As much as things change, they also stay the same


Over almost 3 decades of managing client investments, it is undeniable that our industry has become increasingly sophisticated – asset management has always attracted the smartest people, but these days, new comers have education that is acutely investments specific and they are armed with more technology. Yet, experience cannot be substituted for, and in this article, we take a look back at past stock market dislocations and their underlying causes. The common denominators driving short-term pricing are greed and fear and we question whether this will ever change.

In August 1995, I entered the asset management industry with a crop of newbies, all wide-eyed, full of bravado and glued to our Ferguson Brothers terminals. Investec later bought Ferguson Brothers. It was ‘game on’! We, ‘the untouchables,’ were ready to imprint our DNA on the global financial system.

Things were going gangbusters. Asset management was easy. The summer of 1997 was all about Long Island teas at Café Caprice and rampant markets compounding at 16% annually. Nobody spoke of Benjamin Graham. Instead, we all lapped up every utterance of Abby Cohen.

Then, the first shudders started. It was July 1997 when Thailand devalued its baht as the country buckled under the magnitude of its foreign debt. The JSE dropped 18%, but this felt more like cramps at half-time than a life-threatening injury. Within a year, the local indices had recovered, and we were back to the races.

May 1998, I will never forget, devoid of experience or able mentors, we were forced to muddle our way through the 40% collapse in asset prices as Russia defaulted on its debt. The South African Reserve Bank hiked the local repo rate from 15% to 22% to protect the rand that got clobbered by 20%. It was real for emerging markets. I visited Indonesia just after the Asian and Russian ruble crises, and I met taxi drivers who were executives at multinationals a year earlier.

Then, there was the tech implosion in May 2002. Our market fell 34%, but in truth, a lot of this pain was specific to the sector. Those investors who had not learnt to model quite deservingly endured the pain. The 2008 crisis felt like 1998. It was white knuckle stuff capable of shifting the entire system over the precipice.

The lesson in 2008 for me was less about valuations and earnings and more about balance sheets. Old Mutual proved the poster boy bugger-up. Its stock fell 82%, a business in tune with capital mismanagement. The Bermuda products spoke to the malaise. Fortunately, Fed Chairman Ben Bernanke, President of the New York Federal Reserve Timothy Geithner, and Treasury Secretary Henry Paulson engineered the financial system out of the morass.

I feel the most for the market millennials and Gen Zers. Navigating storms requires experience, which most of this generation has not gone through! The February 2020 Covid meltdown of 31% was like an unsavoury sushi hors d’oeuvre. It was full of bacteria that caused a night of hell, but new-age fiscal and monetary medicine transformed a potential financial catastrophe into a stock market carousel. Indices turned north by the 28th of March of the same year, and we remain, to this day, in the stratosphere.

The common denominator of each correction mentioned above has been a dislocation of market prices from underlying economic reality. In 1997 and 1998, Asian economies grew their property capital bases excessively with foreign debt, which diluted the region’s prospective returns. Vacant buildings popped up long before the stock market latched onto this reality.

The stocks were another dislocation. An example is, which launched as Europe’s budding e-tailer. It created an insatiable demand for its products with magazines and public relations, but it forgot one key criterion – to build a functioning product ordering and distribution capability. Boo raised $135m and at its height was valued at $390m. Founded in 1998, Boo was gone by May of 2000!

Most of us understand 2008, excesses in the property market and investment banks operating with balance sheets geared at 60 times. The USA’s 2008 was Japan’s 1988, proof that markets do not respond to the cognitive in the heights of greed and fear.

To understand the unwind, look no further than Bank of America. Its stock price in 2006 was $53 and reached $2.60 in June 2009. Importantly, its net income collapsed from over $21bn in 2006 to about $4bn in 2008. The stock took 12 years to exceed its 2006 earnings!

So, what about now? Money cannot be made for clients by expecting a spook to manifest around every corner. Doing so would imply zero risk, equating to zero returns.

As professional money managers, we must make calculated and educated bets for clients, and we are! But, it is equally important to identify trends and similarities with the past. This is the benefit of experience.

Yet again, excesses are manifesting in the system: high property prices across multiple geographies, stretched equity valuations in certain market sectors or real estate overcapacity in Asia. Against this, market participants have adopted a laissez-faire attitude towards this cycle, believing that we are at an inflection point for improving economic prospects.

In contrast to this expectation, the real economy is showing signs of slowing down, be it negative purchasing manager index readings, diminishing credit provision by banks, shrinking money supply or even negative earnings revisions. Also, there is usually a twelve-month lag between yield curve inversion and a recession – the yield curve inverted last July.

Yet another disconnect is occurring between the real world and the virtual world of markets.

Time will tell how this turns out!