Being brave at the bottom of a bear market.
Normally a broad mix of overseas assets will bring exposure to economies, sectors and companies with different growth rates and at different stages of the economic cycle. Australian’s often need to invest globally due to a concentrated equity market dominated by relatively small number of banks and mining companies.
However, the global economy is far from normal. The credit crunch has triggered a global economic slowdown. Stock markets have slumped.
While global equities have performed better than Australian shares over the past year, the declines have been severe.
If investors believe in the ability of the market economy to generate economic growth in the future, then there are potential bargains to be had. Identifying the future winners at the bottom of the bear market may lead to handsome rewards for brave investors.
Since 1900, there have been four troughs in the market cycles when the annualized 10 year has been negative. On each previous occasion, the market has recovered and investors have enjoyed a sustained period of attractive returns.
While no two crises are ever the same, this may give a clear message to long term investors who are saving for their retirement. But there are caveats to be applied when using the past to predict the future; each downturn is subtly different. We may be in unchartered territory and markets may go sideways for some time.
By identifying the future winners in the stockmarket, investors may be well positioned to benefit from current conditions, as stronger companies generally benefit from the opportunities created when weaker plays downsize or exit markets.
In these times investors can choose to stay in safe havens such as cash, but this allocation may look increasingly unappetizing as interest rates fall. Recent market events have dented investor confidence to the extent that strategic allocation has become more challenging than ever. For the long term investor, the road ahead may be bumpy at times, but in the future we could look back at this period as a great opportunity to invest in high quality companies at cheap prices.
Money Management, April 9, 2009