British shares narrowly escaped closing in bear market territory last week as
one of the City’s highest-profile fund managers warned the market could
halve in value over the next two to three years.
The FTSE 100 closed at 5,413 on Friday, down 19.6% from its peak of 6,732 in
June last year. A slide of 20% is normally required before stocks are in a
bear market.
Nicola Horlick, the former Societe Generale fund manager dubbed “superwoman”
who now runs Bramdean Asset Management, urged investors to avoid UK stocks
amid fears that the Footsie could slide even further.
“In 20 to 30 years, the Chinese economy will be bigger than the US economy and
we will be ruing our inability to save rather than borrow. It’s like the
last days of the Roman empire and I believe that the current bear market
will last for at least two years, with a general economic decline over the
coming decades,” she said.
While not everyone shares Horlick’s apocalyptic view of the market outlook,
most agree that shares will remain volatile for at least six months, and
many of the signals that would normally suggest it is time to buy are not
flashing green — yet.
Company directors are glum about the short-term prospects for recovery with
business confidence falling to its lowest level since 1992 last month,
according to analyst BDO Stoy Hayward.
On Wednesday, Marks & Spencer boss Sir Stuart Rose added to the gloom by
warning that Britain’s woes would be “more of a two-year problem than a
two-month one” as the retailer announced a 5.3% fall in like-for-like sales
in the last three months.
The ratio of directors buying shares in their companies against those selling,
which has historically been a good predictor of forthcoming rallies, is
going up but is not yet a strong buy.
Seven directors are currently buying shares in their firms for every one that
sells compared with an average of four to one, according to Khuram Chaudhry
of investment bank Merrill Lynch. However, the ratio jumped to 12 to one in
January, ahead of the spring rally.
Bear markets also last an average of 35 months, according to stock market
historian David Schwartz. He said: “Historically, bear markets fall into two
categories: less severe ones that do not go beyond a 25% fall, and those
that surpass that level. My feeling is that this one is likely to be in the
second group, although I don’t expect the market to fall more than 30% from
its peak.”
There are some shreds of good news for the optimists to cling to, though,
including the fact that retail investors have been pulling cash out of
equity funds. Legendary stockpicker Anthony Bolton has always seen this as a
sign that we are reaching a turning point.
Investors pulled a net £156m out of equity funds last month, according to the
Investment Management Association, while ploughing £366m into bonds.
Overall, sales were down more than 50% on a year ago.
Optimists also point out that if you look at the FTSE 250, which has a higher
proportion of UK firms compared with the more international FTSE 100, it is
well into bear-market territory — suggesting the time to buy may be close.
Richard Buxton, head of UK equities at fund manager Schroders, said: “We have
a bit of a weird situation in that oil, mining and resources companies have
been holding the market up, even though all the other sectors have been in a
bear market for some time. If you take resources stocks out of the equation,
the market has fallen 30% since its peak last year, which means we are some
way through the bear-market cycle.”
He is not alone in thinking that the turn could come within the next 12 months
— or even sooner.
Schwartz said: “We have seen some very fast declines of late. The Footsie has
fallen by 15% since May 19. My suspicion is that we will see a rally in the
next few days, followed by another downturn that lasts until the autumn.
“However, if the market continues to fall sharply, the bottom could come much
sooner than that. Either way, I think it will start to pick up again before
the end of the year.”
So what should I do with my investments?
The temptation when faced with a bear market is to sell UK equities and
squirrel your money away in a deposit account — or invest in other areas
such as corporate bonds.
However, if you are still invested, that is probably the last thing you should
do.
Buxton said: “It is too late to panic-sell now because the market has fallen
so much already.
“I believe that the market will be higher than it is now in two years’ time,
so my advice would be to hang on if you can and to take advantage of the
weakness over the coming weeks to start drip-feeding some money into the
market.
“You will have to be patient, though. I am not expecting the market to turn in
the next three to six months.”
So where are the buying opportunities?
Buxton said: “I would advise looking at the sectors that have been hardest hit
— that’s where the opportunities usually are.
“Marks & Spencer, for example, is now a ‘buy’ as far as I’m
concerned. I also like British Airways, which has been hammered due to the
high oil price, and the retailer Next.
“However, I would hold off on housebuilders for the moment because I think
many of them will be forced to issue more shares and I think it would be
sensible to wait for that.”
Funds that invest in retailers and other British companies tipped for recovery
over the longer term include Old Mutual’s UK Select Mid Cap and Psigma’s
Income fund.
Professional investors are also turnign positive on America, which was the
first to feel the effects of the credit crunch and is also expected to be
the first to recover.
Bob Doll of fund manager Black Rock said: “We suggest increasing holdings in
large-cap and high-quality stocks, with an orientation toward growth. US
multinationals offer strong growth, high quality and are selling at
reasonable prices.”
I’m too nervous to get back into shares. Are there any other options?
Managers with the flexibility to use hedge-fund tactics should benefit from
the current market conditions.
Horlick said: “Last year was difficult for hedge funds because the market was
so volatile. Now, though, it’s a more straightforward case of spotting the
next profit warning.”
Black Rock’s Absolute Alpha fund uses the hedge-fund technique of “shorting”
with some of the portfolio — in other words it sells shares in the hope of
buying them back at a lower price.
Ben Yearsley of adviser Hargreaves Lansdown said: “The Absolute Alpha fund can
make money whether the market rises or falls, which is why it is so popular
at the moment.”
Corporate bonds also look attractive at the moment due to the dire year they
had in 2007, with many investment-grade bonds offering yields of between 7%
and 9% as well as the prospect of good capital growth when the economy
recovers.
The Invesco Perpetual Monthly Income Plus fund offers exposure to bonds as
well as equities.
But if the thought of investing in the UK stock market in the current climate
brings you out in a cold sweat, why not look further afield?
Many advisers believe there is still money to be made in commodities such as
gold, despite their massive bull run.
Yearsley added: “Black Rock’s Gold and General is still a good bet over the
longer term.”
Darius McDermott, managing director of Chelsea Financial Services, said: “Our
clients have been taking two very different approaches to the bear market.
At the lower-risk end of the spectrum, they have been buying absolute-return
schemes that use hedge-fund tactics to make money out of falling markets —
such as Black Rock’s Absolute Alpha fund.
“At the other extreme, we have seen lots of people piling into emerging market
and resources funds such as Neptune’s Russia and Greater Russia and JP
Morgan Natural Resources.”
Many emerging markets have been having a bumpy ride of late, however.
Yearsley said: “I have been buying Japan and Asia myself lately, which has
been a bit painful as Japan especially is still going down.
“I do expect it to bounce strongly at some point, though, and I think Russia
could prove more immune to the global slowdown than other emerging economies
because it does not rely on western consumers in the same way as China and
India.”
Appeal of emerging markets
Company director Gareth Horn, 44, uses Fidelity’s Funds Network to manage
his investments, including several emerging-markets schemes.
Horn, who lives with his wife Eilish, 42, a primary-school teacher, and the
couple’s sons Kyle, 17, and Izaak, 9, in Llangynwyd, near Bridgend, South
Wales, said: ‘There is a lot of negative feeling about the UK market and the
UK economy at the moment, so I am avoiding funds that concentrate on
companies likely to be affected by a lack of consumer confidence.
‘I can see there are some opportunities out there, but I have switched all
my investments out of the UK and feel it is still risky to go back in yet.’
He has diversified into countries such as China, Russia and Brazil.
‘I have several emerging-markets funds at the moment,” Horn said. “I also
plan to diversify further by investing in exchange-traded funds that track
commodities such as gold and oil.
‘I like the fact Funds Network allows me to hold a wide range of
investments and change my holdings easily and quickly.’
I switched my investments out of the UK last year, Britain
needs a conservative government that is business friendly,
controls government spending and looks to annually cut taxes
if it can. Hopefully it looks like we might be going to get that
in 20 months.
Roger, Weymouth, U.K.