The current stock market panic brought to mind a memorable experience at the World Economic Forum a few years ago.
The South African delegation hosted a working lunch for foreign investors. We all packed around tables in a dining room on the first floor of a Davos hotel. Minutes after the plates were cleared and table discussions began, there was a very loud bang and a strange smell. It was the closest thing I’ve experienced to a bomb explosion.
While many of those assembled rushed for the exit, nobody in our group moved. Primarily because the table host was one Pravin Gordhan, struggle veteran and leader extraordinaire.
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In a display of grace under pressure I’ll never forget, SA’s then finance minister urged us to stay calm as it wouldn’t help anything to panic like the others. Besides, we’d know what to do soon enough. As it happened, we were able to enjoy our coffee a few minutes later after discovering the cause of the fuss was the explosion of an air conditioning unit – not anything malign.
Pravin Gordhan has his eyes on different responsibilities right now, so we’ll need to draw guidance on market-related matters from other sources.
But it’s worth remembering how, during the worst of the Zuptoid era, apart from urging us to “join the dots” Gordhan continuously reminded us of the resilience of this remarkable nation. Resilience born through the fire of transformation because for almost three decades, change has been an ever present constant.
This is an advantage not to be under-estimated. Particularly in periods of stress where those with less experience are inclined to panic. Just like many from the Rich North did in that Davos dining room. And their kindred spirits are repeating right now in their reaction to the coronavirus.
Today’s fear-inducting headlines warn the world could be heading for a Crash of 1987 proportions.
What they omit is that on October 19, 1987 US stock markets lost 22% in a single session. For a brief moment, then precious-metal-rich JSE bucked the global trend. But we followed the world, and then some, on October 20th. Because the JSE, like others on the globe not only caught pneumonia when Wall Street sneezed, but more relevant for the current period, was long overdue a major correction.
As it happened, after that initial shock, share prices fell for a while but soon regained their composure. Two years later, indices went past their previous peaks, richly rewarding those who took a longer-term view. Equities have a way of doing that. They punish emotion and appreciate logic.
I recall the 1987 Crash well, having occupied a front row seat to the madness. My responsibilities back then included producing a weekly stock tipping newsletter sold by my employer at a R1,000 annual subscription – with a daily share tipping phone line requiring an identical investment every month. Those kinds of experiences get deeply embedded. In later years they serves as a marvellous reference point.
One can argue that US stock prices circa 2020 were a lot like being like 1987. Highly speculative stocks like Tesla literally trebled in a few weeks as first-time investors piled in, oblivious to the reality that what rises also falls. Some pundits also contend that the share prices of rapidly expanding businesses like Amazon or Netflix had risen too high. That, of course, depends on your view of how to value exponentiality.
What is abundantly clear, however, is with very few exceptions, JSE-listed shares have not participated in the global stock market boom. In the last five years, ahead of the recent wipe-out, the US’s bellwether DJIA was 66% higher than in mid-March 2015. Over the same five years, in Rand terms, the JSE was up a modest 16%.
Yet, and here’s the killer, in the current craziness the JSE overall index has mirrored the US’s crash, losing 29% in the past month against the Dow’s 28% drop. So even though South African shares started from a much lower base, they have fallen even harder than overblown American ones.
In times when Mr Market loses his head, smaller markets – and the shares listed there – take even bigger hits than the major focus of the manic depressive’s attention. Collateral damage, if you like, of the insanity. Witness the way Sasol shares have been punished around 20% more than its North American peers.
All of this makes zero sense in a rational world. Mr Market, however, is anything but rational. And it is this quality which gives savvy investors the edge. On the other hand, investors who do not apply this knowledge to their advantage will later kick themselves for acting as irrationally as Mr Market himself.
So, the message today should be to remember Pravin Gordhan’s advice. Many in the Rich North love wearing their “Stay Calm….” tee shirts. But for all that bravado, those are proving to be just empty slogans in these stressful times. Here on the southern tip of Africa, appreciating the advantage of a cool head is obvious. Use it.
