Bear market blues – we ask 4 questions to get you through

Written by Lisa Stanley Mann on 22nd January 2016

It’s official then. This week, the UK’s stock market turned bear.

  1. So what is a bear market?

Technically, a bear market is when stock markets fall at least 20% from a peak, over at least two months. And on Wednesday this week, the FTSE 100 share index dropped 3.5% in a single day, which put it back below its most recent high of 7000 in April 2015, a fall since then of 20%.

Today, the FTSE remains in recovery mode, continuing to claw back Wednesday’s losses. And, globally, markets have settled as well, following strong gains in Japan and even in the oil price.

So far, so volatile. With few knowing which way the wind will blow next, we ask some key questions about bear markets and how you might shield your investments from further volatility. 

  1. What caused the bear market? 

It’s certainly been a rocky start to the year and stock markets all over the world have been volatile, with Japan’s Nikkei closing on 2% down on Wednesday, yet gaining 6% today, further turmoil in China, and oil prices often down (and today up) faster than you can say Eddie the Eagle

This week oil prices hit their lowest level since 2003 – a whole 13 years’ growth removed. That’s pretty scary, isn’t it? How can that be?

The key indicator is the price of crude oil, which has been falling since the middle of 2014. Today, the price per barrel rose, but the market oversupply – thanks to the continued production from the main producers like Russia, the US, China and the Middle East region – that got the International Energy Agency worried enough to warn that oil prices could ‘drown in oversupply’, remains a risk.

  1. OK, so it’s a ropey outlook for oil. What about China?

China has been particularly volatile for the last eight months, for several reasons, not least because during the period between June 2014 and 2015 share prices there rose a massive 150%. As they say, what goes up, must come down. And again, on Wednesday this week, its yardstick index, the Shanghai Composite, closed down 3.2% on the previous day – another big fall after a 6.9% drop earlier this month and 5% in November. However, like the other indices, on the hope of global and European economic stimuli, the Shanghai Composite also rose today, by a more modest 1.25%.

Does this really affect me? Well, China is the world’s second largest economy and the second largest importer of goods and services. Its economic turmoil is clearly impacting on other economies. The financier George Soros warned in January, ‘China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.’

EEEEEEKKKK. So I might as well just bail out now and stick my money under the mattress, yah?

Actually, that could be the worst thing to do. Read on.

  1. OK, so despite what the guy from RBS said, I don’t really want to give in to rabbit-in-headlights panic selling, so what can I do to shield myself from this volatility?

The key to robust investment portfolios, whatever your personal ethics, is to ensure they are diversified enough to withstand periods of volatility such as this. You’re in it for the long-term, right, and no doubt you will have benefited from substantial gains over the past year.

If you want to take a more cautious approach, you can, however, begin to avoid those sectors that might be subject to increasing volatility, such as oil and gas. Another problem is that they constitute so much of many global indices and funds, meaning your investments could be unbalanced towards poorly-performing sectors, often without you even knowing it.

A growing theme in investment circles – and now you can see why – is looking at a company’s corporate governance as an indicator of its future sustainability and outperformance. Just take VW as an example.

There have been some winners among the global volatility. And often its been those companies and funds with a more sustainable mandate. Strong recent UK performers include Premier Ethical, Standard Life UK Ethical and Edentree Amity UK.

That outperformance is all very well, but we can’t really expect that forever, either. Isn’t the true meaning of sustainability something that will tick along quite gently, steadily, not causing harm to people or planet, but equally not setting anything alight?

Well, I for one will take that, thank you very much. If it also saves my little heart racing, anyhow.

As Becky wrote in an earlier post, being capitalists playing the capital markets is all very well, but we need to become more patient with our cash. 5 % is the new-ish norm. 

It’s not just us, either. Some leading industry lights are beginning to play more of a waiting game, too. L&G has ditched quarterly profit reporting and Morningstar is launching ESG scores for funds. (Although funnily enough that’s not been too well received by traditional asset managers. Hmmmnnn, wonder why?)

So whether you’re siding with the tortoises or the hares amid this market craziness, the important thing to remember is perhaps to keep calm and be British – go and have a cuppa before making any rash decisions.