08 Jan 2018 Forget the Chinese – 8 is a Scary Number, unless two 40% crashes don’t scare you
We are entering 2018 on a very positive note on world markets. Tax cuts in the US will most probably fuel equity markets higher. However the years ending with an 8 did not augur well for markets in the last few decades.
The number 8 has long been regarded as the luckiest number in Chinese culture. With pronunciation of ‘Ba’ in Chinese, no. 8 sounds similar to the word ‘Fa’, which means to make a fortune. It contains meanings of prosperity, success and high social status too, so all business men favour it very much. Moreover, in some areas of China, people prefer to pay much more money for a telephone number with 8 in it. They also favour residences on the eighth floor of buildings. In the 1990s, a vehicle identification number with 8 was auctioned off for 5 million Hong Kong dollars. (From Travel China Guide.)
Looking back at the last few decades however, the two biggest crashes on the JSE occurred in 1998 and 2008. So, the number 8 is not such a lucky number for stock markets. Both times the JSE All Share Index lost more than 40% in weeks. This graph is on a log scale for a more accurate view of the size of the declines.
In 1998 the crash was caused by the Asian crisis after Russia defaulted on its debt. Asian markets rallied exuberantly and money flowed aggressively into Asian markets leading to a bubble in stock markets and currencies. When the bubble burst, many hedge funds all over the world went bankrupt and the contagion led to a crash in all emerging markets as the flight to quality escalated. This meant investments moved more to into US Treasury Bonds.
In 2008 it was the US subprime crisis which led to all stock markets crashing. Not even US Treasury Bonds looked safe, but Gold climbed to its highest level ever, from $710 to $1,900 per ounce or more than 160%. In a scenario where not even the US $ looked safe, Gold was the preferred asset to hold.
What might trigger another crash in 2018? That is difficult to see in advance. Very few analysts saw the previous two crashes although the Bond market in S A did give an excellent early warning in 1998 where a few of us realised the equity markets cannot hold up. The Bond markets are always more sophisticated than equity markets, mostly because prices in Bond markets are moved by professional investors. In 1998 it was Russia’s default that triggered the crash. In 2008 it was the failure of Lehman Brothers that led to massive monetary contagion.
In 2018 we need to watch the dangerous interplay between two very immature and arrogant leaders with access to nuclear weapons in the US and North Korea. As was the case in 2008, the US $ might not be seen as the safest investment if they are in a nuclear war. Chances of a nuclear war no doubt increased after the election of Donald Trump, but it is still a smallish chance. For protection however, I will hold 10% to 20% of my portfolio in Gold ETFs and be ready to lighten equity exposure.
Head Sanlam iTrade.