Black Swans not gone yet, says giant Swiss allocator

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The eurozone has not just faced one ‘Black Swan’ recently, as eurozone countries face bankruptcy, says Alan Mudie, chief investment officer at Swiss bank UBP.

Mudie (pictured) notes the trading bloc has been visited recently by a small flock of ‘unpredictable events, of low probability but extremely high impact‘ – the classic definition of a Black Swan as expounded by Nessim Nicholas Taleb.

Another was Germany’s €6bn Bund auction in November, when investors left 35% untouched, about double the normal amount. The associated, unexpected event here was also Europe losing a risk-free asset.

The largest Black Swan remains, arguably too frightful for markets to deal with fully: “We do not think the risk of a break-up of the eurozone itself has been fully factored into prices.”

But also Berlin’s partly-failed Bund auction “left us in an astonishing situation. The eurozone not having a true ‘risk-free asset’ underlines the risks and imbalances with the financial system, and we take it very seriously indeed.

“The disappearance of ‘risk-free’ in the eurozone ticks the box [of being a Black Swan]. The impact of this, we think, cannot be overestimated.”

Perhaps it cannot be overestimated, but, in UBP’s case, it was to an extent ‘foreseen’.

“We sold out of developed world sovereign debt some time ago [and] sold exposure to bank-issued securities in so far as is possible, and instruments where we have banks as counterparties. We focus much more on high quality industrial and commercial issuers of bonds and equities.

“The increase in indebtedness of sovereigns was achieved from an already very high level when comparing the debt of G7 countries to their aggregate GDP. The situation today is extremely preoccupying, in that additional increases in debt are increasingly being ruled out by financial markets, which have obviously woken up to the risks inherent in the situation. Investors are increasingly sceptical governments can do anything to address the situation.”

Did December’s EU leaders’ summit take the measures to change UBP’s mind?

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