Despite negative headlines about the prolonged fall in stock markets, commentators such as Woodford Investment Management point out that some good news can be seen and highlight the long-term opportunities that are being thrown up by the sell-off.
Concerns such as the falling oil price and nervousness over the health of China’s economic growth have contributed to a substantial dip in investor sentiment. The international nature of these worries means that blue-chips have been hit hardest.
FE Analytics shows that since the FTSE 100’s peak on 27 April 2015, the blue-chip index is down 14.36 per cent in price terms. The FTSE Small Cap index – whose members are more domestic facing – has declined by just 7.15 per cent, while the FTSE 100 has also underperformed global stocks, which have fallen by just over 9 per cent.
Price performance of indices since 27 Apr 2015
Source: FE Analytics
As the graph above shows, stocks have seen a small rebound in recent days. But at one point, the FTSE 100 had dipped to a 20 per cent fall from its peak and met a common criteria for a bear market.
Mitchell Fraser-Jones, head of investment communications at Woodford Investment Management, said: “It’s not exactly clear why 20 per cent has been chosen as the point at which a ‘correction’ becomes a ‘bear market’.”
“Nor is it clear exactly what has triggered the recent market reassessment but, even with the benefit of retrospect, it rarely is clear. China, oil, and the Federal Reserve’s recent interest rate increase look the most plausible explanations but valuation will have played a role too – some parts of the market have been defying gravity for a while. Regardless, it has been a rather grim start to the year for equity investors.”
However, Fraser-Jones says it is important to keep in mind that the UK market as a whole is not in a bear market. Looking at the FTSE All Share (as to 28 January 2016) and just over one-quarter of stocks are down 20 per cent or more since 27 April 2015 while around 40 per cent of its constituents have fallen more than 20 per cent from their 52-week high.
Performance of FTSE All Share stocks
Source: Bloomberg, Woodford Investment Management, to 28 January 2016
Within the FTSE All Share, it’s easy to see the difference in performance on a sector level. The software & computer services sector has made a 21.75 per cent total return since 27 April, non-life insurance is up 15.16 per cent and food producers have gained 13.85 per cent.
In contrast, the mining sector has fallen 52.74 per cent, banks have lost 25.42 per cent and industrial engineers are down 23.86 per cent.
Fraser-Jones added: “It’s worth remembering that some stocks can rise in value even in a bear market. The average stock is 21.1 per cent below its 52-week high but more than a quarter of index stocks have actually risen in value since the market’s peak.”
“This is an important reminder of the need to be selective. As active fund managers, our funds bear little resemblance to the index and often behave very differently to it too. Market sell-offs such as the one we have witnessed at the start of this year, however, tend to be indiscriminate. Whilst this can be frustrating in the short term, it can also provide opportunity.”
“As such, when shares get cheaper without fundamental justification, our confidence in the funds’ long-term return potential actually increases. As Warren Buffett once said: ‘Be greedy when others are fearful’.”
While FE Alpha Manager Neil Woodford’s CF Woodford Equity Income fund has made a small 2.36 per cent loss since 27 April 2015, it has held up much better than the FTSE All Share’s 13.02 per cent fall in total return terms. It’s also ranked 12th out of 81 funds in the IA UK Equity Income sector, where the average loss has been 6.89 per cent.
Performance of fund vs sector and index since 27 Apr 2015
Source: FE Analytics
Woodford Investment Management isn’t the only group to warn about the dangers of reading too much into ‘bear market’ headlines and sentiment.
Jim Wood-Smith, head of research at Hawksmoor Investment Management, said recently: “My goat was rattled last week by the number of headlines referring to markets entering technical bear markets.”
“There is no definition of a bear market. To describe a 20 per cent fall in an index as the ‘commonly accepted definition’ of a bear market is simply wrong, sensationalist and lazy. A bear or bull market is defined by the human behaviours that characterise a self-perpetuating trend. They are psychological, not mathematical.”
Wood-Smith also pointed out that there were some positive signs amid the recent market sell-off, such as the absence of a flight to safety. Yields on 10-year treasuries, gilts and bunds have remained unchanged or even risen over the past 12 months, while the price of gold is up 14 per cent.
“Markets are selling the riskiest assets, at times in something of a panic, he said. “This ought to be matched by irrational buying of safe things, but as hard as I look I cannot see that this is happening. And that is very encouraging.”
