Bear Markets and Portfolio Housekeeping

February Reporting Seasonv, COVID-19 (Coronavirus) and Oil price wars impacts on global markets. FNArena Editor Rudi Filapek-Vandyck explains how these events have impacted markets and what investors should do to update their portfolios ready for the next market cycle.

[00:00:06] Here we are on Rudie Tuesday. Welcome back to the year 2020. And what a market to welcome you back, Rudy. [00:00:11][5.1]

[00:00:13] And it is Tuesday. I can confirm that one. [00:00:15][1.9]

[00:00:16] It definitely is that you've brought brought back with a bang. Possibly. My thought was always we've seen it over a decade. Is this the end of an 11 year bull market or have been a couple of bear markets in the same time horizon? [00:00:30][13.8]

[00:00:31] Yeah, that's that's that's the question that people would like to know, don't they? May I? I have this problem with commentators and analysts in financial markets always adopting a very, very simplistic way of analyzing things. And of course, one of the most I think most I mean, let's let's not put any any delay labels on. But one of the one of the least intelligent ways I always believed of analyzing the share market is by by doing it through strict rules that have no foundation other than someone came up with them at some time. And so we have this definition of a bear market. It only applies when an asset price goes down by 20 percent or more, which essentially means if it's nineteen point 9 9 9 9 9, it's officially in Alabama. I tried to go a little bit more intelligent about things, and I do think that if you are a little bit if you are adopting the more intelligent way, you get better messages and better insights in the share market. I mean, if I go back to the lost really big bear market, it was just a wonderful from 2007 until March 2009. That obviously was it was a very big one. It's everyone calls it a bear market. It was Australia down by more than 50 percent. But if I overlook the period since then and today I spoke at least three older bear markets and they are really, really very obvious. If you look at it, the price charged first in 2011, we had the problem that the eurozone, of course, was in trouble or seemed in trouble. And it it seemed that the problems at the time were quite existential. I mean, the union might, might, might break up and no longer survive. And that was quite serious. And you can definitely see that that period on price charts. And what I did this week is I looked at monthly performances to also get an idea to give investors a little bit of an idea what happens through those periods. And for example, in that period in 2011, it was it was it was it was a succession of red gold price boss, which means that at the end of every month, even though the share price go up and down, of course, with the end of every month, indices will lower than at the beginning of each month. And that's that's a that that drains sentiment. And ultimately, of course, we came out of it. Then we moved on. We had a rather splendid time in between, then in 2015 again. And I'm certain that all people will remember that one. We had a quick run up because the RBA was cutting interest rates and that sort of stopped in March, April. And after that, we had a gradual and consistent slide downwards, which culminated in a similar, similar move as we as we are experiencing this week in February 2016. And that was not the start of a new bear market. That was the end of it. And that bear market number two. And now, of course, the one will be nobody. Nobody forgets that one that lost the final four months of 2018 when we were going through a period that is also similar to why what we are doing now. And it was just relentless until until Christmas arrived. So the definition of a bear market. I mean, everyone can have a definition. I think the most the most appropriate approach is the ones the one I just described. And that means we are now in bear market number for. Since the GFC and conclusion of a one to draw from this is, of course, that while central bankers around the world have this idea of themselves that they have made the world safer and more stable, the succession of benchmarks that I just described is showing us. Otherwise the world has become less stable and more vulnerable to shocks and to interruptions. One of the conclusions that investors can draw, of course, is that if bear markets now become so regular, then of course, the conclusion is that it's all it's all temporary and ultimately we seem to find a solution to get out of it. That is one conclusion we can draw from the past. In the short term, of course, is that we'll never know how long it exactly lasts. I mean, while the. The one in twenty eighteen was about four, five months each. Around that around that time span. That is still annoying. But that's sort of a bitch that we can costs mentally. The one in 2015 was a lot longer if you really go from beginning to the end. It's probably 10 months, maybe close to a year and that really drains you. So might my advice to investors would definitely be. Don't be impatient. Patience is now really, of course, meant that you can always decide this is a market. I do not want to be in. And then you go on the present in cash and then you will face a problem to get back in at some point and timing your full entry into the sharemarket. This is something that's much easier done in hindsight than it is with foresight. But for those who are on the market, and I'm certain a lot of people would have been taken by surprise. By what? By the by the extreme volatility we are experiencing in February and March 2020 is that patients all of a sudden becomes a virtue. Having said so, one of the pieces of advice I always give to people, I gave it in 2018 and I'm doing it again this year is that this is an ideal period to get rid of the rubbish in your portfolio. And you should. I mean, two things that do not matter this time around. In every bear market, is that the price you paid for neistat. And an excellent look at me. I mean what? And whether it's whether you're sitting on paper losses, of course. And you you will be sitting on paper losses. Rubbish will fall further than quality and nothing tests your portfolio as as severe, as dramatically as as heightened volatility in the bear market. So while everyone is always inclined to sit on the asset and hope for it to recover, my advice is always you get rid of the rubbish, you have cash on the sideline and you use it to buy high quality, solid growth stories that are now being priced down as well. Do they fall less than the rubbish? Yes, they do. But you will if you do this. If you follow this strategy, you will come out of this with a much better and a much stronger portfolio and a much better weaponised, if not strengthened investment strategy. That debt will be to your benefit for many, many, many years into the future. Instead of holding on to some stories that once upon a time seemed like a good idea, but they haven't really turned out to be that good. [00:08:28][477.6]

[00:08:29] That's a great insight for the portfolio and how to use that volatility to clean out the old. Now, in this volatility we had. And increased injection from the oil markets and that hit the market quite hard. It's a bit of a conundrum going on now that investors are scratching their heads and wondering how come oil prices are no good for global growth? We've got some insights that, aren't you? [00:08:53][23.8]

[00:08:54] Yes. I made a reference back to 2016 when people also forgot that lower oil can be can be quite negative. That's to waste. Why? Lower oil are a negative also this time around. One is that the US economy has increasingly become dependent on what the oil and gas industry does in that country also in terms of investments and things like that. If that industry is now being decimated by the Russians and the Saudis, that will have an impact on the economy and economic growth and labor market, et cetera, in the US. But more importantly for Australian investors is that if we if we go back to the GFC, then we will remember that one piece of negative news after a while dragged out more negative news and then more negative news. And that's why the GFC lasted so long and wide, became so, so devastating in the end. The risk that we are facing now is that what what initially started off as sharemarkets being quite highly valued and then all of a sudden being interrupted by a virus that started spreading. Now we get the Saudis and end and Putin in Russia basically starting a price war in oil. The problem here is that. As the world has picked up more and more yielding instruments that those it does mean a thriving industry in the US, which is high yielding corporate debt. A lot of that high yield and corporate debt is actually linked to very weak balance sheets of quite questionable companies into oil and gas industry in the US. Now, if those companies are now going to be wiped out, there might be a flow on effect that goes much broader than simply a few Italy belatedly frackers in on U.S. soil. And that's obviously the problem that that financial market is not grappling with. Are we now going to see bad debts wise in banks or who holds those corporate bonds? Who owns them? Who will be exposed to it? And before you know what, your also together get a widening. And that's obviously also happening, a widening in the yield gap between high yielding and low yielding products. And there's all kinds of negative stuff doesn't come for it. And it will put market participants on tenterhooks. And it makes people nervous because this is this is a process as it develops. We don't know what's the next piece of negative news that could potentially be around the corner. [00:11:58][184.0]

[00:12:00] Well, that's a good point, to look at the portfolio and say, well, we've got covered 19 coronavirus. We've had a nother bull market cycle, the fourth since the GFC. Quite possibly. And then we've got the oil shocks coming in. So if we're reassessing the portfolio, what would you be? What would you are in through this part of the cycle? [00:12:19][19.3]

[00:12:21] I have been I mean, I'm actually the funny thing is that, as you know, Christopher, I've always been a big fan of of of what would I call the quality or whether stocks in the sharemarket. [00:12:32][11.6]

[00:12:33] And given I look back and I saw four bear markets over the past 11 years or so, I thought and that's just another reason to own stocks to the not highly leveraged to the economic cycle. We are in this low growth, low inflation, low bond yielding, low interest rate environment. And I do want to employ investors again. That is not going to change anytime soon. So in this environment and I know people will always get hope, get hooked up on high valuations and all of that. But I'm still I would still be maintaining that the high quality performance in the sharemarket, which includes the likes of CSL and investment. And you can also throw in a I wish to go to Leisa and the Goodman Group, Carsales, Reequip Technology 1 0, you name it. What many of my of my fans stocks are potentially labled. I would still maintain that those out of the likes of stocks you have in your portfolio in general terms with investors should realize now is that the market will probably start preparing for a recession, potentially for a global recession. That means that earnings forecasts are now going to fall. Price targets will fall. Valuations are going to fall. Companies are going to withdraw their guidances, if not downgrade them. And that means that you are now going to discover in your portfolio which companies are much more susceptible to economic growth, which are less still the ones that are less. So to a very large extent linked to what I mean to this series of stocks I just mentioned. But there's a bit more, of course, and a cheaper price does not always equal low or lower risk. And a cheaper share price does not prevent companies from coming out with bad news. And people should should never forget that one owning high yield stocks is probably equal to above average risk. And that's another element that in particular, people who like you, stocks in a market should also take take on board. I personally that's what my analysis tells me from for many, many years. The best investments are always when you combine growth and yields or yield and growth and not each separately. And that also applies to a company. It only overshoot 2 or 3 percent, but still has the growth. If it goes hard enough, it'll be 4 or 5 percent in a few years time. And that's how investing in the sharemarket should work. But I do know that's that's seldom how it works with people who want to yield immediately. I do have my I do have my personal favorites in the yield space. And they're probably listening to names like a like a Transurban, a fever weed. That was a.. And a few other ones. What these companies have in common is that they will increase their dividends year in, year out, and that by default means they will prove to be better investments than companies that can only hold on to that to the yield debate. In years past for the year ahead. [00:16:12][218.1]

[00:16:14] That's a very good summary of how to apply that to the portfolio. I want to look at to add, remove or looked at as the time presents itself. Thank you very much for those insights. Fruity Philip Van Dyke, editor of Gennarino. My pleasure. [00:16:14][0.0]

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