20 Feb 2024 5 min read

Mind the grey swans

By Chris Franklin

Rather than worrying about unpredictable possibilities, we focus our energy on events whose likelihood and impact we can better quantify.


Financial markets are often described as ‘forward-looking’, meaning they reflect the collective expectations of market participants given all available information. It is the events markets don’t ‘see’ which typically move prices the most.

Even a cursory look at recent history shows us that tail risks, while unlikely at the individual level, can and do occur frequently and can be key determinants of market returns.

Risks that are both highly unpredictable and highly impactful have been characterised as ‘black swans’, the pandemic being a recent example. While concern over such risks has the potential to be a source of much anxiety, by definition these events are not predictable. As investors, we think it makes sense to instead focus on ‘grey swans’: risks for which thoughtful evaluation can help us to spot signals, to foresee scenarios faster and more accurately than most.

Investors often have a base case scenario or forecast. However, our mantra is ‘prepare, don’t predict’, which means being prepared for multiple scenarios. Thinking about grey swans means thinking about what could be possible, even though it isn’t probable, which can help us take steps to hedge against scenarios that are especially harmful for investors.   

At the start of last year, we flagged 16 possible grey swan events that we were monitoring. 2023 turned out to be another eventful year, with three of these events occurring in one form or another.

  1. US/Chinese tech company will be fined under the full extent of EU GDPR legislation. In May, US social media giant Meta was fined a record €1.2 billion for mishandling consumer data1. More recently, China’s ByteDance was fined €350 million for user privacy violations2. Despite both the US and Chinese tech sectors falling foul of EU legislation, we saw a bifurcation in 2023 market performance. Large cap US technology companies led equity markets, returning 56% while China’s Hang Seng Technology Index declined c.8%3,4. This highlights the challenge of grappling with grey swans, which even when they do occur may not always have the anticipated market impact.
  2. Japan to end yield curve control (YCC). In July the Bank of Japan (BoJ) relaxed its YCC policy, allowing 10-yield JGB yields to rise to nearly 1%, the highest since 2013. Many expect the policy to formally end this year, as the BoJ faces pressure to normalise policy. Higher domestic yields have so far largely failed to arrest a precipitous decline in the yen, which hit multi-decade lows against the US dollar late last year.
  3. General strike action from at least three UK unions at the same time. As we anticipated, unprecedented real wage declines in 2022 precipitated widespread industrial action in 2023, impacting rail and air transport as well as healthcare and the postal service. These disruptions contributed to the UK’s anaemic growth, expected to be just 0.3% for 20235.

The recession that wasn’t

One event many investors (including ourselves) failed to anticipate was the US regional banking crisis. Rapid intervention by US regulators largely prevented contagion to bulge bracket banks, but not before the shockwaves pushed Credit Suisse into crisis. A forced merger with former rival UBS succeeded in stabilising the situation.

Perhaps the greatest surprise in 2023 was what didn’t happen rather than what did. Despite widespread expectations of recession it never materialised, and most major equity market indices gained strongly in the year. Most notably, the S&P 500 returned 26%6.

What we’re watching out for in 2024

In making our predictions for the year ahead, geopolitics remains front of mind, most notably the US presidential election. We have previously discussed both the likelihood and potential impact of a return of President Trump to the White House, where we could see less foreign interventionism.

On the other side of the world, we are monitoring bubbling tensions in South America between Guyana and Venezuela, where a territorial dispute over the oil-rich Essequibo region threatens to escalate into conflict. This could have a profound impact on global energy markets given the significant oil production off the coast of Essequibo.  

For investors, the array of conceivable tail risks to consider can be distracting and even overwhelming. Therefore, it can help to focus on those with the potential to have the greatest impact on markets, and where time spent gathering and analysing information can help to improve our predictive power.

With this in mind, here are nine more grey swans we’re watching out for in the year ahead:

  1. Coalition government in the UK leads to an increased likelihood of another Scottish independence referendum
  2. Escalation of the Ukraine war, with NATO mobilising
  3. Recent breakthroughs in artificial intelligence lead to a productivity boom
  4. Sluggish Chinese economic growth sparks a challenge to President Xi’s leadership
  5. Resurgence of pandemic
  6. An incarcerated candidate wins the US presidential election, potentially becoming the first president to serve from prison
  7. Bab-el-Mandeb strait closed by escalating Houthi attacks, causing mass disruption to global supply chains
  8. A large leveraged player (bank, insurance firm, hedge fund or even leveraged corporate player) experiences significant difficulties due to elevated interest rates, triggering a flight to quality



1. Reuters, ‘Meta hit with record $1.3 bln fine over data transfers’

2. Reuters, ‘TikTok fined 345 million euros over handling of children's data in Europe’

3. Bloomberg US Large Cap Technology Total Return Index. Local currency returns

4. Hang Seng Tech Index Net Total Return Index. Local currency returns

5. Median UK 2023 real GDP year-over-year growth forecast, as at 09/02/2024

6. S&P 500 Total Return Index. Local currency returns

Chris Franklin

Investment Specialist

Chris is an Investment Specialist in the Asset Allocation team, primarily covering our institutional fund ranges. Chris joined LGIM after completing his MBA at the University of Cambridge. Outside the office, he is an outdoors enthusiast, always plotting the next excursion whether on a golf course, up a mountain or anything in between.

Chris Franklin