Investment strategies to navigate a bear market

The unintended inflationary consequences of these decisive monetary and fiscal policy incentives were elevated by supply chain challenges across the globe with the Ukraine war adding another layer of uncertainty.

The inflationary concerns have led to a change in policy for Central Banks as they revert to a tightening policy to try and bring global inflation under control by increasing interest rates. As a result, the global growth slowdown has naturally unsettled investors with developed markets decreasing around 20% from their peaks which is theoretically classified as a bear market.

Bear Markets & Investment Strategies
Market downturns provide investors with the opportunity to buy good shares at cheaper prices. Staying invested maximises your chances of reaching your investment goals. Some of the investment strategies to keep in mind during a bear market include:

1. Diversification
Diversification helps minimise some of the loss from any sudden downturns. This means having a wide range of stocks within your portfolio to ensure that you are not overly exposed to one specific sector.

In an economic downturn, investors need to shield themselves as much as possible by including defensive stocks that are able to better perform and deliver during a downturn.

2. Quality & Defensive Stocks
Bear markets can offer opportunities for investors looking at buying quality fundamentally sound companies with rock-solid balance sheets at lower prices in hopes of realising longer term gains. There are sensible stocks that are more likely to outperform the wider market and are best suited to deal with the inflationary environment.

If a company’s valuations appear attractive, then you need to buy. Looking at a company’s Earnings Per Share “EPS” is a great measure to determine the company’s profits relative to its share price. A high EPS means that the company is making a lot of money relative to its share price, which is a good indicator of a healthy company with an undervalued stock. These types of companies are often good buys in a weak market.

Defensive stocks are blue chip companies that generate stable earnings irrespective of economic conditions. These include products and services that have inelastic market demand such as food items, utilities, healthcare, telecommunications, etc. In addition, defensive stocks generally pay out dividends every quarter, making them ideal investments for those requiring a dividend income.

Defensive stocks to consider include:
Consumer staples are a safer bet during any economic downturn. Supermarkets are generally better positioned to maintain their sales as people need to eat and buy general household items regardless of economic conditions or their financial situation. The buying power of the larger firms will prove critical amid rampant inflation. Supermarkets offering their own brand products stand to benefit the most as cost-conscious shoppers will need to turn to cheaper alternatives.

Alcohol and Tobacco companies as consumers will keep buying cigarettes and alcohol during harder times even if it means shifting to cheaper alternatives. During the 2008 financial crash, alcohol sales barely nudged down.

Healthcare tends to be a relatively resilient sector during a recession as they produce medical devices, provide medical care and services needed even when the economy is in bad shape. It’s better to opt for established players with cashflow rather than smaller start-ups.

Telecommunications is also a safer bet. Mobile data and phones are essentials and needed by all to keep in communication with the rest of the world.

The Commodity sector has been worst hit and offers good value for the longer-term investors.

Holding companies that hold interests in a diversified set of companies should also be considered as there is a range of different sectors that they invest in such as banking, financial and medical sectors to name a few.

3. Dividend Paying Stocks
Dividend-paying stocks also become more attractive in a downturn, but tread carefully and pick those with sensible payout ratios to ensure the company can maintain dividends when times get difficult.

In difficult conditions, good properties become available, and cash flush companies tend to pick them up at extremely good prices. Property Real Estate Investment Trusts “REITs” earn their income from property leases, which means that have a relatively stable income stream and are adjusted accordingly to keep up with inflation. Due to the huge exposure to a diverse range of high-quality real estate, REITs pay a competitive taxable dividend income.

4.Market Timing & Gradual Investing
Market timing is always difficult, we unfortunately don’t have a crystal ball. Take advantage of shares at lower prices even if the prices decrease further. It’s important to invest steadily over time. While you can buy more during a bear market, do so gradually. That way you capture the gains of an undervalued market while not going in too heavily in any given direction. This also lowers your average cost price paid to purchase the shares allowing you to enjoy the profits once the market starts to recover. Rather than time the bottom of the market, use the principle of rand-cost averaging to lower your cost price and limit your total exposure if there should be another downturn. Consider possibly setting up a monthly debit order that encourages you to save and gradually grow your portfolio.

One of the worst things you can do during a bear market is to panic and sell your shares. Hold onto your existing investments and look at opportunities to buy shares at a lower price. Also consider switching any non-performing shares with stocks that are cheaper and offer further growth potential.

Summary
With the equity market, it’s best to focus on the long-term horizon and manage your exposures, limiting risk and ensuring sufficient diversification. Remember to aways focus on the future potential rather than what is being delivered today.

While the global growth slowdown is in line with a bear market, it is important to remember how markets work. Despite the poor market sentiment associated with bear markets, the current bout of weakness should be contextualised against the strong long-term performance of the market and weakness in high quality counters should be used as an opportunity to appropriately add exposure to high quality businesses.

While volatility levels are likely to remain elevated for 2022, the longer-term trends for equities remain bullish and as such investors should avoid emotional reactions to market sentiment and news.

If you would like assistance with managing your portfolio or if you need any advice, please contact us for more information.