“It’s worth noting that there hasn’t been a market correction of more than 10% in the US in the last 3,5 years. Historically we see this type of correction every two years, so one could argue that the US is due for one. Throw in that the period from May to September is historically a weak period and there is a good argument that we could see a major market correction sooner rather than later.”
The correction the market analysts were waiting for arrived and we saw global equities, commodity prices and emerging market currencies fall dramatically. By 24 August, the JSE had fallen by 15% since its high in April and the MSCI World Index was down 12,2% before recovering. The only winner was gold, which rallied substantially alongside major gold producers due to the fact that gold is seen as a safe haven purchase.
Corrections are normal in bull markets, especially one that has lasted 6,5 years. So the big question during this time is always whether it’s a correction, or whether it’s the start of a new bear market, because corrections create good buying opportunities.
There are mixed views on this, even within Stanlib. Our economist Kevin Lings believes that the bull market is over and he points to the weak economies of the emerging markets, including China. The prevailing view, however, is that this is an overdue correction within a bull market, albeit an aged bull market. In other words, it could be short lived.
The US economy is solid and inflation and interest rates remain low. Europe and Japan are doing quantitative easing and China can still do more to stimulate its economy. Many emerging markets have raised interest rates so that they can lower them to stimulate growth, although their currencies are very weak.
How to position your investments
In our May newsletter, we suggested that investors take a more conservative approach to their investments and reduce their equity exposure from their normal risk profile. If one followed this advice, a fall in share prices could be a good time to start buying and increasing weight in equities. If you’re young and have a longer time horizon, a market correction offers the opportunity to put some money into the market.
If you didn’t lower your equity weighting and remained fully invested, a market crash is certainly not the time to sell. One would be realising the losses and if the correction is short lived, one would miss the recovery. If, however, you believe that this is the start of a longer bear market trend and that we could see a further fall of around 20%, then you may want to lower your equity weighting during any short-term recovery.
If you’re investing on a monthly basis, through a debit order for example, a market pull-back is good news as you will continue to buy shares at lower prices. Even if this turns into a bear market, you’re continuously buying at lower prices, effectively getting good quality companies at a cheaper price.
For the risk takers, it’s worth ending off with some advice from US market commentator Steve Sjuggerud who looks for areas that are hated and cheap and where the trend is turning upwards – which in this case would be gold shares and gold – the next ones to watch are Chinese shares and mining shares. We’ll await the up-trend first before committing. |
