Market falls may have increased in severity and pace since the start of the year, but this particular correction has been going on for some time. The FTSE 100 has been on a consistent, if volatile, lower trajectory since its peak of 7,104 in April last year. It is now hovering around lows not seen since July 2012. This, of course, is nothing to celebrate. But it does suggest that the bear market is rather more mature than some have suggested.
However, what it cannot tell us is how long it will last. The bear market following the technology bubble will still loom large in the memories of many investors, with the FTSE 100 dipping from 6,930 at its peak in December 1999 to a low of 3,567 at its trough in 2003. Yet some bear markets are done and dusted in a matter of months. The crash in 1987 had bottomed out within a month and led to an uninterrupted 12-year bull market.
Equally, aggregate figures do not say terribly much about the reality of a bear market. Over the past 12 months if an investor had been in mining and financials, they would have lost around 32 per cent and 16 per cent respectively. Those who had kept their cash in consumers, down 4 per cent or utilities, up 2 per cent, would have felt far less pain. This is a highly differentiated market. This has historic precedent; the burden of the bear market in 2000 was borne by technology companies, while the rest of the market carried on relatively benignly.
It is difficult to see what is so troubling markets at the moment. The oil price has ostensibly been the catalyst, with markets erroneously concluding that a falling oil price must mean significant problems in China.
This is not what we see. The oil market is over-supplied so the price is falling. The cartel that successfully managed the price of oil historically has been broken and the oil-producing states find themselves in something of a ‘prisoner’s dilemma’; desperately needing the US dollar revenues from sales, so producing as much as they can, but depressing the price as they do. While this is a disaster for some emerging companies, developed economies continue to be significant beneficiaries of a low oil price.
But with hindsight, any manner of reasons might be applied for the market’s jitters: the weakness of China may indeed prove deleterious for the global economy, the falling oil price may be a clear signal of failing global demand, rather than excessive supply. These reasons will only become clear later.
So what can be done? Markets will come out the other side. This is not an indiscriminate buying opportunity, but some opportunities are emerging. For the time being, we continue to avoid cyclical areas – the markets concerns are not without some justification and risks remain in certain parts of the market.
But consumer spending is healthy, employment figures are brighter and wage growth is improving. Combined with lower fuel prices, people are undoubtedly feeling better-off and are happier to spend. At the same time, companies are not as healthy with business expectations turning lower. This is shaping our stock selection; we are trying to pick up stocks in stronger areas such as consumer goods, where valuations have once again become reasonable.
Equally, while we do not expect a rapid turnaround, we wonder whether there isn’t too much complacency around inflation forecasting and expectations. Clearly there needs to be some stability in commodity markets for this to happen, but it would not take much for the figures to surprise.
There are likely to be uncomfortable months ahead for investors, but we need to keep our heads. There are risks to the global economy, but they may not be quite where people think they are.
James Mahon is chief executive of Church House Investment Management.