Understanding market shocks: A Guide for the resilient South African investor
Another day, another headline, and another market jolt. Lately, this has become a regular feature of global financial markets, with South African investors caught in the crosswinds. From global trade tensions to local political uncertainty, markets can swing sharply in response to shifting narratives and breaking developments.
Beneath the surface of these market moves are what economists call 'shocks'; unexpected events that trigger wide-reaching effects across economies and portfolios. So, understanding the different types — namely event, cyclical, and structural — is essential for navigating volatility and building a portfolio that can withstand uncertainty.
Event Shocks: Fast, loud, and disruptive
Event shocks are sudden surprises that jolt the economic system, forcing a rapid repricing of risk before the full impact is clear. These include tariffs, wars, pandemics, assassinations and natural disasters. US President Donald Trump's tariff announcements are a classic example, disrupting supply chains, fuelling inflation concerns and shaking investor confidence overnight. When such shocks escalate, they can weaken company margins, hurt earnings and tip markets into a broader downturn.
While event shocks are unpredictable, investors can build resilience through diversification, holding cash or owning defensive assets like government bonds, gold, or consumer staples such as companies that sell essentials like food and healthcare products that stay in demand regardless of economic conditions.
It's also important not to overreact to short-term market noise unless it points to a deeper shift with lasting consequences. We've seen how quickly markets can rebound once some uncertainty or trade tensions ease. However, that sharp recovery doesn't mean the uncertainty is gone, it just means it's changed shape.
Cyclical Shocks: The market's natural downturn
Cyclical shocks are part of the market's natural rhythm. They emerge during phases of economic slowdown, often marked by things like shrinking growth, tighter lending conditions or a spike in borrowing costs. While they tend to build up gradually, their effects can hit hard.
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