering reminder of the importance of managing risk as a starting point in any investment decision.

At Rosebank Wealth Group we have consistently promoted a policy of diversification, which has resulted in our clients’ portfolio geographic weightings being 60:40 in favour of offshore, invested across the asset allocation spectrum. Importantly, this is the net result of a strategic diversification strategy that has taken between 10 and 12 years to bed down and is specifically not a reactive decision.

Over the last few years, we have developed systems that assist in the monitoring of fees, tax structures, compliance and risks.  We have also built expertise and capacity in assessing and evaluating investment strategies of many offshore-based fund managers.

Do you have any questions you would like answered by registered financial planners?



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