‘Mu­sic stopped, party was over’

The Weekend Australian - - BUSINESS REVIEW - AN­DREW WHITE

For many the 1987 crash, the big­gest ever one-day fall in the Aus­tralian share­mar­ket, was the be­gin­ning of the end. Thirty years ago, a lethal com­bi­na­tion of high in­ter­est rates and ex­ces­sive lever­age used to buy over­val­ued stocks wiped out spec­u­la­tors when the Aus­tralian mar­ket fell 24.9 per cent on Black Tues­day, Oc­to­ber 20, 1987.

It also set the ball rolling against a gen­er­a­tion of cor­po­rate raiders such as John El­liott, Alan Bond, John Spalvins and Robert Holmes a Court, who rode to fame and for­tune on the back of sweep­ing eco­nomic re­form, tech­no­log­i­cal ad­vances and easy money fu­elled by the float­ing of the dol­lar and the open­ing of the bank­ing mar­ket to for­eign com­pe­ti­tion.

While they sur­vived the ini­tial shock of the crash, it ex­posed the flaws in the cor­po­rate struc­tures that, along with ris­ing in­ter­est rates, would even­tu­ally lead to their em­pires un­rav­el­ling.

But the way El­liott, the chief ex­ec­u­tive and driv­ing force be­hind El­ders IXL, saw it at the time, the panic sell­ing on Black Tues­day, Oc­to­ber 20, was an op­por­tu­nity. It knocked out a cru­cial im­ped­i­ment on his path to “Fos­ter­is­ing” the world and pro­vided a buy­ing op­por­tu­nity.

Re­turn­ing from his over­seas hon­ey­moon as the mar­ket was about to go into melt­down, the then pres­i­dent of VFL Aus­tralian rules pre­miers Carl­ton or­dered the El­ders IXL su­per fund to pick up some stocks at knock­down prices.

“I thought it was a gross over­re­ac­tion. We ac­tu­ally made some good money in the months af­ter that,” Elliot tells The Week­end Aus­tralian, as the 30th an­niver­sary of the crash ap­proaches.

More sig­nif­i­cantly, it ended an au­da­cious bid for BHP by West Aus­tralian raider Holmes a Court.

El­ders IXL was then the sec­ond-big­gest com­pany in the land, with in­ter­ests across brew­ing, agri­cul­ture, min­ing and food pro­cess­ing, and it had risen to BHP’s res­cue by tak­ing a 19 per cent stake as part of a cross-share­hold­ing deal that stalled the Holmes a Court bid.

But when prices crashed, Holmes a Court’s fund­ing evap­o­rated and he switched from ag­gres­sor to vendor, sell­ing a swag of as­sets to keep the em­pire afloat.

“The crash took Holmes a Court out of the game and that al­lowed us to work out how to un­wind things with BHP,’’ El­liott, then the chief ex­ec­u­tive and chair­man of El­ders, says. “And we got the money we needed to ex­pand our brew­ing busi­ness.”

It was the later un­wind­ing of the cross-share­hold­ing that brought El­liott un­done. When El­liott and a group of El­ders ex­ec­u­tives used Har­lin Hold­ings to buy the shares held by BHP, Na­tional Com­pa­nies and Se­cu­ri­ties Com- mis­sion chair­man Henry Bosch or­dered them to make a full bid. They ended up with 55 per cent of El­ders, but the debt taken on to fund the bid sunk Har­lin as in­ter­est rates rose to 18 per cent. El­liott re­signed in 1990.

Some, like fund man­ager Ge­off Wil­son — who was broking Aus­tralian stocks in New York on Black Mon­day, as it was in the US — see some par­al­lels with con­di­tions then and now.

“I went out for a drink on Fri­day night to cel­e­brate be­cause I thought I was see­ing his­tory be­ing made,” Wil­son says of the 108point fall in the Dow — then the big­gest one-day points fall since 1929 — on the trad­ing day be­fore Black Mon­day in the US. “Lit­tle did we know what was com­ing.”

The US mar­ket had al­ready fallen 9.5 per cent in the week be­fore and Wil­son says there seemed

to have been a col­lec­tive re­think over the week­end about the long bull mar­ket run, such that by Black Mon­day ev­ery­one wanted out. “That trig­gered a 508-point, or 22.6 per cent, fall in the mar­ket, wip­ing out $US500bn of value, and trig­ger­ing mar­ket plunges around the world, in­clud­ing Aus­tralia, the fol­low­ing day,” Wil­son says.

“Very sud­denly the mu­sic stopped. To me it looked like the fi­nan­cial sys­tem was dis­in­te­grat­ing be­fore our eyes.”

But if any lessons were learnt from the crash, they have not elim­i­nated the risks that it could hap­pen again. Wil­son reck­ons the ex­cess liq­uid­ity driven by cen­tral bank re­sponses to the global fi­nan­cial cri­sis leaves mar­kets vul­ner­a­ble to ris­ing rates. Share­mar­kets are trad­ing on val­u­a­tion mul­ti­ples above their his­toric av­er­ages and ex­change-traded funds could prove to be the mod­ern equiv­a­lent of the port­fo­lio in­sur­ance that ex­ac­er­bated falls in the mar­ket in 1987.

“The mar­ket had been in­cred­i­bly strong and in early 1987 ev­ery­one was say­ing the mar­ket was ex­pen­sive, but it kept go­ing up,” Wil­son says.

“It is sort of like now — ev­ery­one thinks the mar­ket is a lit­tle bit ex­pen­sive — but back then it goes up an­other 45 per cent (be­fore the crash).”

Spalvins, who as early as late 1986 had called the mar­ket ex­pen­sive and pre­dicted a crash, doesn’t see any par­al­lels in to­day’s mar­ket. “My ar­gu­ment — 87 ver­sus 17 — is that the con­di­tions are en­tirely dif­fer­ent,” Spalvins says.

“In­ter­est rates are dif­fer­ent for hous­ing,’’ he says, not­ing that mort­gage rates were al­ready at 14 per cent when the mar­ket crashed, and kept ris­ing through 1989. Per­haps un­sur­pris­ingly, both El­liott and Spalvins urge cau­tion. “Can you imag­ine what would hap­pen to hous­ing, which is al­ready ex­pen­sive, if rates went from 5 per cent to 7 per cent?” Spalvins says.

El­liott says it is the prop­erty mar­ket that’s “a bit over­done”.

“I think right now I wouldn’t be in too much debt,” he says.

“You could get into trou­ble. When the econ­omy picks up, and if in­fla­tion picks up with it, in­ter­est rates will have to rise.”

As for shares, Spalvins says con­di­tions are nowhere near as ripe for a fall: “The mar­ket is in fact 20 per cent be­low where it was 10 years ago, whereas in 87 the mar­ket had dou­bled and tre­bled in five years.”

In 1986, Spalvins backed his view that the mar­ket was ex­pen­sive by tak­ing out a short po­si­tion. But the mar­ket kept ris­ing strongly through 1987 and, un­der pres­sure from his board, he closed it out.

His con­glom­er­ate Ade­laide Steamship sur­vived and went on to take over Ron Bri­er­ley’s In­dus­trial Eq­uity, win­ning own­er­ship of Wool­worths, and be­came the big­gest pri­vate sec­tor em­ployer with it. But high rates and dev­as­tat­ing re­ports by Bar­ings an­a­lyst Vik­tor Shvets and Bri­er­ley him­self ex­posed the high debt lev­els across the group and trig­gered its col­lapse into bankruptcy in March 1991.

John El­liott


For­mer Ade­laide Steamship chief John Spalvins, who in 1986 pre­dicted a crash, doesn’t see any par­al­lels in to­day’s mar­ket

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