In recent years, the global economy has been hit by a series of black swan events, from COVID-19 to war Ukraine. The chief investment officer at Jesmond Mizzi Financial Advisors, Marc El-Lazidi, shares his thoughts on catastrophic market events and whether they have become the new normal. 

What are black swan events and why do they matter?

Generally speaking, it’s a term we use to refer to unpredictable and rare events with potentially catastrophic market consequences. They are the type of events which analysts consider to be extremely unlikely to occur and which by most estimates shouldn’t occur more often than once every 100 years.

The problem is that looking back over the last 10 to 15 years is forcing us to rethink that definition.

The 2008 global financial crisis, the 2020 COVID-19 pandemic and Russia’s invasion in 2022 are all good examples of black swan events, as is the recent collapse of three US regional banks over the course of a month. There are also rumblings of a more widespread banking crisis, all while the global economy edges closer to recession.

Now looking back at history, we can find several similar events – the first world war, the Spanish Flu, the Great Depression, others – but the difference is that these events were decades, not months apart. We are seeing this sort of event take place much more frequently.

What is the reason or this change and how has this impacted the markets?

Without time for recovery, the negative effects get compounded, and problems build up. The volatility we’ve registered over the past couple of years has been the combined result of all of these events. The question is, will things revert back to normal eventually or have we reached a point of no return?

As for the reasons for it, I think there are several, but I would say it’s primarily because we live in a far more globalised and interconnected world. News travels across the world in seconds and often impacts markets in ways that similar news wouldn’t have 10 or 20 years ago.

Rumblings of a more widespread banking crisis

 

And would you say this the new normal?

Let’s put it this way… the world is only going to become more interconnected. Whether this will fundamentally change the behaviour of markets is a different story. One could argue that if black swan events start to happen very frequently, then they stop being black swan events and would start to be priced into the market like every other possible development. In the short to medium term, however, I do think we’re in for a period of increased volatility.

This is both because of the possibility of more extreme events occurring but also the effect of online hype on the price of certain stocks.

We have more people than ever before participating in the market and you can see it in what I call viral stocks – stocks of companies whose products capture the public imagination leading to hype and a large increase in perceived value. We saw it with companies like Netflix, Shopify and Zoom which saw their price skyrocket at the start of the pandemic but which have failed to keep up the momentum since.

They’re all mono-product companies with a relatively low barrier to entry which could very conceivably be replaced by a new innovative competitor. In many cases, their value increases because of a surge in new users but users are of little use without a robust plan for future growth and development.

On the other hand, you have companies whose products are structurally important: companies like Microsoft, Nvidia or ASML, which will be shaping the next 10 years.

And this is clear from their stock price charts. You can very clearly see that while all companies registered a pretty significant decline during 2022, the likes of ASML, Microsoft and Nvidia have seen their share price recover unlike other hype stocks which remain in the doldrums.

Is a large user-base enough to justify some of the high prices we see certain tech platforms increasing to?

In some cases it is, after all, we live in a data-driven world that is going to become even more dependent on data as AI is integrated into more of what we do. That said, data is only as good as how you use it and a platform onboarding a large number of users quickly doesn’t mean its stock will continue to command a high price.

As we witness this shift in market dynamics, what does this mean for the lifespan of companies and the potential investment opportunities?

As technology continues to shape our world, it’s likely that our approach to investing will also evolve.

The lifespan of companies, especially tech ones, may become shorter, leading to more short-term opportunities. However, markets are adaptable and they may start pricing in this new reality.  Whether the rules of the market are changing or remain the same, increased market volatility is likely, leading to both more risks and opportunities. Thus, staying informed and adaptable is key for investors in this ever-changing landscape.

This interview is issued by Jesmond Mizzi Financial Advisors Limited and does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA, under the Investment Services Act. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For more information, contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on tel: 2122 4410, or e-mail info@jesmondmizzi.com.