Source: Thomson Reuters Datastream
Over the last month the price of shares on stock exchanges around the world have fallen rapidly. Some markets, including South Africa, US, Europe and Australian share markets fell by over 30% in a month.
The last time South African markets saw a drop like this was during the global financial crisis of 2008.
Even South African government bonds, meant to be a safe haven, fell by over 18% over the last month. On the 27th of March, Moody’s downgraded South African debt to ‘junk’ status.
While we knew this was likely for a considerable period, the timing of the downgrade could not have been worse. We are still waiting to see what the impact of this downgrade would be on portfolios.
To make matters worse, the rand-dollar exchange rate went from R15 to 1 US Dollar to nearly R18 to 1 US Dollar in just over a month.
If that wasn’t enough, the price of oil has also fallen sharply, from over 50 US Dollars per barrel in February to less than 25 US Dollars in the last week.
The price of a share on a stock market is determined, like many other things, by demand and supply. The more people want a share, the higher its price goes because there are only a limited number of shares available.
The reverse is also true: when a lot of people want to sell a share, the price falls because there are more shares around to buy. You all
Over the short term, stock markets are affected by investors all over the world buying and selling shares based on short-term price movements to make profit.
Those who speculate during these times are investors like asset managers, wealth managers, hedge funds and investment banks.
In February, global investors started selling their investments, including shares, as the panic over the rapid spread of COVID-19 across the globe hit. We believe there are two contributing factors.
Firstly, the rapid spread of the disease caught many investors by surprise, and many sold to try and avoid loss. This started to drive prices down.
As this happened, other investors, such as investment banks and hedge funds may have been forced to sell their positions as if they were borrowing, or had issued derivative’s in the market. This pulled share prices down faster.
Around the same time in the oil markets, Saudi Arabia signaled that it was going to increase the supply of oil. The price of oil has more than halved as a result. Due to the global lockdown, the price was just under 25 US Dollars per barrel on the 27th or March. The last time the oil price was this low, was in 2002!
Many investors sold everything they held and moved back into US Dollars. As a result of supply and demand, this drove up the price of the US Dollar against the rand and many other currencies, including the Euro and the UK Pound Sterling.
You might wonder how all of this affects your investment.
The initial event has negatively affected all our funds, except the Granate Money Market Fund. As you can see from the table below, in the month leading up to the 23rd of March, the CoreShares OUTaggressive Fund fell over 30%, the OUTmoderate fell 28%, the OUTstable fell 23% and the OUTcautious fell 18%.
That being said, in the last three days immediately following this, the funds recovered very sharply.
The OUTaggressive Fund recovered nearly 11%, the OUTmoderate Fund recovered 8%, the OUTstable Fund recovered 4% and the OUTcautious Fund recovered 1.6%.
All this movement is extremely uncomfortable and you might be tempted to start moving some money around. However, we strongly advise that you stick to your investment time horizon.
As you have seen from the performance chart, sharp drops are often followed by sharp recoveries and you risk missing out on these recoveries if you redeem your investment.
Speak to one of our financial advisors and start your investment journey.