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I think most readers will agree with me that Brexit has been dominating all forms of media recently.
I would like to focus on similar market-related historical events, what we can learn from these events, and how we can safeguard our investments in this time of uncertainty.
It’s a well-known fact that a large pullback in the market doesn’t necessarily mean it’s a bad thing, as share prices are always restored to more affordable levels, offering good opportunities for patient investors.
Brexit being a geopolitical event offers even greater opportunities, as Giles Keating (chief investment officer of Credit Suisse) stated that shares usually recovered over the past ±100 years, following similar geopolitical shocks.
I don’t want to sound like the big brown bear, but I would like to highlight what Sir John Templeton considered to be the four most dangerous words in investing: “This time is different”. But why?
This can turn into more than just a geopolitical event
Many countries have already highlighted the possibility of recessions and I feel that finances on a global level are hanging by only a few thin threads.
We cannot afford to endure too much turbulence at this stage. There are several events that have taken place over the last two decades that resulted in similar movements. They include:
This can turn into more than just a geopolitical event
Many countries have already highlighted the possibility of recessions and I feel that finances on a global level are hanging by only a few thin threads.
We cannot afford to endure too much turbulence at this stage. There are several events that have taken place over the last two decades that resulted in similar movements. They include:
27 October 1997: After the Asian markets announced massive overnight losses, along with their concerns about the spread of a new Asian (financial) flu, the rest of the world followed, with the JSE falling by 6.2% that day.
By the end of the next day (28 October 1997), the JSE was down by 17%, only to rise by more than 14% a week later.
The fact, however, is that the market was still down by 16% three months later and down by 31% less than a year later.
14 April 2000: This is known as the day that the tech bubble burst, after the US Federal Reserve announced that inflation may rise much faster than initially anticipated.
The JSE followed in the footsteps of other world markets and fell by 3% that day, followed by a further 8% decline in the following three days. It managed to recover quite well shortly after, however.
11 September 2001: This date marks what will probably remain one of the most infamous and unforgettable terror attacks of all time.
On 12 September 2011, the JSE followed world markets with a 4% decline in value. Unfortunately, that was only the beginning of a downward spiral and markets were down by 14% a week later.
At first glance, it seemed as though the JSE recovered fairly quickly in rand terms, but when we viewed the market in dollar terms, it became clear that we were still under a tremendous amount of pressure three months down the line (down 17% in dollar terms up to December 2011).
29 September 2008: After US house prices fell to their lowest levels since the great depression, and Lehman Brothers was declared bankrupt, the JSE once again followed world markets and fell by 6% that day.
With the great correction that followed shortly after, a further 30% of the JSE’s value was lost.
Markets remain expensive
The JSE price-to-earnings (P/E) ratio shifted slightly towards the more affordable side, but at its current P/E of 21 times, it still isn’t anywhere near our 20-year average P/E of 15 times.
We can also argue that the S&P 500’s P/E of 23.5 times isn’t that cheap either. Even the London FTSE100 shares are looking expensive after the Brexit announcement, with a P/E of nearly 34 times.
Political uncertainty isn’t over
Who or what is next? Will Scotland request another referendum of their own or will other European countries such as the Netherlands follow Britain?
This forms only a fraction of the uncertainty that currently prevails.
To make matters worse, not even people living in the UK know what’s going to happen next. Yes, so an exit has been called for, but what exactly does this mean and when will it happen? Unfortunately, the answer is that no-one really knows at this point, and as long as this is the case, I don’t see any immediate relief for the discomfort that has taken hold of world markets.
Right now, I advise investors to handle this market with extreme care. Beware of buying too soon. Cash may just be the safer option for the time being.
Schalk Louwis a portfolio manager at PSG Wealth.
This article originally appeared in the 14 July edition of finweek. Buy and download the magazine here.
