Madeleine Wackernagel : TAKING STOCK
The economist John Maynard Keynes referred to the “animal spirits” of financial markets. This week they demonstrated a wild streak as one after another, world stock markets plunged. After months of conjecture, predictions of a repeat of October 1987 became a self-fulfilling prophecy.
It was an accident waiting to happen: the signs had been growing stronger since August when the South-East Asian markets experienced the first tremors. But Hong Kong was not like Malaysia, Thailand and Indonesia: its eco-nomy was sound and the handover to the Chinese had passed with barely a hiccup. Since July, politicians and investors alike have been repeating the “business as usual” mantra. Until some commentators pointed to an obvious crack in the economy’s financial edifice – the property bubble. No longer can prices continue to rise inexorably; but whether there is a crash or a mere correction remains to be seen. The damage to the financial markets had already been done and confidence severely dented, despite the stock exchange’s rapid turnaround.
Would that it had ended there, but in these days of globalisation the domino effect took hold with alarming speed. In the aftermath of “Black Monday”, the New York Stock Exchange had installed a computerised version of safety nets to ensure that never again would the market witness a wipe-out along the lines of the 22,6% loss experienced in the first hour of trading on October 19 1987.
Black Monday II saw dealing first suspended automatically when the Dow fell 350 points. The second shutdown was sparked after the Dow registered a drop of 554,75 – its biggest ever. All in all, the index lost 7,18% of its value, which was still 11% higher than at the beginning of the year.
Europe quickly followed suit, with London worst hit and the Footsie down 450 points at one stage. South Africa was not left out of the fun. The Johannesburg Stock Exchange recorded its biggest-ever points fall on Tuesday, a drop of 11,2%. But following Wall Street’s lead, shares staged a strong recovery midweek. So, is the panic over?
Not entirely. Politicians have been active the world over trying to calm the markets with talk of “sound fundamentals” but there may still be some way to go. Anyone who remembers October 1987 knows crashes have a momentum all of their own and invariably ignore the “fundamentals”, especially if they’re sound.
The events of the past week hold two lessons: if there’s a panic in the offing, be first to jump ship; and make sure your financial adviser was around the last time. Valuable lessons in spreading risk should have been learnt. If your fund manager knows his stuff, the chances are your investments are not as hard hit as the drop in the overall index would indicate. At this stage, only those investors who plied more than 20% of their total assets into stocks should be concerned.
Interestingly, it wasn’t the big players and speculators who sparked the selling frenzy on the JSE, but small investors, many of whom had borrowed money to fund their equity purchases. They will be feeling a great deal poorer but can take comfort in the fact that what goes down invariably goes up too.
In South Africa’s case, it may take time, though. The fundamentals are not as strong as in the United States or Britain; plus, we get lumped in with every other “emerging market” and fund managers rarely differentiate between them; one is as risky as the other. Indeed, as a bloc, the emerging market sector has underperformed Wall Street for the past 12 years.
That trend is unlikely to change in the short term, judging by the continuing fallout from the South-East Asian currency fiasco. At least Asian countries had strong growth rates in their favour; South Africa’s performance is pedestrian at best.
So investors on the JSE may just be better off quitting while they’re ahead, or else exercising a great deal of patience. The worst is not over yet.