Tuesday, 15 September 2015 - 20:00

 

Charts

Seed Weekly - Volatility on the JSE

August saw the much anticipated decline in global equity markets. The selloff was severe across a range of market indices with the MSCI All World index losing 7% in the month, the Dow Jones Industrial Average down 6.5%, and the MSCI China index down 11.7% as examples of the declines experienced.

By comparison the decline in the JSE All Share Index (ALSI) in August of “just” 3.6% was therefore relatively muted. However, since the beginning of May local investors on the JSE have experienced a cumulative price decline of 7.6% and naturally for many this is starting to feel very uncomfortable – especially as the market is barely positive for the year to date. When measured in USD, the ALSI was down a more pronounced 8.3% in August.

By historical comparison purposes, until the beginning of the year from the market decline in 2008/2009, JSE investors have had a relatively smooth upward ride. That is until more recently when the global market prices came under pressure, following the Chinese economic slowdown and currency devaluation, the ongoing Greek crisis and uncertainty with respect to interest rate hikes in the US, etc.

We decided to look back at monthly data on the JSE from the beginning of 1970, specifically the peak to trough declines that investors have experienced. What is very interesting is that in each calendar year since 1970 there has been at least one month of negative returns. In many cases where negative months follow one another, investors have suffered losses of up to 20% and 25% in some years. On average the calendar year losses have been around 14% over this period.

It is exactly because of these very large negative periods, that many investors are dissuaded from investing into riskier ordinary shares. The chart below reflects these calendar year peak to trough declines.

What is interesting to observe is the relatively benign period of downside volatility that we have experienced since the market crash of 2008/2009.

Then, when one moves away from the annual declines and looks at the positives, it is noteworthy that out of the 46 full calendar years, there were only 10 years in which investors’ experienced negative returns. This is reflected in the chart below, which reflects annual total return from the ALSI for each calendar year.

As we know and expect, annual returns are erratic. But the positive years more than made up for the negative periods and the compounded average return from the market since 1970 to 2014 was just over 17.5% per annum. It is exactly because of this relatively high price volatility that investors demand and typically receive an additional return when investing into the ordinary shares of companies.

In conclusion we can say that looking back at history, it is not self-evident when an investor will experience large price declines. However, history does tell us that over time it pays an investor to be investing into risk assets if they can adopt a longer term investment horizon. Also because the ideal entry level is when prices are down and risk tolerance is low, currently it makes sense to have a lower allocation to this risk asset.

Sincerely,

Ian de Lange

Tel +27 21 914 4966
Fax +27 21 914 4912
Email info@seedinvestments.co.za

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Tue, 15 Sep 2015

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