This could trigger the next market crash

A black swan event is by its very nature almost impossible to predict. We have been through a number of such events over the last 20 years, from the Asian Financial Crisis to Black Monday, all of which have had a major impact on financial markets globally. Some of the effects were relatively short-lived, while others have been much longer lasting.

The term was coined by finance professor and former Wall Street trader Nassim Taleb in his book The Black Swan, in which he defines it as an event occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict.

Black swan events - a brief history

July 1997 - Asian Financial Crisis

A series of currency devaluations spread through East and South East Asia. The Thai baht plummeted as a result of the government's decision to no longer peg it to the US dollar. Import revenue for the region fell by 38% and international stocks fell sharply.

March 2000 - The dot.com Crash

Stock prices rallied at unreal speeds. Several leading tech giants placed huge sell orders at the market's peak, sparking a wave of panic selling. By the end of 2001, trillions of dollars had been lost.

September 2001 - 9/11

The twin towers of New York's World Trade Center were hit by two hijacked airliners. US stockmarkets lost an estimated $1.4 trillion in the following five days.

September 2008 - Global Financial Crisis

Lehman Brothers, in debt to the tune of $619 billion, filed for bankruptcy. Bear Sterns then collapsed and was bailed out by the Federal Reserve and sold to JP Morgan Chase. The subprime mortgage-induced crash is considered the worst financial crisis since the Great Depression, wiping $10 trillion off global markets.

December 2009 - European Sovereign Debt Crisis

In the fallout from 2008, stronger countries like Germany were unable to fund weaker ones out of their debts. Greece, Portugal and Spain all required bailouts. There were fears if one or more eurozone countries were to leave the euro and default on its debts, it could bring down the entire global banking system.

June 2014 - Oil Crisis

Oversupply caused the oil price to drop from $110 to $50 a barrel. Meanwhile, US shale supply increased from 5 million barrels a day in 2008 to 8.5 million barrels a day in 2014. Commodity-exporting nations such as China were hit hard by the price crash.

August 2015 - Black Monday

Speculation that Chinese companies using borrowed money was widespread. The amount invested soon exceeded the rate at which the companies could grow, and the government's plan to devalue the yuan backfired, causing a wave of panic selling. China's stockmarket fell 30% in three weeks.

What could be the next black swan event?

This is the million-dollar question. It's almost impossible to know the nature of the next event that could derail markets. The whole thing about black swan events is they often come out of leftfield. But here are a few ideas about likely culprits.

China

The 19th National Congress of the Chinese Communist Party is set to be held in Beijing this autumn. It's an occasion where significant changes could happen in the upper echelons of the ruling party. Such decisions may help determine the future direction of the world's second largest economy, resulting in consequences for companies and investors across the world.

In addition, if the economy weakens many believe the authorities will be unable to restart a required credit boom, or that the magnitude of credit needed to rescue China will be too much for the system to bear.

South American Crisis

South America has always been a hotbed of geopolitical and economic issues. Brazil has been through economic depression and corruption scandals which eventually led to the impeachment and removal from office of president Dilma Rousseff. Current president Temer has now been indicted for corruption, after he was taped apparently discussing bribes.

Argentina has also endured economic mismanagement and further accusations of corruption. A number of economies regularly experience very high inflation rates - Argentina and Venezuela are two examples. Given its close proximity to and links with the US, any major negative event in South America could trigger wider problems.

North Korean Missile Crisis

North Korea has continued to antagonise the West by testing missiles capable of carrying nuclear warheads. The latest test, said the country, proved it could fire a missile which could reach American soil. President Trump's administration has ramped up the pressure on Kim Jong-un's regime, with open shows of US military presence in the region, and tensions remain high. South Korean prime minister Lee Nak Yon has also called on North Korea to end its nuclear programme.

The assassination of Kim's half-brother Kim Jong-nam, who was living under Chinese protection, also angered China's leadership and strained relations between the two countries. Given the unpredictability of Kim Jong-un, political and/or military activities related to North Korea could be the catalyst for serious upheaval.

Middle East Political Tensions

The Gulf region was hit by its biggest diplomatic crisis in years in June after Arab nations including Saudi Arabia, the United Arab Emirates, Egypt and Bahrain cut ties with Qatar, accusing it of destabilising the region with its support for Islamist groups.

The countries said they would halt all land, air and sea traffic with Qatar, eject its diplomats and order Qatari citizens to leave the Gulf states within 14 days. The crisis remains unresolved and should it escalate it could have far reaching implications, particularly given Saudi's key role as an oil producer.

In addition, the Saudi King recently appointed his 31-year-old son Mohammed bin Salman, nicknamed MbS, to the role of Crown Prince of Saudi. MbS is seen as something of a warmonger and increases the likelihood of military conflict between Saudi and Iran.

European Union Crisis

There are a number of potential issues surrounding the eurozone at present, from countries which could default, such as Greece, to those leaving the club in the shape of the UK following its Brexit vote. The result of the forthcoming German election will be watched closely, with any sign of chancellor Angela Merkel's position being under threat likely to rattle nerves around Europe and beyond.

In addition, Catalonia may have a referendum on independence from Spain on 1 October, which could have far reaching implications for the country and for Europe.

With all this in mind, it's worth reading the latest article by Kyle Caldwell at Money Observer, which names the 10 shares fund managers think can whether any crisis.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.