MARKET UNCERTAINTY & VOLATILITY – NOT NEW TO SOUTH AFRICA
Considering the political and economic pressures facing the country at the moment, investors are understandably cautious to allocate aggressively to shares listed on the Johannesburg Stock Exchange (JSE). The economy is hardly growing and every week our attention is‘captured’ by the endless news-flow that highlights state and corporate corruption. The JSE itself has gone sideways for the last few years, yet remains on the expensive side, and amid all this doom and gloom the question is when the political and economic realities will reflect in prices. But then, politics and corruption have been part of South African life for decades. It therefore comes as a surprise that, according to a recent Credit Suisse study, the JSE has been the world’s best performing equity market from 1900 to the end of last year – returning 7.2% p.a. over inflation to investors, ahead of the 6.8% p.a. returned to Australian investors, the second best performing market.
HISTORY OF THE JSE
The historical performance of the JSE, as illustrated by the blue line in the graph below, shows that had you invested R100 at the start of 1960, that investment (including reinvested dividends), would now be worth over R700,000. Of course, the return profile has not been smooth, as can be seen in the volatile black line, which shows the annual index return generated over the previous twelve months. The worst annual return was recorded in May 1971, when the JSE lost 48%. Alternatively, the JSE gained 125% in the twelve months leading up to June 1983. Events that have contributed to this volatility have been both local and global, and economic and political in nature. History is fickle, and not guaranteed to repeat itself in the same way, but studying historical market cycles and their impacts on equities provide clues to how markets react under different circumstances.
The worst politically motivated market correction followed Sharpeville in March 1960, which eventually culminated in the referendum to make South Africa a republic (see point 1 on the graph). Markets fell by 20% in the two months following Sharpeville, and by another 20% in the three months leading up to the referendum. At its lowest point, the market was down over 30% 16 months after its previous peak, and it took another 11 months to recover the loss.
Although the rest of the 1960s procured unparalleled economic growth in the US and Europe, and by extension in South Africa by virtue of her commodity exports, the dawn of the 1970s saw the economic situation deteriorate markedly. The Bretton Woods system, which ensured governments back up the value of their currencies with gold reserves, proved unsustainable, causing its slow dissolution from 1968-1973 (see point 2 on the graph). The gold price reached its lowest level in December 1970, and by October 1971, the JSE had lost 58% of its value from its previous peak 31 months before. It took the JSE another 20 months to recover to its previous high.
The unwinding of the Bretton Woods system and the subsequent floating of currencies caused several developed market currencies to depreciate. Given that oil is priced in Dollars and OPEC’s lack of capacity to adjust oil prices against a now volatile Dollar, the Arabian oil producers saw their profits decline. To counter this, OPEC embargoed oil sales to several countries, including South Africa, in what became known as the First Oil Crisis (see point 3 on the graph). Oil prices soared globally, causing second round effects of high inflation, monetary tightening and economic recession. The equity bear market that followed lasted over 5 years from peak to peak, and by August in 1976, the JSE had lost 42% of its value.
In October 1987, stock markets around the world crashed in an event that became known as Black Monday (see point 4 on the graph). Unlike other market crashes, this wasn’t caused by economics or politics – instead, prices had become increasingly inflated during the course of the year and when a sell-off started in Hong Kong, investors panicked and tried to exit the market. In addition, the advent of computerised trading in the prior few years amplified the situation as computers were preprogramed to sell if prices fell through certain levels. The JSE lost 24% in one month, and 42% in total over the next six months. The losses took 14 months to recover.
Since the 1990s, global economic events and market sell-offs contributed to the Asian Financial Crisis in 1997, the Russian Financial Crisis in 1998, the bursting of the Tech-Bubble in the US in 2002, and the most recent Global Financial Crisis of 2008 – all of which caused the JSE to lose over 30% of its value. These events are summarised below:
There are valuable learnings from this. Firstly, despite the massive political challenges and interference in the country since 1960, which South Africa is still burdened by, surprisingly few of the major drawdowns on the JSE have been attributed to politics. Instead, major global economic events and panicked market sell-offs have been responsible for all drawdowns greater than 20% over the last 50 years. This fact, however, by no means dilutes the pressure the economy is under and the potential impact on the market due to the current political dispensation.
Secondly, markets recover. In the most recent financial crisis, the market took 10 months to lose 40% of its value, and subsequently made it back in less than 2 years. Despite having lost more than 40% in five separate occasions since 1960, your R100 investment was still worth R715,853 at the end of June this year.
Equity markets are volatile and prone to drawdowns by design, but there are ways to mitigate the risks: Take a long-term view of five years at the least; avoid trying to time the market and stay invested; and look toward having a diversified portfolio that reduces event specific risks.
WRITTEN BY FUNDHOUSE
Fundhouse is a leading investment adviser specialising in fund research, ratings and portfolio construction services. We help clients manage investments on behalf of the end investor. Our experienced team understands the complexities of the fund management world. We apply this knowledge alongside a client‐first mindset to improve the outcome for the end investor. Fundhouse was founded in 2007 by professionals from the investment management industry. We currently operate from offices in the United Kingdom and South Africa, where we cover the local and global fund industry first hand. Our business is 100% independent and owner managed which means we can offer objective advice and services in the best interests of our clients.