Return profile of JSE after 10%-down months

“The last month in global markets has been characterised not by sound market fundamentals, but by geopolitical and environmental factors,” says Dr Prieur du Plessis, chairman of Plexus Asset Management.

It started with the social uprising in Egypt, which moved on to Libya and many other countries in northern Africa and the Middle East. Then Japan experienced one of the largest earthquakes in recorded history, followed by a devastating tsunami that among other things caused uncertainty around the possibility of a meltdown at the nuclear power plant in Fukushima.

“As a result of these factors world bourses, especially Japan’s, experienced consecutive negative trading days,” says Du Plessis. “South Africa was no exception. From an intra-day high of 33 334 on 14 February 2011, the FTSE/JSE All Share Index fell 10,2% to an intra-day low of 29 944 on 15 March 2011.”

This begs the question of how the South African market has fared after a month in which it lost 10% or more, and if this was different to normal market returns.”

To reach an answer, Plexus studied the calendar months since January 1960 in which the FTSE/JSE All Share Total Return Index (ALSI TR) lost more than 10%. The returns for various subsequent periods were then calculated to determine the results after such a strong decline.

“Since January 1960 there were 23 months in which the ALSI TR fell more than 10%, and there was only one occasion where this happened in consecutive months – September and October 2008,” says Du Plessis. The accompanying Graph A summarises the historical returns.

“It is clear there is a high level of volatility of returns,” says Du Plessis. “This is evident from the large spread between the minimum and maximum returns, especially over one year, with a 140% difference between the best and worst one-year returns.

“However there is an encouraging pattern in that as the term increases, the average return increases while the percentage of negative periods decreases,” he says. “This implies an improving level of predictability as the term increases.

“The other important point is that the average return over all periods is positive. Even the minimum return is positive over a five-year period.”

However, the question remains whether this is better than the returns delivered under ‘normal’ market conditions. “The accompanying Graph B suggests there is a similar return profile in the market regardless of whether the preceding month was a 10%-down month or not,” Du Plessis points out.

“This more than anything demonstrates that even after the market has experienced a tumultuous period, not panicking and staying invested according to your risk profile over the long term is the way to go,” he says.

Graph A

Graph B