MONEY A tale of two Cities
NICHOLAS DAVENPORT
Johannesburg—The last thing a financial writer would want to do on his holiday would be to watch the stock markets. But
coming to South Africa for the first time I was overwhelmed by talk about the incred- ible boom and slump on the Johannesburg stock exchange. When I found that it had some of the characteristics of the Wall Street crash of 1929, which had shadowed my own entry into financial life, I was too fascinated to turn aside. I went straight into the research room of one of the great banks to look at the equity market's fever chart —a sight to delight any financial doctor studying the disease of stock speculation.
South Africa is prone to this disease because it has a financial set-up too big for its economic boots. Deposit banks, mer- chant banks, credit institutions, and mutual funds (unit trusts) proliferate. Financial ex- pertise is as advanced as it is in New York and London. The financial salesmen are adept and as slick as anywhere in the capit- alist world. And the number of suckers increases with the growth of the economy (7 per cent per annum in real terms).
The boom started at the beginning of 1968 and went on gathering speed and fury until May 1969 when the break came. By that time the price index had more than doubled and the more speculative stocks had more than trebled. Warnings had been issued by Dr Diederichs, the Finance Minister, and other responsible leaders but the market had ignored them until a very special situation, reminiscent of the financial malpractices of 1929, sent the market crashing. In seven hectic months the equity share index had lost half its rise and the key speculative stocks had fallen by over 90 per cent! It was a disaster on a scale never seen before in South Africa. The small-time gamblers were wiped out.
The 'special situation' grew out of the financial expertise of a few clever stock salesmen. Four years ago a new unit trust
(called a mutual fund in South Africa) was formed with the title of NGF (National Growth Fund). It became the second largest in the growing field of mutual funds—the largest was known as SAGE—and in 1969 it attracted a go-getting merchant bank sEtsrrax which took control of its manage- ment company NFI (National Fund Invest- ment). A second mutual fund was launched known as SATS. Naturally the financial acumen and drive of its `go-go' controllers was a selling point for NGF but to attract more and more subscribers in a great drive lo beat its rival fund SAGE, the NFI manage- ment concocted a selling device which proved fatal. It gave special rights to NGF subscribers in an issue of the management company Nwt shares which was timed for May. This set the -Market in NFI ablaze.
There was nothing improper in this move, which was a recognised practice in financial hard selling' but it was extremely naughty in the circumstances. The economy was enjoying a rapid rate of growth-10 per cent at current prices—and the fact that the managers of NGF were allowed to exact from subscrit.ers an initial 71 per cent loading charge enabled them to splash alluring advertisements in the press boasting of the huge capital gains which the boom would bring. They appealed for a mad gamble and they got it. No less than 230 million Rands was poured into the NGF treasury through the lure of the NFI flotation. It would have been only prudent to put the money into short-term bonds until the market fever had subsided but the managers did the opposite. First, they bought heavily into. sErrrax and NFI at near the top of the market and also into SAGE, so that this unit fund should appear over-valued in relation to NGF! Then, when the market broke before the end of May, they continued to pump money into a falling market in June and July in a futile attempt to stop the slump. One is re- minded of the British Treasury trying to stop the slump in Dalton's 2{ per cent in 1947 by pumping in the cash of the National Insurance Fund. The quickest way to lose money is to get out of the step with the market trend. As I write the fall in SENTAK from the market top has been 93 per cent, in SAGE 90 per cent, and in NFI 83 per cent. This has washed out the small- time gambler, and destroyed also the con- fidence of the genuine investor. A solid and much loved investment like De Beers has now fallen 60 per cent.
One is reminded also of Wall Street in 1929. The interlocking of holding compan- ies and share management companies is always a dangerous financing practice. Wall Street crashed because the financiers had created holding companies to buy up the shares of holding companies which held .management or operating .companies whose earnings could not support the inflated values of their parent companies' paper. There was also another striking resembl- ance between Wall Street of 1929 and Johannesburg of 1969. The flood of specula- tive money into the brokers' offices cause,' a breakdown in the investment machinery. Company registrars could not cope with the rush of transfers. Deliveries of stock were three to four months behind the brokers' contracts, so that a speculator could not be compelled to pay immediately for his pur- chase. But, of course, he should have been. This is where the Finance Minister was at fault. He should have instructed the banks to withhold credit from clients but Dr Dieder- ich's warnings were too academic. His government on this rare occasion lacked bite.
But in one important respect a parallel between Wall Street of 1929 and Johannes- burg of 1969 cannot be drawn. The Wall Street crash was followed by an economic crash because the financial structure was unsound and many banks became insolvent. Today Johannesburg has a strong financial structure and its banks are above suspicion. The stock market crash has not upset the economy. Growth has not been hurt. But investment confidence has been shattered. The wise king of the mining finance houses. Mr Harry Oppenheimer. has just said that shares have fallen enough to warrant sound investment. But the market is still nervous.
There are surely lessons in this sad Afri- can story for the financial establishment of the City. The confidence of subscribers to the unit trusts can be upset by over-optimis- tic, 'hard-selling' techniques.
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