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The structure of market drawdowns – a historical perspective

Chief Investment Officer of STANLIB Multi-Manager, Joao Frasco, analyses past market performance in an effort to inform our understanding of what markets are experiencing today and how they may behave in the future.
Joao Frasco

Joao Frasco

Chief Investment Officer STANLIB Multi-manager

Anyone who has been investing long enough would have experienced an equity market drawdown. A drawdown refers to the time period between a market peak and a market trough. These periods can be fairly significant in length and magnitude during times of crisis such as world wars, a financial crash and pandemics. Many articles have been written about how long these drawdowns have lasted and how quickly markets have recovered thereafter, illustrating why one should remain invested. This analysis looks at drawdowns from a slightly different angle, exploring the performance of the market before and during the drawdown period.

Recovering from the worst drawdowns

This analysis considers the performance of the South African equity market and starts by gaining an understanding of the drawdowns this market has experienced historically. Using monthly data (daily data would yield different results) for the South African equity market going back to 1925*, we calculate the 10 worst (largest) drawdowns. Table 1 provides the relevant summary information on each of these drawdowns.

Table 1: 10 worst drawdowns since 1925

While the average length of the drawdown was around 35 months (almost three years), the data shows that, in four instances, it took less than one year to reach the bottom. And all except one were less than three years. The recovery by comparison, took on average 20 months. So, if you are going to exit the market during market drawdowns, it is best to get back in relatively quickly as the recovery could be swift. Recoveries on average take less time than drawdowns.


Chart 1 shows the path of these 10 worst drawdowns, illustrating in many instances the quicker recovery period.

Chart 1: Evolution of the worst 10 drawdowns since 1925
But what happened before the drawdown?

Investments rarely start with a drawdown, so while it is important to think about the structure of drawdowns, it could be enlightening to think about investment returns earned in the equity market in the period before a drawdown. Thinking about the returns achieved before the drawdown could be as important as understanding the pattern of the recovery, because the capital value lost in the drawdown may have been earned from the same market.


So, let’s turn our attention to what happened before these drawdowns. Table 2 shows the same 10 drawdowns, but now considers the time that was required to achieve the same return as the drawdown, i.e. the drawdown in reverse. Above, we considered the time required to recover from the drawdown, we are now considering the time required to achieve the return that was subsequently lost during the drawdown. You will therefore note that a couple of the values in Table 2 correspond to Table 1.

Table 2: Returns lost as a result of drawdowns

On average, it took 32 months to achieve the returns that were subsequently lost through the drawdown period. This may sound like a long time, and while it may be disappointing to return to where you were three years before, this is a relatively short period of time when you consider that investing in equity aims to provide long-term growth for a lifetime of savings. And, as shown, the impact of an equity market drawdown over the long term and especially when combined with a recovery, is not as significant as one might think.

What about returns around drawdowns?

Another way to think about equity market drawdowns, is to consider what happened with returns before and after the drawdown. This is similar to what has been done above, but fixes the period being considered instead of fixing the returns achieved to either the recovery period, or the period required to achieve the return that would be lost. Table 3 provides the annualised returns for the period before the drawdown started (the peak) and for the same period of time after this point, as well as the full period (combined).

Table 3: Annualised returns around the start of the drawdown

If you focus only on the average column, you will note that the averages over the combined periods are positive. Recall that these are the 10 worst drawdown periods since 1925. Again, as painful as drawdowns are, especially when you are living through one and have to draw an income from your fixed pool of capital, the returns over even reasonably short periods of time are, on average, better than one might expect, especially as we increase the time period.

Staying invested in equity markets through the drawdown and beyond, provides an opportunity to participate in the recovery and ensure one achieves a positive, real return over the longer term.

How do we relate this to the current market drawdown?

Let us end by putting the current drawdown into context. The current drawdown began in December 2017 when our equity market reached a significant high. The drawdown period has continued for the last 28 months and at 31 March 2020, we were at the lowest point thus far.


However, it is impossible to know whether the market will move lower. While it has recovered substantially in April, this could reverse given the continued market uncertainty driven by the pandemic. Measuring -25.6% over period would make it the 11th-worst drawdown thus far, and at 28 months, it is the 6th longest to reach the bottom, if this is indeed the bottom.


We can’t be sure how long it will take to recover but what the analysis shows is that over time, the impact of a drawdown, especially when combined with the recovery period which is typically shorter, is limited. Staying invested in equity markets through the drawdown and beyond, provides an opportunity to participate in the recovery and ensure one achieves a positive, real return over the longer term.



This article appears in the Q2 June 2020 edition of our StandPoint publication. Click here to download a copy of the full publication.

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