Following 'Black Monday' a number of global markets from Australia to Zurich have entered an officia...
Following 'Black Monday' a number of global markets from Australia to Zurich have entered an official bear market.
First small-caps were hit, then mid-caps, then large-caps. Defensives have suffered along with cyclicals. Even the London Metal Exchange index is down almost 25% from the highs of May last year.
There really has been nowhere to hide.
The phrase 'entering a bear market' not unnaturally sends waves of panic through investors, although of course it might be less alarming to say 'completing a bear market'.
After all, to meet the definition of a bear market the market must have already fallen over 20%. Europe did not enter a bear market on Monday, 21 January 2008 - it entered a bear phase on Friday, 13 July 2007; we just didn't realise it at the time.
Thus, by the time most people have realised it is a bear market, it's (hopefully) almost over.
Dresdner Kleinwort reckon that today's 11.2x trailing P/E ratio for the European market closely equates to the 10.5x seen in 1990 as the recession took hold. This means that in any scenario short of a nasty recession, equities look very cheap indeed.
So is it all nearly over? That is certainly a possibility, but agonising over short-term market direction is likely to prove fruitless. Instead, investors should focus on investing in cheap, safe, high-quality companies, where as little is taken on trust and grandiose projections as possible.
In Europe, this means a focus on dividends, where cold, hard cash is generated, and coverage is good.
Our key sector to watch is telecoms: dividends are strong and growing, and the business is fairly defensive too. High-yield stocks in general should also do well as interest rates fall, thanks to their bond-like characteristics.
Moreover, although the UK may well face recession this year, most of Europe, where the excesses have been fewer, will not.
This makes it a key diversifier away from purely UK economic risk, although we would overweight lower-risk, income-based strategies.
- Chance of a persistent global bear market and uncertainty over short-term market direction;
- On the plus side, equities look cheap;
- Potential for strong dividend growth.
- Oliver Russ, partner at Argonaut Capital.
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