What’s a Black Swan event and are there any predicted for 2025?

In the context of financial markets, a Black Swan event is a highly improbable and unpredictable occurrence that has an extremely negative impact, which usually has dire consequences for global and local economies and society at large.

These events are often seen as rare outliers that deviate from normal market conditions, defy conventional wisdom and challenge established models and theories.

During a Black Swan event, financial markets typically experience extreme volatility and uncertainty, leading to sharp declines in stock prices, increased trading volumes, currency devaluations, and a flight to safety as investors look to protect their portfolios.

Black Swans throughout the years

There have been multiple global and more localised Black Swan events throughout modern history. The major Black Swan events include:

1. The Wall Street Crash of 1929 was triggered by a combination of factors, including excessive speculation, margin buying, and a global economic downturn. The stock market crash led to widespread bank failures and triggered the Great Depression, which ushered in a prolonged period of economic hardship.
2. Black Monday: On October 19, 1987, the Dow Jones Industrial Average experienced its largest one-day percentage drop in history, plunging 22.6%. While the exact cause remains unknown, a combination of program trading, margin calls, and global economic uncertainty are generally considered the main factors.
3. The Dot-com Bubble: In the late 1990s, the dawn of the internet led to a surge in investment in technology companies, many of which were overvalued. The resultant stock market bubble burst in 2000, leading to significant losses for investors.
4. The 2008 Financial Crisis: Sub-prime home loans led to a financial crisis that triggered the collapse of the housing market in the United States. The crisis spread to the global financial system, leading to widespread bank failures and a severe economic recession.

1. Brexit: The unexpected vote by the UK to leave the European Union (EU) in 2016 sent shockwaves through global financial markets. ‘Brexit’ triggered a sharp decline in the value of the British Pound and increased uncertainty about the future of the EU.
2. COVID-19: The COVID-19 pandemic had a significant impact on financial markets, leading to sharp declines in stock prices and increased volatility. The pandemic also led to a global economic slowdown and rising unemployment.
   
   

Numerous Black Swan events had a less significant global impact, affecting local and regional economies more severely. For instance. The 1997 Asian Financial Crisis, triggered by the devaluation of the Thai Baht, spread rapidly across Southeast Asia, exposing weaknesses in many emerging market economies, including excessive borrowing in foreign currencies and weak banking systems.  

In 2015, the Swiss National Bank unexpectedly removed the minimum exchange rate for the Swiss Franc against the Euro (known as the EUR/CHF floor), causing the Swiss Franc to surge dramatically, resulting in significant losses for investors who were short the currency.  

Dealing with Black Swans

Consequently, investors remain acutely aware and cautious of Black Swan events, with many expecting that something similar is lurking around the corner.

The problem is that Black Swan events are virtually impossible to predict. While a few investors have been able to spot certain Black Swan events in the past and generate exponential returns, most investors dread the possibility. 

While it’s prudent to remain mindful of Black Swan events, investors should not base their investment strategies around avoiding or profiting from Black Swan events because the opportunity cost is too great – overly cautious investors would lose out on significant market returns.

If a Black Swan event unfolds, the best approach is to remain calm, avoid panic selling, and stick to your long-term investment plan.

While rare and unpredictable, periods of market recovery typically follow Black Swan events. As such, panic selling during an event can lock in losses while staying invested can help investors benefit from the eventual rebound.

For investors concerned about the potential for a Black Swan, hedging can offer portfolios protection against sharp market or asset price movements in the opposite direction.

This approach can help offset losses in the event of a market downturn. For example, investors could buy put options on a stock or index, which would give them the right to sell the stock or index at a certain price, regardless of the market price.

Those looking to profit from a Black Swan event typically use short selling – borrowing shares of a stock and selling them in the hope that the price will fall – to capitalise from any severe market downturn.

However, this is a risky investment strategy that requires strong conviction, significant experience and insights.

Black Swan risks in 2025

Whether you want to protect your investment or realise exponential returns, it pays to identify potential Black Swan events looming on the horizon.

The Investec SA trading desk has identified four potential Black Swan events that could play out in 2025.

While the breadth and depth of the market impact is hard to quantify, self-directed investors should keep their eye on the following scenarios:

1. Leveraged crypto speculation: Currently, there is massive speculation using leverage in the crypto space. Rising yields and the cost of financing are major headwinds. Should markets experience a crypto crash, it would cause forced selling in other asset classes, like tech stocks, especially AI-related stocks.
2. AI hype: If AI does not deliver the immediate productivity gains that the market is currently pricing in, AI-related stocks will come under pressure due to sky-high valuations and rising yields.
3. Unlisted asset bubble: While the U.S. has been dealing with the bubble in unlisted asset valuations, the rest of the world has not adjusted their valuations yet, which could cause the growing bubble to burst.
4. Undoing Brexit: Polls in the UK show that a majority would support rejoining the EU. Should the government get a mandate for the re-accession of the UK into the bloc, risks will emerge when discussions ultimately don’t lead to this outcome.

Forewarned is forearmed

It is crucial that investors understand Black Swan events as the risk landscape evolves in an increasingly complex world.

Acknowledging the possibility that rare events can have significant consequences on investment returns and portfolios can help investors prepare and position themselves to navigate an unlikely, but not impossible, Black Swan event.