Tomorrow marks the anniversary of the bleakest day in ASX history. On 20 October 1987 — 30 years ago exactly — the Australian market crashed by a massive 25%.
That figure paints the day in better light than it should. The 25% plunge at the market open only reflects the fall in the stocks that traded. That is, the larger-cap stocks.
What the figure does not include is all the other stocks that didn’t trade at all. Not because there weren’t any sellers around — there were plenty of those. However, some of the smaller stocks, even the mid-caps, didn’t have any buyers at all.
The ‘chalkies’ — the clerks employed to scribble prices on massive blackboards — were scrambling to write up the best sell price. But buyers? Not a single bid in place.
The event became known as ‘Black Tuesday’, following on from the ‘Black Monday’ in the US. There the Dow fell by over 500 points — a fall of 23%.
More Than One Cause for the Collapse
Running into the collapse, the Australian corporate world was full of speculators and corporate raiders. Awash with easy finance, brought about in part by the deregulation of the Australian financial system, these raiders had an almost limitless supply of cash.
It was a simple and circular process. Raise some cash, buy an asset, and then revalue it higher. Then borrow even more against the increased asset value.
But none of the raiders survived the ‘87 crash intact. While their debt pile surged, the value of their ‘assets’ collapsed in front of them.
Given that all of their ilk were in a similar position, there weren’t any ‘bunnies’ on which they could offload their holdings.
It wasn’t just the raiders who went down the pipe. Their lenders — the international and local merchant banks — also went out the back door. Some disappeared completely, while others were absorbed into other banks.
While competition is usually seen as a good thing, it proved to be less so in this case. Banks had tripped over themselves in the rush to lend. They chased just about any deal going around.
But the banks were left with unsalvageable debts once the cards came crashing down. The Commonwealth Bank of Australia [ASX:CBA] hadn’t yet listed when the ‘87 crash came around. But the other three banks took more than a decade for the bad debts to wash through.
It wasn’t just local investors who bailed out of shares. The international funds, who’d recently begun to invest in the Aussie market, also went running for the door. For them, it was a mad panic to liquidate their Australian holdings to help prop up their positions back home.
It only took around two years for the Dow to make its comeback. However, the Australian market took a lot longer. This was in a large part due to the heavy toll the bad debts had put on Aussie banks, which even then made up a large part of the market.
It wasn’t until 1994 that the index once again reached the 1987 high…and then only briefly. Only in the latter half of 1996, nearly a decade later, did the market break higher.
The Fundamentals Remain Unchanged
While those corporate raiders have long since vanished, so too have many of the conglomerate-style companies they created. You may remember the Quintexs and Westmexs of the world — long since liquidated and delisted from the ASX.
Most of the companies they raided just didn’t generate enough cash to finance the raiders’ debts. Once the stock bubble burst, and the market reverted to fundamentals, there was nothing left to prop up their empires.
Since that time, there have been many other booms and busts. The dotcom bubble…the Asian currency crisis. And, of course, the big one — the subprime disaster unleashed a decade ago.
What does survive these troughs, though, are companies that generate cash. Companies that haven’t borrowed too much. Companies that can grow their earnings intrinsically. That is, those companies that don’t buy growth by continually acquiring other companies.
These companies are usually the ones that pay their shareholders a reliable and growing dividend. And they’re the companies we’re continually on the hunt for at Total Income.
All the best,
Editor, Total Income