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Heritage News

Don’t Fear The Bear!

Recently, global stock markets have entered “Bear Market” territory, which is defined as a 20% fall from peak level. There are plenty of ‘doomsayers’ around and news is full of negative stories about the global economy. At times like these it’s easy to become fearful of further falls, fearing there is no bottom to this negativity and that you will be losing money.

The main driver of the negativity is concern about the Chinese economy not growing at its previous levels and how this will impact economic growth in the rest of the world. Allied to this is the dramatic fall in oil prices, which has impacted large oil companies which make up a large part of the UK and overseas’ stock markets.

The markets currently anticipate a global recession on the back of this lack of growth. However, many economists believe that the data on how the global economy is performing does not support such a gloomy forecast and that, as is prone to happen in emotion led markets, the falls get overplayed and present the wise investor with opportunity. As Warren Buffett quoted, ‘be fearful when others are greedy and greedy when others are fearful’.

So why the optimism when markets appear to forecast gloom? Let’s look at some facts before we deal with the emotional side of things:

1. Developed economies are experiencing growth in wages and household credit expanding. This means the consumers in the US, UK and Eurozone are continuing to spend money on goods and services which is good for the economy.

2. A recession in the USA is unlikely as unemployment is still falling there; house sales are still climbing and interest rates, although rising, are still very low which are all conducive to growth. This is significant as the US is very important to the global economy.

3. Although the oil price has fallen, this is largely as a result of excess supply and not weakening demand. This will have another positive impact on businesses and consumers, now having more dispensable money to spend on goods and services than fuel.

4. The Chinese economy is a quasi-planned economy and the government there has the same and perhaps even more effective control over policy than developed economies, to ensure that growth is maintained.

The facts are that the consumer in developed economies is still alive and well (housing, unemployment and credit figures all support this – source JP Morgan Asset Management) and has enough impetus to avoid recession. The fall in the oil price is overplayed and the supply glut will eventually right itself as supply at this price level begins to wane.

If, as is likely in my opinion, the world avoids a recession, then prices of stocks have become very cheap and this never continues for very long. It’s at times like these that active fund managers and wise asset allocation come into their own which is why our portfolios are much less volatile than the indexes. The bigger risk from here, in my opinion, is not that markets may fall further, but missing out on the inevitable rally when the negative sentiment which currently dominates, begins to subside.

As previously stated, our portfolios are much less volatile than the widely reported indexes, but if you are concerned about your investments, please contact your adviser.

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