Market Corrections are Never Pleasant  

The Bear Market 

We have entered a bear market as the declined prices of stocks have demonstrated across the world’s major indexes. The causes of this bear market are a compound of a few key things; the COVID pandemic, government stimulus levers, the devaluation of fiat currencies, geopolitical tensions, the war in Ukraine, the high cost of shipping as well as fractured supply chains, erratic weather, and protectionist mindsets. A bear market forces investors to re-evaluate the stocks in their portfolios to see if the substance that underpinned the value in companies is still present or has eroded over time. Companies that fail to pivot to market changes with long-term implications will often fail to compete effectively against competitors who have adopted newer technologies that provide more significant advantages.

As company valuations struggle to hold on to previous highs, a correction is poised to readjust returns and the flows of capital placement within market sectors as investors grapple with the unpredictability of the current environment. Nevertheless, a correction is long overdue, and interest rate hikes will also see some positive outcomes like higher returns on pension funds, superannuation, term deposits and savings accounts. On the optimistic end of a bear market, there are immense opportunities to put money to work for those astute enough to pick value stocks which are in temporary decline, in effect, trading at a discount. 

Bear Market Planning

In times of economic distress, low rates of return and ambiguity, the worst thing investors can do is to panic and sell their shares at rock bottom prices, whipping out previous gains. The best advice provided by successful investors is to pick stocks with long-term credibility and hold them for extended periods. The due diligence required to pick the right companies to add to one’s portfolio must also consider critical metrics. The three points below are some of the most important.

  • Select companies that are not at the end of their product lifecycle and make sure they are modernised in their preparedness to conduct business for the next decade. 
  • Select honest leaders with integrity and quick-witted adaptiveness that can steer companies with logical thinking and long-term planning. 
  • In addition, make sure the companies of interest have solid financial history and backing and have reserve funds to see them through a prolonged decline.

Over time a proven long-term strategy is to build portfolio strength by gradually adding undervalued stocks with a strong potential for growth in the medium to long term.

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Other Considerations

The new Australian labour government is beginning its tenure. It has signalled to all Australians and the world of investors that its outlook on economic strategy, trade relations, geopolitics, regional security, and societal issues will be supported by policies which influence fairer, positive outcomes. One central area of opportunity is to align with the government planning on environmental issues that won the labour government its votes. Environmental and economic policies will either expand Australia’s wealth and influence or see Australia decline over time. Implementing aggressive climate change policies is no simple feat, which will impede Australia’s ability to effectively compete within the free market if only a few participants play by the rules.

Opportunity in Climate Adaptiveness

As more of the world becomes environmental, social and governance (ESG) compliant, organisations are forced from a top-down approach to be clearer on their carbon reduction plans. Laggards will struggle to link to required capital pools as capital access demands more substantial reasoning and planning toward carbon neutrality to appease investors. The inability to demonstrate significant planning will lose the trust of stakeholders and will cause competitors to gain additional market share. The labour government is stepping up climate change policy which will eventually see ESG disclosures become mandatory, and Australia move from a voluntary market to a compliant market. 

In March 2022, the Australian Securities and Exchange Commission (SEC) proposed new rules to mandate climate-related disclosures, which signal substantial change if the proposed rules are implemented. Understanding the whole gamut of climate-related risks and addressing them in succession is something all companies must prepare for promptly. When analysing and sharing information on financial risks with executives and stakeholders, it will become increasingly crucial to demonstrate how shortcomings in ESG principles could hurt consumer demand, thereby reducing top-line revenue. Knowing how markets respond and prepare for climate change in policy presents a green light of opportunity for organisations to react with haste. 

From Bear to Bull

Although current valuations have declined the recent technological developments have enhanced business activity in many sectors, it is no longer prudent only to entertain the possibility of more losses for stocks across the board. There is validity in accepting the possibility of better times ahead for investors if investors take part in directing capital toward necessities (like the food and water sectors). However, the worst is yet to come. A prominent cash position will demonstrate prudence, though a strategy should be in place to redeploy capital should the markets surprise on the upside for an extended period. Nevertheless, there will always be winners and losers in both bear and bull markets, and it takes more time to evaluate the resilience of companies in a downturn. 

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Furthermore, history shows that rebounds in market activity and returns realised are exponential after markets have fallen to notable lows and are reinvigorated over time. The 2007-2008 bear market declined 46% from the October 2007 closing peak to October 2008. However, the recovery formulated another bull run until the beginnings of COVID. Fractured supply chains reduce the trade and exchange of commodities like wheat and grain, specific oil products and others. The lack of rain in some countries leads to soaring food prices. The unpredictability of weather patterns due to global warming is shifting the productivity scales of some emerging nations. Nevertheless, innovation, market connectedness, capital access and trade relationships cushion dire situations and are the saving grace of nations if trust and confidence exist.

Mitigating world hunger will save tens of thousands of lives and contribute to calming global food insecurities. To that end, the practicality of investing in companies that adapt to the needs of consumers and can (produce and deliver) the necessities to where they are required will prevent world hunger by solving one of the world’s most wicked problems. At the same time, the risks undoubtedly remain for investors in all markets.

Conclusion

Generally, survival and principal preservation are the primary objectives in bear markets. Bear markets indicate that significant stress exists in the global economy and, if unattended, leads to a prolonged decline in markets. Therefore, dire problems are what set bear markets in motion. The fact that we have huge problems today does make the current bear market somewhat unique, as there have never been so many counteracting factors in play simultaneously. The critical takeaway is that bear markets expose the most prominent issues, prompting governments and business leaders to respond with the most appropriate countermeasures. However, markets will continue to decline; they will get considerably worse before things improve. Needless to say, positive trends will emerge in some asset classes and commodities, stocks, fiat currencies and even cryptocurrencies will see a resurgence once tangible anchor points are established. Investors can also offset their risk with a large allocation to cash via hedging strategies, such as using put contracts.

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