What spurred last week’s panic attack at the JSE and what should investors do to prevent future losses? Jacques Magliolo reports
BEARS had a field day last week when the Johannesburg Stock Exchange overall index fell a mere 100 points. No sooner had the index fallen in line with Wall Street — on the back of rumours that interest rates could rise — than out came bearish cries and wails of “Sell, sell the market is collapsing”.
The market didn’t crash and the next day saw all the indices return to normal. What happened that day and what should investors do to prevent possible losses in future? Can they in fact do anything?
“There was a sense of panic and outrage last Wednesday, particularly from the dealers,” says one banking analyst. He adds that the exchange is in a state of change and rumours are naturally more in abundance than usual.
Apart from speculation that interest rates were about to increase, rumours centered on whether the present open cry system would be completely or only partly dismantled by the end of 1995.
“If we had been automated the day the index fell, we would definitely have seen a crash,” says a dealer. His contention is that computers cannot foresee a market collapse, but simply register deals.
It is only in an open cry system that dealers can (at times) quell investors’ fears of another 1987 Black Monday.
Not all market experts agree. Commercial Union’s head of investment, Alex Murray says: “Share prices are a function of supply and demand and the mechanism of trading would not have neutralised these forces.”
Across the spectrum, experts are divided in their opinion as to what actually took place that day. One school of thought is that the correction was a much needed one, but that investors should not expect a crash until exchange controls are lifted.
“Institutional funds will leave South Africa for better and less expensive shares,” says a market bear. He is one of a number of bears who believe that only the top 100 market capitalisation shares will survive a massive institutional sell-off. Market capitalisation denotes a company’s size on the basis of shares issued multiplied by share price.
Each of the other 500-odd companies listed on the JSE has a market cap of less than R500-million.
“Institutions will sell these shares to obtain funds to buy foreign shares in less volatile countries which can provide better returns,” says an institutional fund manager. Quietly he says: “Why should I buy Wooltru when I can buy Marks & Spenser, or ISM when I can place my funds in IBM?”
Another school of thought suggests otherwise. These are bulls who believe that the correction was not a precursor to a crash, but merely a hiccup in a strong long-term bull run which will last well into 1996.
Murray is one such bull: “The corrolation between the Dow Jones and our industrial index held true when the overall index dropped last week. However, the low JSE sell-off points to strength of buying in South Africa.”
He also believes that local institutions will be allowed to sell local shares to buy foreign shares. “We expect South Africa to follow the Canadian precedent where to a large extent local institutions have to back local liabilities with local assets,” he says.
Essentially, this means that institutions will only be able to buy shares overseas with the surplus of assets over liabilities. The exchange will thus remain unaffected.
One bear persists: “What if there is a crash next year? After all, dividend yields are down to two percent and p:e ratios are over 20 times. Surely, that must indicate a crash next year?”
As one analyst advises: “It is only a loss when you sell your shares. If you keep them, the shares are likely to return to previous levels.” It may take time, he says, but ultimately that’s your gamble.