If January has taught us anything, it’s that just when you think you have a handle on all the forces that are likely to drive the economy and financial markets, you bump up against the abiding truth that life is full of surprises and that risk is, by its very nature, unquantifiable.

 Towards the end of a week during which world leaders and the brightest investment and economic minds from around the world grappled with all the risks that they envisage to be most pressing, the new coronavirus came out of the left field.

 In a survey published to coincide with the World Economic Forum (WEF), climate change-related risks commandeered the top five places on the WEF’s Global Risks Perception Survey measuring the likelihood and the impact these risks could have on the world in the years to come. But the potential for the coronavirus to upset the fragile economic equilibrium of the global economy swept all considerations about the climate aside and took centre stage this week.

 Non-US investors started the week level-headedly trying to assess the severity of the potential risk of the epidemic. They looked to the past for answers, revisiting the SARS 2003 virus and the impact it had on the global financial markets and economy. However, investor nervousness escalated into sheer panic at the opening of the US stock market on Monday 27 January when the Dow Jones Industrial Average plummeted 500 points.

 When it comes to risk, arguably the greatest challenge is finding a way to respond simultaneously to the short-term risks and any unanticipated Black Swan events in a rational and considered way, while not losing sight of the longer-term seismic risks, like climate change. That is more important than engaging in an impossible quest to try and find a way of anticipating Black Swan events.

 Little has changed since Wired journalist James Surowiecki interviewed Nicholas Taleb, an author who has profoundly changed the way risk is viewed in financial markets, in 2007. In his introduction to the interview, Surowiecki commented: “In a world of Black Swans, the first step is understanding just how much we will never understand.” 

The notion of Black Swan events was first introduced by Taleb in his book released the same year, The Black Swan.

Surowiecki asked Taleb: “If Black Swans are the crucial determining events in history, why do we think we can predict anything at all?” 

Taleb responded: “After they happen, in retrospect, we think that Black Swans were predictable. We think that if we can explain why something happened in the past, we can explain what will happen in the future.” 

More than a decade later, investors are still trying to do the impossible: look to the past to predict whether the coronavirus can be classified as a Black Swan event.

Emilio Franco, head of Global Risks and Geopolitical Agenda at WEF, was prescient in his assessment of the “drastic and relatively quick shift in risk perceptions” from economic to the environment encapsulated in the Global Risk Perceptions survey. He called this potentially troubling and noted:

“Because environmental and economic risks are inextricably linked, risk perceptions that account for only one over the other mean blind spots may be arising and integrated mitigation efforts may be lacking.” 

He explains that with the global economy potentially likely to become entrenched in a multi-year slowdown, viewing economic and environmental risks as distinct could encourage short-termism as finding ways of invigorating the economy become more pressing.

“In the near future,” he said, “immediate economic and political concerns could arise, but they should not fully displace ongoing environmental risks from our perceptions.” Little did he know that this fight for attention would arise quite so soon.

Ultimately, it is immaterial whether the coronavirus is a Black Swan event or not. Given the still-sluggish state of the global economy and the particularly fragile economic base that China has managed to build on last year’s stimulatory measures, the likely damage already done to the pace of economic growth is cause for serious concern. But it doesn’t yet justify a wholesale financial market sell-off.

There may be more at play here. Old Mutual Multimanager investment strategist Izak Odendaal makes an interesting point. He says although investors have grown increasingly nervous in recent days, we need to bear the backdrop in mind: a four-month strong rally in global equity markets has probably put many investors in a position where they want an excuse to take some profits.

 “The fear of a contagious disease is as good as any,” he says and points out that other disease scares over the past few years, such as Ebola, H1N1, and avian flu caused only short-lived wobbles on markets. “Investor sentiment was hurt more than underlying economic activity.”

 It is well-nigh impossible to predict whether this contagion will be worse – or less damaging – than these past epidemics, but the decisive and far-reaching measures the Chinese government has taken to prevent the further spread of the virus is encouraging.

 Of greater long-term concern is whether the long-awaited focus on the environment will still remain top of mind as governments and the private sector put all their weight behind keeping the global economy on a steady keel at least and on a growth trajectory at best. BM