Business | Markets
It's a horrible bear market
The collapse in deposit rates has brought a previously rather abstract question into stark relief. As a saver, why should you settle for under 1 per cent return when you can get several times that on equities?
- By Tony Jackson, Financial Times
- Published: 23:42 January 13, 2009
The collapse in deposit rates has brought a previously rather abstract question into stark relief. As a saver, why should you settle for under 1 per cent return when you can get several times that on equities?
If you have a decade to play with, the question answers itself. But, for most of us, the near-term risk of capital loss is more pressing. So is the equity market, as some suggest, at a turning point?
As a natural sceptic, I approach the question with some diffidence. We sceptics are better at identifying snags than opportunities, and spotting a market bottom is not our forte. That said, here it goes.
I have turned for guidance on market bottoms to Anatomy of the Bear, by fund manager Russell Napier. He examines four periods of extreme undervaluation - of which more later - on Wall Street: 1921, 1932, 1949 and 1982. He then looks for common features.
Typically, it seems, the bottom was immediately preceded by a turn in commodities (copper especially), auto sales, corporate inventories and corporate bonds. Good news was, meanwhile, ignored by investors.
The turn also generally coincided with economic recovery. This contrasts with less extreme cycles, where the market often anticipates recovery by several quarters.
And now? The copper price has risen by 20 per cent since Christmas - though it did the same in October, only to lose those gains again.
US auto sales in December were down a gruesome 36 per cent on a year before. But, on an adjusted annualised basis, they were up a fractional 1.4 per cent on November, after six straight month-on-month declines.
As for corporate bonds, the improvement in recent weeks is striking. The market is by no means back to normal but yields have fallen and high-quality companies are getting new issues away for the first time in many months.
Corporate inventories, though, seem unlikely to have bottomed yet. As Absolute Strategy Research observes, global inventories typically lag behind orders by nine months. For most companies, orders only started plummeting in the autumn.
This is one to watch, though. Excess inventory is hitting corporate cash flows at the worst possible time and prompting companies to slash spending on new capacity. When the turn in the inventory cycle eventually comes the revival in pricing power could be explosive.
So far, so good - mostly, anyway. But, while these are all necessary conditions for a market bottom, they are scarcely sufficient. They result from a revival in confidence and risk appetite. That will certainly be a feature of the bottom proper, but it could equally be a false dawn.
Some of Napier's other conditions are scarcely met. Last week, for instance, Next and Debenhams, two UK retailers, reported falls in sales that were less severe than the market expected. Their shares jumped 12.5 per cent and 20 per cent respectively. Not much ignoring of good news there.
Another feature is that recovery from extreme undervaluation should coincide with economic recovery. The markets are not - yet - undervalued. But neither is anyone seriously saying the recession is over, even in the US.
What do we mean here by undervaluation? The approach is one I have referred to in this column before, using either the so-called 'Q ratio' - measuring the share price against the replacement value of a company's assets - or a price-earnings ratio based on cyclically adjusted earnings.
These measures have been championed by the investment consultant Andrew Smithers, on whose work Napier has drawn. According to Smithers, the US market is at present "mildly cheap" on the basis of the 'Q ratio' and "reasonably priced" on the cyclically adjusted PE ratio.
If this really is a bear market, like those examined by Napier, the conclusions are slightly chilling. At each of his four market bottoms, the "Q ratio" reached a discount-to-asset value of about 70 per cent, against only a few percentage points today.
However, that, of course, still begs the essential question: Is this a horrible bear market like those others, or a mere short-term cyclical one?
The sceptic in me says the former. Along with Napier and Smithers, I think we have here a continuation of a major bear market that began at the start of 2000, from an all-time peak of overvaluation.
Yet this need not be the whole story. Perhaps, as Smithers suggests, there will be a rally as the present recession subsides, to be followed by another collapse as central banks tackle the inflation resulting from today's prodigal government spending.
That would be consistent with another finding of Napier's. The 1929 crash, he says, was unusual in that the move from peak to trough of valuation took three years. The average for the other three was 17 years. Only eight years to go, then.
Share this article
More from Markets
More from Business
Popular in Business
-
XPRESS
Way to go this DSF
A fun-filled route to guide you to all the happening dos in town
Business Editor's choice
-
What to expect at the Dubai Airshow
We preview what types of aircraft to expect at the Dubai Airshow
-
Air Arabia revamps its website
Upgraded site offers new features, accessible in range of languages
-
Dubai looks ahead to 2010 with new projects
Global visitor numbers up 4% on year and occupancy rates remain strong
