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GLOBAL MARKETS PLUNGE. OIL PLUMMETS.

It has been a disasterous few weeks for Australian punters. Two weeks ago the ASX200 stood at 4602.90. After Friday’s 4% plunge it had dropped to 4105.40, a drop of 500 points, or 11% – putting it officially in correction territory.

Fear is gripping global markets, with indices around the world falling as the US looks like it could head straight back into recession. Europe is a basket case, with one country after the other hitting a point of no return with unprecedented levels of debt. 

I know what you’re thinking: ‘I’ve got to get out before it gets any worse.’

While we’re hardly immune to what’s going on globally and market volatility will continue for some time, we are not the USA. Nor are we Europe. The aftershock of current global market gyrations is sure to be felt on our shores, but that doesn’t mean that you need to sell your entire portfolio in a panic. China’s ongoing growth and demand for raw materials will fuel future growth at home, with many emerging economies also experiencing strong growth.

Anyone who has invested over the past 10 years would have experienced the panic of the market sell-off. Fear grips the market and billions are wiped off the value of sharemarkets globally. Of greater importance, large chunks of your own personal wealth disappear without a trace.

The tech wreck saw markets plunge almost overnight as euphoria for IT stocks wore off, followed closely by the 9/11 panic. More recently we had the fear surrounding the GFC, which saw global markets plunge in 2008 with no apparent bottom in sight. And for those who were around in 1987, you’ll never forget the 20% one-day plunge in October.

But there’s always a bottom. Well-managed companies continue to make profits. The key for the savvy investor is to refrain from dumping quality stocks in a panic at the bottom.

Finding the bottom

Finding the bottom is another matter altogether. It’s important to note that each bear market is different and it is impossible to pick the bottom with any degree of accuracy.

One thing’s for sure though, market declines rarely finish on days that see panic selling, such as Friday’s 4% walloping of the Australian market. Further volatility on international markets overnight points to even more pain throughout the week for Australian investors.

If we look back at recent crashes and subsequent bear markets, it is clear that panic selling usually signals that a lower low is in store, even if there are rallies along the way. The days on which previous bear markets registered their lows were nothing like the crash on Friday and the ultimate bear market low wasn’t found until much later.

 

 Bear market  Years  Date of plunge  Date of the bear market low  Weeks to hit the bottom
 GFC  2007-2009  29/09/2008  6/3/2009  23 weeks
 9/11  2001-2003  14/09/2001  13/3/2003  78 weeks
 ’87 crash  1987-1987  19/10/1987  4/12/1987  6 weeks

 

March 6th 2009 was the lowest day of the ‘GFC’ bear market of 2007-09, ostenibly the worst slide since the Great Depression. The market fell just 1.3% on that final day of the bear market, almost 6 months from the real panic selling of late-September 2008.

The bear market following 9/11 took even longer to finally reach a bottom. Although it initially recovered its losses three weeks after the event, it wasn’t until March 2003 that it finally hit its low – some 18 months later. Just like the bear market low of 2009, the last day of the 9/11 bear market was uneventful, with the ASX200 falling just 0.7% to 2700.40 on 13th March 2003.

If history is anything to go by, the bigger the crash, the faster the bottom is found. During the Crash of 1987 when the Dow dropped 22.6% in a single day on October 19th – and then bounced 5.9% and 10.1% on the following two days – it took just six weeks to finally hit the bottom on December 4th 1987.

What’s most concerning about the current correction is that when the 2007 crash began, the US deficit was $200 billion, the Federal Reserve’s Funds rate was 5.25% and no stimulus packages or bailouts had occurred. Today, the deficit stands at about $1.4 trillion, interest rates are effectively at zero, the US public won’t stand for any more bailouts and the US Congress is reluctant to approve more stimulus. And while we aren’t the US, as the world’s biggest economy what happens there impacts the rest of the world.

However that’s not what is important right now. What investors need to do is to calmly review their investments and derisk their portfolios. Derisk, derisk, derisk – we can’t stress that enough. In bearish conditions, you do not want to hold a portfolio overloaded with penny stocks, or high risk miners. As a case in point, check out the top ten losers on the ASX200 on Friday:

  #FOTO:1233:381#

Whether or not these stocks can make up these losses is irrelevant, what investors need to consider is whether the losses can be magnified should the market push lower. And more importantly, whether your risk profile matches the stocks’ risk levels – i.e., can you afford to lose the money you have invested in risky shares.

To sell or not to sell

You really need to analyse why you want to sell. Is it simply because everyone else is selling? Because of the negative news that is flowing out of the US and Europe? Or is it because the fundamental outlook for the stocks in your portfolio has changed?

Sure, the outlook for some Australian companies is far from rosy. It’s no secret that retail and banking are in trouble. Australians have stopped spending, banks around the world are facing a rise in the cost of funding and bad debts are on the rise.

But not all companies are set to suffer. In fact, market plunges can present fantastic opportunities for those who remain calm and manage their investments in a sensible manner.

Your approach to managing the market turmoil may change depending on your circumstances, be it novice investor or long-term investor. Novice investors and those in for the long term shouldn’t succumb to the hysteria and panic. Markets have always suffered downturns and have always bounced back, it’s just a matter of ensuring that you don’t have all your money in a handful of speculative stocks. Remember the wise words of Warren Buffett: ‘Be fearful when others are greedy, and be greedy when others are fearful,’and Sir John Templeton: ‘The time of maximum pessimism is the best time to buy’. Bargains are sure to emerge amongst oversold high-quality companies during the market panic. You simply need the courage to buy.

Buying opportunities

During the shakeout many quality stocks will be oversold, presenting great entry points in companies whose outlook remains bright. As you’ll see from this week’s ‘Broker Buys’, brokers have been busily placing buys on defensive stocks like Wesfarmers and Coles over recent weeks, as well as CSL, Cochlear and Telstra. Some miners too – although juniors are noticeably absent – with the ever popular Atlas Iron (Credit Suisse & Merrill Lynch) and Coal & Allied (Citi, Deutsche, UBS, Perpetual & Credit Suisse) also featuring strongly in broker buys over the past week. There’s even a retailer in the mix, with several brokers (RBS, UBS, Deutsche) bullish on Kathmandu’s prospects after recently reporting a 36% profit increase.

Of course, you will most likely need to let go of some stocks that present a significant risk to your portfolio. Just take a look at the top 10 shorted stocks on the ASX and you’ll see just how unpopular retail and media stocks are, with David Jones, Harvey Norman, JB Hi-Fi and Fairfax all bet against by the shorters. And as much as you love that junior miner that is set to soar, be wary of untested miners in these conditions.

The important point is not to panic over the coming weeks. Companies keep making money, markets recover and good investments are made by those who are astute and remain calm. Investing is a lifetime activity, and this current wave of volatility is all part of the journey. 

>>Back to the newsletter to view other articles – August 6th 2011

 

Please note that this column should not be construed as advice. TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.