Does history provide some clues

The JSE tumbled sharply today across all sectors as sellers simply outnumbered buyers. There is a massive dose of panic sentiment. As foreigners sell the rand weakened to R8,21/USD. The JSE shed 1400 points or 5,76%. All sectors fell in sympathy. Gold shares shed 4,4%
In the US, Congress is preparing to vote on the $700 billion US Treasury rescue package.
As prices fall sharply across the market, the only advantage is that it brings back reasonable value. At this time, it may be cold comfort for many investors, but the reality is that for prospective annual returns have increased sharply.
But when the news flow is negative, the rand is weakening, politics are in turmoil, interest rates are high, and prices are falling in a heap, most investors want to join the panic queue.
Time and time again we have seen this and with the benefit of hindsight, times of panic prove to be excellent opportunities. Perhaps not tomorrow, but the point of maximum pessimism will coincide with a low point.
I went back to some Financial Mail articles post the 1998 market crash and the 2003 market lows to highlight some of the general pervasive comments that were definitely influencing most investors and their decision making.
9 times out of 10 decision making is influenced by recent past price action as opposed to valuation.
I specifically recall discussing with one local asset manager post the 1998 price panic and his comment was along the lines of, “Ian, this is the big one, we have been waiting for. “
The emerging market crisis that started a world market crisis was being compared to the 1929 crisis.
This is what the Financial Mail had to say:
4 September 1998“ Ghosts of 1929 flit out of history's crypt Even as this article was being written on Tuesday, the JSE Overall index fell a further 4% in sympathy with Wall Street's plummet the previous day, when the Dow Jones industrial average fell more than 500 points. Wall Street could go lower; it's not immune to investor panic or other countries' economic problems.
The JSE almost certainly will fall further. It's a victim of two serious ailments: global economic ills and investor panic. Sounds familiar?
The market decline here has been staggering. On April 20 this year, the JSE Overall index peaked at 8362. On Monday, it closed at 4923, more than 40% off that peak. And this would have been worse if gold shares hadn't shown some strength. The glamour sector, electronics, has fallen more than 50% since July 22 and the adventurous sector, venture capital, has more than halved.”
So, if this is not a repeat of 1969 or 1987, have we been here before?
The answer, unfortunately, has to be yes - in 1929. The stock market crash then preceded the Great Depression, which really only ended after the outbreak of World War 2 in 1939Now we have very high interest rates. This makes equity investment unattractive by comparison with interest-bearing investments. This will tend to slow stock market recovery. Worse still, it could encourage even more sell offs.
The bottom of this market may not yet be in sight. Reaching the peak again will probably take years”
With hindsight September 1998 after the market had fallen proved to be an excellent entry point.
Again in 2002/2003 market prices slid down to the point where the sentiment was very negative. Prices were down, but value was up.
Some comments near the point of maximum pessimism in the Financial Mail.
“7 March 2003
Share prices, the pattern of corporate earnings and even some of the predictions for equity returns have deteriorated sharply in the first two months of this year.
With the resources sector now accounting for about 45% of the all share index's total market capitalisation, the retreat among mining and other commodity stocks almost inevitably drags down the main market index.
Bearish financial markets elsewhere are also having a greater impact. For some companies, notably the life assurers and short-term insurers, slumping markets are hitting their investment returns and earnings directly.
Overall, however, the broad trend in SA equities is looking bleak. That could continue until the gloom over global financial markets lifts. With the prop of a weak currency no longer in place, the JSE has joined the rest of the world. “
4 April 2003There seems to be a concern among asset managers that investors will abandon high-fee equity products in favour of generic, low-fee money market products. The disillusionment with equities is understandable, and there is no doubt that many people's investments were too skewed towards the stock market.
2 May 2003Based only on the capital appreciation - or the lack of it - returns from equities in recent months have been poor. The JSE all share index (Alsi) has fallen almost 20% since the start of this year and is down more than a third since it peaked last May.
These are severe declines, which may not be over yet. But dividend yields have been rising sharply, on the back of lower or stagnating prices, strong earnings growth and, in many cases, robust corporate balance sheets.
Since early 2000 the average yield on the Alsi has risen from just more than 1,8% to about 4,2% this week. “
With hindsight April 2003 after the market had fallen proved to be an excellent entry point.
As investment advisors we will be looking for the opportunities.
For investors with discretionary funds, or living annuities or preservation funds etc, don't hesitate to contact me.
Kind regards