We’ve finally moved into bear market territory. We’ve been sitting on an overweight cash position for most clients for months and waiting for markets to fall sufficiently to deploy these funds. For existing portfolios, we typically have between 20%-30% in cash (or similar) depending on the client and for new clients who joined in the last 6-12 months we’ve held 60%-80% in cash. The main question I’m being asked right now is this:
Is it time to buy?
My answer is no, not yet. The time to buy will most likely be when people stop asking. Investors are simply not yet scared enough. When markets are driven by fear, people no longer want to buy. For all the volatility and the fall in the market to date, we haven’t seen markets truly capitulate into a free fall. That’s when the best buying opportunities will be available – when no one wants to buy. We haven’t seen real fear and I think we need to see that before this market reaches a bottom. The next question I get after that is this:
Just how much further do you think markets will fall then?
Obviously, that’s a difficult question to answer because there are so many variables, and we just don’t know how they will ultimately play out. But I think the falls in share markets so far are really just in relation to interest rate rises being factored in and markets making a one-off adjustment from extremely good times of low inflation and low rates to the opposite. In my opinion, markets haven’t really adjusted for bad news or a bad economic environment. It seems increasingly likely that is just around the corner. I think there are lower corporate earnings ahead and slower economic growth. All of these are yet to be properly forecast by the big institutions and that will likely come next in the form of downgrades. I think there is some way to go before the market finds its low point.
Additionally, we have the prospect of higher interest rates than markets expect. If that plays out, markets will likely fall further to adjust to the shock of a second round of rate rises. For a while, the consensus was that central banks in the US and Aust may end up at around 3% but it looks increasingly like that it is going to be north of 4%. Keep in mind that central banks are always behind the curve on these calls and then they panic and over tighten. We’re starting to see talk of bigger rate rises at the next meetings of 0.5% and 0.75% but to me, they are not panicking yet, that’s just them catching up to reality. The Central Bank panicking comes later when it’s obvious to everyone that they’ve caught up, but they keep raising rates.
This is clearly a once in a generation recalibration for the global economy. However, the flipside is that I don’t believe (at this stage) it becomes a GFC style event where markets fall 56% or a 1929 style crash that led to The Great Depression where markets fell 89% (not a misprint!). At this stage, there is no evidence of the level of systemic problems within the global economy that occurred during those events. The global banking system is strong, and markets are functioning relatively well so far. That’s not to say it can’t happen and I am acutely aware of the potential for black swan events to emerge from left field when there are just so many volatile situations in the world right now.
But my expectation at the moment is that markets finish down from their highs somewhere in the range of 25%-40%. I think that’s fairly realistic. I would be surprised if we are at the low point now. We are certainly getting closer, with markets broadly down 20%, but I don’t think we are there yet. As we enter the next phase, that’s when we will start seeing the sort of buying opportunities emerge that we have been waiting for. That’s not to say there are no opportunities to buy now because as markets fall, I am increasingly seeing specific opportunities in areas or companies I am comfortable buying. But in terms of deploying the large cash positions we have been holding, we will continue to be patient.
General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.
Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.