The structure of market drawdowns – Part 2

Money Marketing Joao Frasco image
Joao Frasco, CIO, Stanlib Multi-Manager

By: Joao Frasco, CIO,
Stanlib Multi-Manager

The structure of market drawdowns is an interesting concept to inform investment decisions. This is particularly relevant as we continue to grapple with the ongoing temporary slowdowns in economic activity worldwide and market uncertainty.

The South African equity market ended 2020 below its previous high in 2017, which technically means that the so-called recovery had not yet happened. However, the All Share Index achieved significant gains off a low March and almost reached 60 000 points during the year. It changed quickly in the first few days of 2021, when it moved substantially higher and past the 64 000 level.

The most important message from our previous article, was to remain invested through the worst drawdowns in history. Our analysis demonstrated that average returns, both before and after drawdowns, were on average very high. Trying to time the market is very difficult and can be detrimental to your wealth and long-term investment strategies.

Did 2020 prove anything different?

To further analyse the latest drawdown, I reviewed daily data to gain a more accurate picture. The previous analysis observed data dating back to 1925, for which only monthly data was available.

Stanlib global equity market performance in 2020 graph

The latest South African equity market drawdown using daily data actually started after a daily high on 25 January 2018 (using monthly data, this was December 2017), and it reached a low on 19 March 2020 (due to COVID-19), almost 26 months later. The subsequent market recovery was swift, surpassing the previous high at the close of 6 January 2021, less than nine months later. The total return between the low and the recent high of just below 64 000 (using daily closing prices), was a staggering 68%. If an investor had disinvested from equities after the initial drawdown, they would have missed out on this significant recovery.

Unfortunately, as investors flocked to safety during the uncertainty of the pandemic, we saw massive flows from risky to more secure assets and funds during the year. This means that many investors suffered losses from the negative market performance in this period, and had not returned to participate in the subsequent recovery.

For example, in the ASISA South African (Multi-Asset) High Equity category, there were outflows of R26.9 billion for 2020, whereas the ASISA South African (Interest-Bearing) Money Market category had inflows of R22.9 billion. With perfect foresight, this would have happened before the crisis and reversed at the bottom, but this was sadly not the case. Most of the inflows to the money market funds happened in the second quarter (R20.8 billion) after the crash, when markets had already begun recovering.

Shifting our perspective globally

Global markets behaved similarly to those of SA. In the US in particular, the equity market hit new highs much sooner. The recovery from the initial COVID-19 crisis occurred as early as June for the Nasdaq 100 (less than four months), as early as August for the S&P500 (less than six months), and as early as November for the Dow Jones Industrial Average (less than nine months).

The chart above shows the three major US indices discussed above, and their path since the beginning of 2020, through the COVID-19 crisis and subsequent recovery. While this recovery was primarily led by the technology sector, the 2020 crisis accelerated many disruptive businesses.

Stay invested through a short-term market crisis

Although many of these ideas are already well-understood by seasoned investors, they remain important to reiterate, especially during times of market volatility and uncertainty.

It is critical to create a long-term investment strategy focused on achieving clearly-specified objectives and goals and staying invested when things get temporarily tough.

Understanding upfront how markets can perform is essential to avoid trying to predict what markets may do. Key to protecting your financial well-being, is remaining steadfast during these times, based on having longer-term investment plans and enough liquidity and secure investments or income to see you through tough market conditions.

Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za