Uneasy markets limped into the final quarter this week after the major international indices posted their worst quarter since early 2011.
While almost all indices, excluding the NSX local index, have given up the gains of 2014, the damage inflicted in the third quarter was particularly noticeable on the FTSE 100. Arguably the world’s most stable highly-traded index, even this stalwart had to succumb and moved below 5900 index points. That is almost unimaginable for the FTSE.
The trouble started in the third week of August, little over a month ago when the People’s Bank of China made two successive, minor adjustments to the external value of the Yuan. It quickly lead to a precipitous correction in both the Hang Seng index and the Shanghai index. This contagion spread to other markets in Japan, Europe and the United States. Since then, none of these really big markets have made a substantial comeback.
Coinciding with these overseas movements, was a not insignificant pullback on the Johannesburg Securities Exchange where the Allshare Index ended on Thursday a tad above 50,000 index points. Here, however, it must be noted that the JSE ALSI started showing signs of weakness already at the beginning of the second quarter. Whereas it ended the first quarter on a lofty 55,000 index points, that level has never been reached again and the year-to-date charts show a spiky but persistent downward trend.
Also in the third week of August, the external value of the Rand started sliding, setting new record lows as it breached the R14 to one US dollar twice during the quarter.
It is a common superstition amongst traders that September is a horrible period for stock markets. This is usually supported by quoting some calamitous events in the New York markets, many of which happened during September. There is this further popular notion that the US markets are slumbering during August, only to revive at the end of that month with the end of the US summer holidays. On the surface, seasoned traders say, everything appears normal but this is deceptive. The trading floors are manned by young, inexperienced traders who believe the financial press more than their own analyses. It is only when the big gurus return from their summer vacation that real and reliable assessments of both sentiment and real value, start becoming visible. And it is when these old dogs are not convinced the market holds value, that sell-offs are easily triggered.
This may sound like a bit of voodoo investing, but unfortunately, that is exactly the feeling I often get when I try to make sense of short-term moves. I know there are many well-researched studies that explain the psychology of investing, but even these are based on very weak premises. This is reflected in the vocabulary employed for instance, herd mentality, greed or fear motivation, irrational exuberance, and many similar phrases that spell only one thing – we don’t know!
This opaqueness in what really drives investment, is accepted by experienced investors. They may express their strategies in different ways but in the end, the level of convergence between a so-called technical trader and a value investor, is striking. The differences are tenuous at best. Whether the attraction lies in volatility or stability, every investor has a level below which it can not go. And since investors cum traders usually deal in other people’s money, even such seemingly protected strategies as those used by hedge funds, are forced to sell when a correction sets in.
Whether the third quarter is traditionally the worst for the calendar year, is open to debate. True, there are many awful third quarters on record, but that also applies to all the other quarters. Whether the markets are more prone to trader superstition during the third quarter, is also a notion for which there probably will never be a rational explanation.
As for southern Africa, the last two quarters have been particularly unsettling. If the volatility continues in overseas markets, and if the Rand gets battered more, and if the budget deficits in Namibia and South Africa keep growing, and if the negative trade balances continue, and if industrial action continues to weaken the manufacturing base, and if productivity lags behind the entire rest of the world, and if the Federal Reserve raise interest rates, and if fullscale war erupts in the Middle East, and if refugees flood western Europe, and if, and if, and if……
For us, there is really only one important consideration – and if it does not rain.