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Making a bear market more bearable

4 April 2020 |Insights
Learn how unlocking the value of your investment portfolio using a margin loan can help build wealth and achieve your financial goals on a chart background.

Making a bear market more bearable

4 April 2020 |Insights

David Robertson, Head of Economic and Market Research, Bendigo and Adelaide Bank

COVID-19 has been the sole driver of the markets this year, being the ultimate ‘black swan’ event. Completely unexpected and unpredictable, it has driven a wave of fear through stock markets and every financial asset class. It also presents the immediate prospect of a deep global recession. In the face of this severe disruption, what can we observe about the current economic and financial landscape that makes this reality more bearable?

There are numerous aspects of this virus outbreak and its impact that make it completely unique. Contrasting with SARS in 2003 and similar health crises in the past, the fact that COVID-19 has the attributes to spread so quickly and indiscriminately means all countries face the same challenge. No one is immune to its impact.

The influence of government policy

It was thought the GFC would be a one in a 100-year event. However, we now face closed borders, social distancing and business slow down. The economic impact is therefore much greater than the GFC. Central banks have cut rates to zero almost everywhere, a control measure not required in the GFC. So with monetary policy ‘all-in’, and no central bank ammunition left other than quantitative easing, we turn to governments for ‘last resort’ support - and they have delivered. In Australia this aims to help businesses for six months and provide wages subsidies for impacted employees. It may even be enough to bring forward a bear market hibernation too.

The health and economic challenges of COVID-19 are indiscriminate around the world. However, countries that are equipped with better health systems and stronger fiscal positions going into the crisis will no doubt recover more quickly. In the case of Australia, having ‘net debt to GDP’ of less than 20% at the end of 2019 has made our fiscal response far more affordable. In addition, the government response of around 17% of annual GDP including the latest wage subsidies has been larger than anyone would have predicted a month ago.

Market whiplash and dollar volatility

The markets have just experienced some of their most extreme volatility on record. The Aussie dollar was above 67c against the USD for much of February, but collapsed to 55c in mid-March, before a quick return to 62c.

Meanwhile stock markets took less than three weeks to record the fastest transition in history from bull market to bear. During the GFC the ASX200 fell 55% but it took 18 months. The 39% fall since the market’s high on 20 February this year has been as rapid as it has been unnerving. Nevertheless, the tentative retracement since the low of 23 March does give some hope.

Looking beyond the bear cave

This environment is not one for making bold forecasts. Even the Federal Budget has been deferred from May to October because forecasts were judged to be futile. However, I offer three observations that may make the outlook slightly less grizzly. This is despite the unknown duration we face for this health crisis, and therefore the unknown length of the economic downturn:

  • Every bear market and crisis in history has been followed by a recovery - although some recoveries have taken longer than others to break the previous peak;
  • Unlike the GFC or other crises that were caused by investment imbalances or irrational exuberance, this was caused by a virus. We can presume that the virus will have been ‘controlled’ by a certain date in the future; and
  • When considering stock market investments and superannuation, the longer the time horizon, the less prominent bear markets appear against the longer-term uptrend.

The duration of stock market corrections and crashes is never predictable, and so this event has no predetermined end date. However, to quote Warren Buffett, “Our favourite holding period is forever.” Buffett became one of the world’s most successful investors by concentrating on valuations and returns over the cycle. It’s always worth remembering cycles include bull and bear markets.

Call Leveraged on 1300 307 807 for more information about how margin lending can enable your future investment decisions.

Things you should know

Gearing involves risk. It can magnify your returns; however, it may also magnify your losses. Examples are for illustration only and are not intended as recommendations and may not reflect actual outcomes. Past performance is not an indication of future performance. The information provided in this document has not been verified and may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.

Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). This information is correct as at the time of issue, and is for general information purposes only. It is intended for AFS Licence Holders (or authorised representatives of AFS Licence Holders) only. It is not to be distributed or provided to any other person.

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