Bears in the woods

For the past few years investors have been hearing about the imminent arrival of bear markets. But in many stock markets across the globe, we have instead seen some quite severe corrections rather than the slow sliding grind of the bear.

Siyabulela Nomoyi, investment analyst at Sygnia Asset Management says it is important to distinguish between a bear run and a bull market correction. “Bear markets are evidenced by huge pessimism, a prolonged selloff, they are widespread, all sectors of the market are affected, investor fear factor is high, and representative key indices are down by 20% and more. In contrast, correction events are short-term, the quantum of the fall is up to 10%, and volatility is high, accompanied by frequent recoveries – in contrast to bear markets which demonstrate a drop in volatility and follow a laboured downward path.”

In recent times, there are three notable bear markets that deserve mention. “The latest was in the 2008 financial crisis” says Nomoyi. “We had low volatility, negative market returns persisted, and sell-off sentiment prevailed. The early 2000s dotcom bubble was a very clear example of a bear market, marked by notable negative returns and low volatility. And then of course there was the October 1987 crash.”

The nature of bear markets has changed over time. “Going way back in history, bear markets were less frequent but longer lasting and they could span a drawdown period of 7 to 8 years” says Nomoyi. “From around the 1950s, they became more frequent, and last a year or two at most. This evolution is probably driven by technology and the move to electronic trading, and information is now readily and instantly available to everyone.”

“At this particular time, not many regions have actually entered into bear territory” says Nomoyi. “The bear is quite noticeable in Asia, and many countries are flirting with the concept. But many markets are not yet there.”

He confirms that “China is certainly in a bear market, requiring huge intervention from regulators. Japan, in a secular downtrend since 1989, and finally turning up with some momentum from 2012, has fallen into bear territory, despite listed companies in this region actually showing increasing and decent corporate profit margins. And Australia has very recently joined this group as cheap money which lifts a market has dried up and is no longer easily accessible. Many other markets are sitting at the entrance to bear territory, stepping in and out as 2016 progresses.”

While certain sectors of the JSE, such as resource producers, are experiencing many of the characteristics of a bear trend, Nomoyi says that the JSE overall is by no means in a bear market. “The South African market, in Rand terms is instead experiencing a correction – which is a very normal occurrence in secular bull markets.

Nomoyi says that a good indicator of a bear market versus a correction is the volatility index. “The US VIX is presently very high and has been at elevated levels over the past few months – and in SA, the SAVI, which was launched in 2007, has been at an average of around 20. Currently it is at 25 which is an increase from 12 in 2014 and in this period we have witnessed two corrections: a 10% drop in August 2015 and the 12% drop from October last year till mid-January this year.”

In these unpredictable times Nomoyi says a stable approach to investing must prevail. “The tried and tested strategy of diversification, in asset classes and geographies, applies. A multi-asset fund would be the right way to go at present. Those who have not yet gone offshore missed out on the currency aspect of returns in the last year. But if you believe the Rand will weaken further, you could still put money in offshore products.”

With the US$ being strong, and the Fed possibly increasing interest rates, Nomoyi says that Rand sentiment is poor and the ZAR could see additional depreciation.

Nomoyi reviews the resource sector and highlights how it has been hammered over the past year. “The last positive rolling 12 month return for resources was in Sept 2014. This is not a good sector – except for gold, which has bounced back on recent bear market fears, also helped by improved profit margins at the producers, thanks to Rand weakness and the increased dollar gold price. We see stocks such as Harmony recovering well, but they still have a long way to go. But for those in platinum, iron ore, copper and the like – there is just too much reliance on China.”

Banks are also concerning at this time. “These stocks face some significant threats in the form of interest rate hikes and a possible country downgrade.”

Looking for some positivity in the market Nomoyi points to Rand-hedge property stocks. He spotlights the value managers who have had a punishing time since around 2011, struggling during the bull-run. “Current conditions will now favour them, and many should do better than the broad indices. But with retail clients facing an overwhelming choice of over one thousand funds on offer, it is a challenge to decide on whom to back, and to then monitor their performance. The investment decision in current markets is a difficult one.”

He also looks at the psychology that accompanies corrections and bear slides. “Retail investors witness market panic that seems to have no good reason; and they listen to market commentaries predicting bear markets that never seem to materialise. For those who are not particularly informed on the markets, this can be very concerning. So a passive multi-asset offering with some bonds, property and money market instruments could be the most sensible strategy at this time. This means investors do not have to take on unnecessary risk. And add in a large helping of patience.”

Nomoyi concludes with an insight from physicist Sir Isaac Newton, who is said to have lost around USD 3 million in current money equivalent, in the South Sea Bubble of 1720. His philosophical take on his losses goes something along the lines of: “I can calculate the motions of the heavenly bodies, but not the madness of the people.”

This article was sponsored by Sygnia.