JSE. Picture: MARTIN RHODES
JSE. Picture: MARTIN RHODES

The past year promised so much but ended up in a proper klap. We had a rip-roaring start to 2018 with domestic retail shares on the JSE rising 15% at the beginning of the year.

But as Warren Buffett famously warned, the time to be fearful is when everyone is greedy. The JSE plummeted 12% in 2018, its worst performance since the global financial crisis. Even the call to invest offshore was not a slam-dunk. Those who felt the US markets were overheated did not contend with the boost provided by US President Donald Trump’s corporate tax cuts.

On the other hand, Europeans had to grapple with their own demons: Brexit and a pernicious Italian economy, to name just two. With China as their poster child, emerging markets had to brace for a slowdown in growth and, to make matters worse, Trump upped the ante by threatening them with an all-out trade war. Klap after klap!

So no surprise that global equity markets had their worst December since World War 2, with the S&P 500 down 9% in the month. The final quarter was the third-worst quarter on record for world equities, with only the 1987 closing quarter (which included Black Monday when the Dow fell 23% in a day) and the final quarter a decade ago during the global financial crisis being worse.

The final quarter was the third-worst quarter on record for world equities, with only the 1987 closing quarter (which included Black Monday when the Dow fell 23% in a day).

Globally, there was nowhere to hide, with none of the broader asset classes beating inflation, whereas in 2008 investors could find refuge in global bonds. The best metaphor for what happened in equity markets in 2018 was the art work Girl with Balloon by British artist Banksy, which shredded itself after being auctioned for £1m by Sotheby’s.

Locally, the diagnostic of our downfall is more complex. After a near-fatal blow the previous December, Steinhoff International slowly bled to death — down about 63% — engulfed for most of the year in an information vacuum, with creditors cutting funding lines and the company having to dispose of assets to stay afloat. In an era of rising rates where liquidity is being withdrawn, the share markets decided to put “Pac-Man” companies on a strict regimen. A number of high-profile names saw their share price just about halve.

After making some company-transforming acquisitions in Europe, Aspen was forced to dispose of its Chinese infant milk business to reduce its debt burden, but this did little to satisfy investors, who saw the slowdown in operational performance as a sign of acquisition indigestion. Questions were posed also on the cross–holdings within the Resilient Group,  and a former industry consolidator, EOH, also had to simplify its business.

Regulators also added to the carnage. Just as a convalescent Mediclinic International was finding its feet after its Middle Eastern regulators came to their senses, the hospital group’s Swiss business bumped its head against a regulator hell-bent on reducing the cost of hospital services. The group issued a profit warning, with its share price dropping 17% in one day.

British American Tobacco’s expected synergies from the $50bn Rothman acquisition went up in smoke when the regulator announced that they would impose stricter nicotine rules in the US. In addition, traditional cigarette sticks have been in decline, while the younger generation choose “vaping” products and the US plans to ban menthol cigarettes, which represents a third of the cigarettes sold in the US.

Finally, Chinese internet behemoth Tencent (in which JSE giant Naspers holds 31%) experienced its own tiff with regulators, who decided to slow the approval of online games.

But it’s not all bad news. Three years ago another JSE blue chip, Anglo American, faced its own demons as a sharp commodity downturn left it with a perilous balance sheet position, forcing it to put a number of marginal assets on the chopping block and focus on cost cutting. Three years later the stock is up fivefold, with a solid 31% in 2018 alone. Similarly, a trim Old Mutual has come back to base, refocusing on its core business after a near-death experience almost a decade ago.

Sometimes the best investments are made when things look the bleakest. As Buffett  would have said, the motto for 2019: be greedy when others are fearful!

• Rassou (@patricerassou) is head of equities at Sanlam Investment Management.