ECONOMIC PULSE

Emotional Markets

On 28 May 1962 the Dow Jones average of thirty leading industrial stocks dropped by 34.95 points. At the time this was a drop bigger than on any other day in history, with the exception of the crash on 28 October 1928. On Tuesday 29 May 1962 the market suddenly changed direction with the index gaining 27.03 points by the close of day.

Wednesday was a public holiday, but Thursday saw the index climb another 9.4 points, leaving it slightly above where it was before all the excitement had begun. (Source: Business Adventures, John Brooks)

At that time, President Kennedy’s retrospective analysis eluded to the steel industry’s planned price increase. However, he couldn’t have been more wrong.

Back to Monday, 28 May 1962, when brokers used teleprinters to distribute updates. The massive sell-off caused a delay of up to 52 minutes between trading volumes and teleprinting the prices. Since the machine could no longer keep up with new information, it consistently showed lower prices, inconsistent with trading volumes. This in turn caused mass hysteria and panic among investors.

By lunchtime, brokers all over Wall Street had to deal with a flood of walk-in clients trying to sell their shares. Eventually radio and television stations got wind of a rapidly “falling” market, resulting in even further sell-offs. The story did not end in Wall Street, however. News filtering through to the rest of the world led to even further sell-off in Europe, dropping copper prices, missed margin calls, et cetera. By Tuesday morning the calculated loss in value in the stock market amounted to $20,800,000,000 – a record at the time which even surpassed the height of the 1929 crash. As mentioned above, the market eventually corrected itself and was back to normal by Thursday that week.

Human sentiment, fear, and emotions were the drivers of one of the craziest weeks in stock market history.

Moving forward to the present: what we are witnessing in current markets has a slightly similar feel, as the world tries to wrap its head around the impact of the Covid-19 pandemic.

At this stage it is almost impossible to determine the longterm effect that the virus will have on the world economy. It might be naïve, however, to declare that “this is the beginning of the end”, given how similar situations in the past such as SARS, Ebola and Swine Flu, came and went without much long-lasting repercussions on the world economy.

Further on sentiment-driven markets, it is worth noting that Tito Mboweni (Finance Minister of South Africa) recently presented his 2020/2021 budget speech, outlining plans to stabilise an increasing debt burden. Many thought it was an impossible task but Mboweni managed to surprise markets by suggesting reductions in the public sector wage bill.

Not many could have predicted such a bold move and as a result we witnessed an almost immediate rise in the share prices of a number of the reputable listed South African companies (companies that derive most of their earning from South African operations), and a decline in the stock of those JSE-listed companies that derive most of their earnings offshore – because in their case the focus remained on Covid-19.

Sentiment driven Volatility

Share/Index Close of Day (after Budget Speech) - 26 Feb 2020 Close of Day (Coronavirus) - 27 Feb 2020 1 Feb – 29 Feb 2020

Nedbank 5.42%

-5.76% -9.76%

Shoprite

Quilter

Glencore 9.75%

-0.78% -4.22%

-1.40% -2.34% -12.69%

-1.93% -2.90% -13.55%

One can see how quickly a change of sentiment can cause the markets to run in either direction.

Of course, the very next day (27 February 2020), positive sentiment about South Africa was overpowered by further fears surrounding Covid-19, and we saw downward price pressure across the board.

To illustrate our point, see the table above where Nedbank and Shoprite are the South African incorporated companies, and Quilter and Glencore are offshore companies. All four shares trade on the same exchange, but sentiment drove the price in very different directions. Column 4 illustrates the effect of volatility for the month of February 2020.

In conclusion, we refer to an earlier article written by Rene Olivier, MD of Wealth at IJG, highlighting the impact of such volatility and how to handle it.

“Constructing a portfolio around binary outcomes will result in you chasing your tail and paying brokers unnecessary trading fees. How easy was it to predict that Trump would be president of the biggest economy in the world, or that Ramaphosa would become president of South Africa”? Or now, to predict Covid-19? “These things are often not that important to predict. What is important is that you understand what you want to achieve (broken down into tangible objectives) and decide what investment solutions will match your objective’s time horizon. Thereafter, you can sit through volatility and protect the permanent loss of capital as you compound over your investment horizon by being adequately diversified and always paying the right price”.

By William Ross Rudd (IJG Wealth and Portfolio Manager)

William Ross Rudd is the Wealth and Portfolio Manager at IJG, an established Namibian financial services market leader. IJG believes in tailoring their services to a client’s personal and business needs. For more information, visit www.ijg.net.

To sign up for the Economic Pulse newsletter, send an email to: daleen@venture.com.na www.namibiatradedirectory.com

The Whirl Wing

It’s been 80 years since the first helicopter, a brainchild of Igor Sikorsky, took flight in 1939. No tribute to the helicopter would be complete without praising this amazing man. Sikorsky was born in Kiev, Russia, in 1889. At a young age he developed an interest in aviation, specifically in the drawings by Leonardo Da Vinci. According to school records he was 11 years old when he first experimented with a machine that could take off vertically. Sikorsky went on to study in Paris and completed his education at the Mechanical Engineering College of the Polytechnic Institute in Kiev.

In 1909, Sikorsky began his life’s work of designing an aircraft that was capable of vertical flight. While he was able to work out the issues he had with his design, the materials and technology of the time let him down and in 1913 he abandoned, but never forgot his dream and started working on airplanes.

His engineering abilities, and his work on aircraft used during World War I earned him an honorary degree from the St. Petersburg Polytechnical Institute, but the horrors of war had left a deep scar on Sikorsky and triggered a drive to invent a machine that could save human life in a way that no other vehicle ever could or would.

Apparently, after watching a cargo plane trundle down a mile of runway, billowing out exhaust fumes before finally getting airborne, Igor was heard saying “this is certainly not the vision man had when dreaming of a flying horse”.

And with that his focus returned to developing the most complicated flying machine ever built: the helicopter.

The word helicopter was first coined by Gustave Ponton d’Amécourt in 1861. It’s a combination of two words, Greek in origin: helico and pter, literally translated meaning whirl wing.

On 14 September 1939 the VS-300, the world’s first helicopter, took flight. The physics, aerodynamics and mechanical engineering that went into the development of that first helicopter still baffle undergraduates in aeronautical engineering and leave the helicopter student pilot dumbstruck.

The machine was so complicated in its design that Sikorsky was quoted as saying to the newspapers: “The helicopter appeared so reluctant to fly forward that we even considered turning the pilot’s seat around and let it fly backward.”

Sea Rescue of drowning victim by coastguard

VS 300 Helicopter

With this amazing feat of engineering he had conquered aerodynamics, but he was certainly not content. The images of soldiers left on the battlefields of both World Wars drove him to develop a machine capable of saving injured and desolated persons from any location. “If you are in trouble anywhere in the world, an airplane can fly over and drop flowers, but a helicopter can land and save your life”, he told potential investors.

Sikorsky’s first helicopter was ready for mass production by 1942, and his designs have served as the basis for military and passenger helicopters that we still use today. It would be right to say that the helicopter’s role in saving lives represents one of the most glorious feats in the history of human flight.

Saving lives was exactly what Igor Sikorsky wanted the helicopter to do, and that is exactly what pilots, engineers and ground staff do with helicopters every day.

If the vision of Igor Sikorsky is your dream, come speak to us at SIGNA Aviation about a career as a Helicopter Pilot.

Richard Becker

Website: www.signaaviation.com Office: +264 83 339 0094 Email: info@signaaviation.com