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March 2020
Markets have been driven down precipitously, primarily due to concerns around global economic contraction resulting from the spread of the coronavirus disease (Covid-19). A compounding factor is the tensions between Saudi Arabia and Russia, which have resulted in a major increase in oil supply - causing prices to decline by its most in almost 30 years. South Africa entered a lockdown period on 26 March and many countries across the world have implemented similar measures to counter the spread of Covid-19.
Global Capital Markets have entered a bear market, which means that markets have fallen by more than 20% and the fall has taken place over a sustained period (a month or more). The JSE has not been spared. During this time, one may see daily spikes in equity values or bond prices, but momentum remains downward.
How has the JSE fared in previous bear markets?
We consider the major downturns over the past 40 years.
While we don't have data for the JSE during the Spanish Flu Epidemic of 1917-1918, the Dow Jones fell 33.5% from the start of the outbreak to December 1917. The market had already started recovering prior to the peak of infections (October 1918) and returned to previous levels by June 1919. The Down Jones surpassed previous highs by August of that year.
The above case studies show that markets always recover, but the length of the recovery will depend on what triggered the initial downturn.
What type of bear market is this?
Goldman Sach's chief global equity strategist Peter Oppenheimer categorised the different bear markets faced over time as either being structural, cyclical, or event-driven:
Using the above definitions, this is an event-driven bear market with the event being the Covid-19 outbreak. Event-driven bear markets are usually shorter in duration and the recovery is usually quicker than in structural or cyclical declines.
An issue we are facing, however, is whether this event-driven downturn could in fact trigger a structural decline or cyclical downturn.
The lack of inflation in the global financial system resulting in a cyclical downturn being triggered is a low probability event. Unprecedented fiscal and monetary stimulus could see this happen sometime in the future, although this is currently viewed as unlikely given that the demand slump will unlikely be made up over the coming months.
The only structural issue that can be identified now is high levels of corporate debt. After years of low interest rates, many corporates have levered up to undergo expansion activities or make large acquisitions. A lack of activity will place pressure on balance sheets. While this carries a higher probability than a cyclical downturn, we expect financial institutions to look through the Covid-19 slump and restructure or refinance loans to turn the tide.
Whatever the outcome - and regardless of whether the event-driven bear market is followed by a structural or cyclical decline - markets do still eventually recover.
Navigating the current bear market
It is important to remember that bear markets are quite normal and occur every 10 to 15 years or so, whether it be structural, cyclical or event-driven. The world has survived many wars, plagues, and economic and natural disasters. We adapt and recover and survive. The stock market has survived every previous disaster and has made a full recovery (and then some) in every instance.
Finally, we have seen unprecedented support not only from the South African government (which should provide some support to the local economy) and the SARB (which will help local markets), but also international governments and central banks. The stimulus measures undertaken in support of economies and financial systems world-wide will eventually support South Africa as well - through a resumption in external demand and a return of portfolio flows.
News flow over the next few weeks or months will likely remain incredibly negative and markets will remain volatile. It remains important to stay the course during this time - markets usually begin recovering the day after "peak bad news".
