Don’t tell ’em your name Pike..

Market turmoil throws up opportunities…by David Brenchley

 
When days like Monday happen (which, of course, they do quite often), it’s perhaps worth bringing that famous phrase from the classic sitcom Dad’s Army to mind. No, not that one.

Put on your best Lance Corporal Jones voice: “Don’t panic, Mr Mainwaring… DON’T PANIC!”

It’s not a perfect metaphor; the late Clive Dunn’s character who coined the phrase was usually the one panicking when everyone else seemed serenely calm. Still, it’s pretty good general advice for those of us invested in the stock market. When everyone around you is losing their heads, remaining calm is the key to protecting yourself and your wealth.

Corrections (falls of between 10% and 20% from a previous market high) and bear markets (falls of 20%-plus) happen a lot. Since 1950, the S&P 500 has seen a correction 27 times (so about every three years on average) and a bear market 11 times (about every seven years or so), according to Ben Carlson from the US financial advisory firm Ritzhold Wealth Management.

Since the early 1980s, there’s been a greater than 5% drawdown in the S&P 500 in every year except 1995 and 2017, according to Invesco.

So far, the S&P 500 hasn’t fallen into correction territory during 2024, but it got pretty close. By about 10.30am New York time on Monday, the US market had fallen 9.7% since mid-July. Maybe we’ll get there eventually.

One index that plunged into correction territory on Monday was Japan’s Nikkei 225, which saw its biggest fall since 1987. At one point, it was down 13.2%, a fall that wiped out all its year-to-date gains.

The reason it happened was because the Bank of Japan raised interest rates last week from 0%-0.1% to 0.25%, their highest level in 15 years. This caused a major unwinding of the popular yen carry trades.

Essentially, investors had borrowed yen at historically low levels to invest in other currencies in countries with higher interest rates and, thus, returns.

The rate hike in Japan, alongside cuts in Europe, the UK and Canada and the expectation that US rates will be cut imminently, means that the carry trade no longer pays off, so investors have reversed their positions, and the yen has surged.

A higher yen in theory means that exporters, which account for a decent portion of Japanese large caps, will see lower than expected profits because they are converting foreign cash into a stronger home currency.

This may be true in the short-term, but it hasn’t changed the fundamentals that had been driving Japanese markets higher before last week. The rise in the yen won’t cancel out the corporate governance reforms that are well underway in the Japanese market.

CC Japan Income and Growth (CCJI) and AVI Japan Opportunity (AJOT) were both set up to take advantage of these reforms, which are already leading to higher payouts to shareholders in Japan and have plenty still to go, not as any sort of play on the currency.

Shares in both have bounced since Monday as people realized their over-reaction, but they are still in correction territory despite the investment case for both arguably still stacking up.

Western markets, particularly large-cap US technology stocks, have been under pressure because of fears that the US Federal Reserve have left it too late to cut rates and will push the economy into a recession.

They were embroiled in the unwinding of the yen carry trade, though, because the bigger, more leveraged players have been forced to cut their now-loss-making positions by selling other stock holdings (read: US tech) to de-lever.

Another trust still in correction territory is Allianz Technology Trust (ATT), which offers specialist exposure to an area of the market that has been and will continue to be at the forefront of global innovation at a discounted price.

Others on the cusp of being still in a correction (but not quite) include JPMorgan US Smaller Companies (JUSC) and Rockwood Strategic (RKW), both of which provide investors with access to cheap smaller companies.

A further event that has served to spook investors is the fact that Warren Buffett has sold half of Berkshire Hathaway’s Apple shares so far this year. Some think the Sage of Omaha is building up a warchest ready to buy when markets plunge into a bear market soon.

That’s not necessarily the case, though – markets are recovering and while this could be a so-called dead-cat bounce, it could be a sustained rally. If you thought that the investments you bought a month ago were bargains then, they are probably even bigger bargains now.

As ever, when in doubt, just remember: don’t panic. In fact, if you’re still in accumulation mode, perhaps stock market corrections (or worse, bear markets) aren’t such a bad thing – you can pick up high-quality investments at low prices and secure yourself a greater future return.

Right, I’m off to watch the Olympics – and you can probably guess what will be on the telly in the Brenchley household once that’s finished for the day.

Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.