If It looks Like A Bear, Sounds Like A Bear, and Feels Like a Bear…:
PROFESSIONAL’S VIEW – FEBRUARY 2016
Last month we wrote the following: “In our opinion, a market correction is a near certainty in 2016. It’s just a question of when, and by how much. And will a correction turn into a full blown bear market? We’re certainly due one.”
Silly us. The graph below clearly shows that we’re already in one.
For some reason others are in denial, clutching on to various definitions of a bear market that insist upon the 20% fall in a market occurring within a two month period, and so on. To us that’s a bit like looking up as a half-ton bag of sand is about to land on you and discussing whether it’s come from Travis Perkins or Jewson. Best take evasive action first – detail can be analysed later. If the highs are consistently higher, and the lows are consistently lower, there’s only one direction that is dominant and you’re not going to be very thankful if you are invested in a FTSE tracker. Yes, it will be cheap, but it will just be a cheap way of losing money, until the bear turns of course. The crucial question, therefore, is when will this be?
This is where the hindsight fund would come in useful as we could be invested in it with 100% of our assets. Sadly, it doesn’t exist. We will only know that a bear has turned into a bull after approximately the same length of time as it has taken for the graph above to identify the current bear. In other words, the highs will need to get higher and the lows will need to get higher too. It feels a bit of a way off just yet. Let’s look at some of the obstacles in the road ahead.
It is worth stressing here that one sees obstacles in the way by looking forward and not by being fixated by data that is backward looking – Janet Yellen take note. We said at the time that we considered the interest rate rise in the US last December to be a mistake as leading indicators were pointing to a slowdown approaching. It hasn’t taken long for this to be becoming clear.
China, Deflation, Global Slowdown, Geopolitics, Cyber Crime etc etc:
That’s quite an impressive line-up of potential headwinds. It’s not all bad though. On a positive note, the evenings are getting lighter.
We can see from the graph that there are regular rallies in which opportunities exist to make some money, but sentiment is a powerful adversary. Of the two problems listed above, deflation and geopolitics would be the most significant as a longer term threat. China, the global slowdown and cybercrime could, to varying degrees, be seen as more temporary and controllable risks. Having said this, each is inter-related to the other to some extent.
“The Last Time It Was Like This? Just Before WW2. And Before That? Just Before WW1”:
This cheery observation was made by BCA’s Geopolitical Editor, Marko Papic and refers to the state of multipolarity that exists in the world at the moment. For better or worse, the USA has been the global hegemon (leading influence) in the last thirty or forty years, but now that Russia has rediscovered its nationalism and China has quickly emerged as the 2nd biggest economy in the world and the dominant hegemon in Asia, which has coincided with the US withdrawing from the Middle East, a power battle is developing which does not bode well for the stability of markets.
A currency war is virtually upon us already, with the Yuan, Yen, Dollar, Euro and Sterling all playing musical chairs and trying not to be the strongest when the music stops. At times of crisis, the Yen and Dollar are traditionally the currencies under which to shelter, but a strong currency in each case causes domestic problems that respective governments are desperate to avoid.
A strong Dollar usually goes hand in hand with weaker commodity prices and expensive debt repayments for the emerging markets, so these are two areas we continue to avoid. The fact that the Bank of Japan have just announced negative interest rates shows just how important a weak Yen is to their plans.
Last month we predicted that this year would be characterised by markets waking up to the fact that central banks were out of ammunition. True enough, markets responded in junkie fashion when the Bank of Japan gave them a short term hit of lower rates, but their rush is likely to be short lived. What happens when they want more next time and it’s not there? Cold turkey is an unpleasant medicine, apparently.
Hands Up If You’ve Lived In A Deflationary Era:
We didn’t expect to see any raised. China’s biggest export at the moment is deflation and the global economy doesn’t quite know how to handle it. More importantly, the world’s policymakers don’t really know what to do. We see this as probably the biggest threat in the coming months, as people can argue all they like about whether we’re headed for recession or not, or point to improving order books, but if those orders are being delivered at a reduced price because deflation determines that you can’t put your prices up, then your profits go down.
And if your profits go down, your share price goes down. And if too many share prices go down that makes a market and a slowing economy. And if your economy is slowing and your central bank can’t help you, a correction in prices and projections takes place. And that’s where we think we’re headed.
It’s not all doom and gloom as rallies can last for three to six months, allowing plenty of time to reposition and make some profits, but for now we’re going to play it safe and treat any rally with suspicion, preferring to play safe and let others play the “buying opportunity” game in the short term.
Sources: BCA Research – January 2015
The value of investments can fall as well as rise and past performance is not a guide to the future. The information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion.