File image: Reuters.

CAPE TOWN - Following the recent US's market crash last week, we take a look at what key lessons South Africa can learn from the downward spiral of the dow. 

The MSCI All Countries World Index lost 7.5% in US dollar terms since the start of the month which was one of their biggest sell-off’s since the 2008 recession.

According to Investment Strategist at Old Mutual Multi-Managers, Izak Odendaal, the sell-off was sudden and it can be attributed to many factors. 

What caused sell off?

The sell off was caused by rising bond yields, says Odendaal. The bond markets which were priced in higher interest rates due to stronger economic growth in the US, Europe and elsewhere 

Great emphasis have been placed on the so-called Phillips Curve by the Central Bank which is the idea that rising wage growth will tie into higher inflation.  

Yet, markets recovered since and remains favourable, with solid global economic growth which translates into company earnings growth low inflation and interest rates that are still expected to rise gradually, says Odendaal. 

Odendaal says that the key lesson from this market crash is that the US is central in all relations and impacts heavily on the rest of the world.

“The US still matters most. The sell-off started in the US and then spread across the world from there. As riveting (and frustrating) as our local politics are, investors need to keep an eye on what happens in America”, says Odendaal.

So far, the crash only influenced local equity values in South Africa.

“There is no indication of a broader spill-over into the economy. The fact that the rand has remained resilient is important in this regard”, says Odendaal.

He adds that going forward, investors can avoid incurring a loss by means of appropriate diversification.

This remains the best defence against market volatility, says Odendaal.

What this means is relative to the investment goal you want to achieve over time.

“The other important thing to realise is that it is only a loss if you sell. So investors need to be careful to avoid knee-jerk reactions to newsflow and market events that results in them locking in losses”.

On conditions for a complete market crash, Odendaal says that historically, with the exception of the 1987 crash, major bear markets coincide with recessions.

In a recession, companies generate losses instead of profits and this adjusts share prices accordingly.

There is also an element of forced selling.

Odendaal says that there is currently no indication of a recession on the immediate horizon in the US or in any other major market.

“If anything, growth appears to be accelerating in these countries. Bear markets on the JSE have occurred when there is a crash in developed markets or when sentiment towards emerging markets has turned sharply negative”, says Odendaal.

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