As far back as the 1830s, the English author, Mary Russell Mitford wrote: “There’s nothing so easy as catching a heart on the rebound,” which is where we get the term in dating called ‘the rebound’ – is it as easy to catch a market on the rebound, and what kind of investments should you be looking out for?
When a romantic relationship ends badly, often the partners suffer from complex emotional stresses of detachment. The grieving reflex kicks in, and people suffer from the classic symptoms of denial, anger, bargaining, depression and acceptance, as they exit the relationship.
It’s also true for investors’ relationship with their portfolios, and 2022 has been a painful year for UK stocks and investors. A market downturn is psychologically damaging for professional portfolio managers and having seen what happens on a trading desk through two serious bear markets I can attest to the mental anxiety a portfolio sinking into the red can cause.
This must be even more damaging for investors new to the game who, are now sitting through the initial throes of one of the most significant market corrections across all asset classes since 2000. Smaller investors have probably already gone through the first few stages of investment grief. For example, the incredulity of cryptocurrency falling so dramatically, with Coinbase leading the charge, saw many investors saying: “This can’t be happening”, some even double-downed on their exposure to the asset class believing it was a momentary blip.
Then the anger kicks in. “It is the fault of that awful Putin chap; BoJo and the Tories are wrecking the economy with their squabbling; we should never have done Brexit,” and investors blame extraneous events for the poor performance of their portfolio, which is sometimes valid, but well beyond most mere mortals’ control. Many investors are somewhere between the bargaining and depression stages now, whilst others may have come to acceptance, and given up on the markets.
But as sure eggs is eggs, the market will swing around eventually, and positioning your portfolio for the rebound and recovery now is really important.
Surging inflation, labour shortages, a manufacturing slowdown in China and war in eastern Europe are not the most clement conditions to be an investor. But these structural problems are working themselves out, and by this time next year they could all be a bad memory. And by that time the rebound will have happened, and the recovery will be full steam ahead, but many small investors may have missed the bus.
Emerging markets
In the worst-case scenario, developed economies will slump into a recession. For how long, nobody knows. But when the US and Europe take a step back, developing markets have the opportunity to fill the gap.
Emerging markets are home to 85% of the world’s population and account for 60% of GDP. Demographics are in the emerging markets’ favour, as the developed world faces an ageing population and low levels of economic growth. Growing developing nation middle classes have larger disposable income and typically larger families. Many developed market-listed stocks have expanded their presence in emerging markets, hoping to get a slice of the pie, and some of the larger emerging markets companies are now listed on US and European exchanges.
The growth of the emerging market consumer looks set to be one of the most compelling investment themes over the next few decades as the middle classes in highly populated countries such as China and India continue to rapidly expand.
However, emerging markets only make up 12% of global equity markets, and most investment advisors recommend the average portfolio should hold no more than 5% of their total exposure in the region. Investing directly is for the foolhardy and courageous.
There are ways that a UK investor can get direct exposure to emerging markets through UK-listed stocks. Mediclinic LON:MDC, for example, provides private medical healthcare in in South Africa, Namibia, Switzerland and the United Arab Emirates. It is also listed on the JSE and is a reasonable defensive investment.Another option would be Vale [NYSE:VALE], the US-listed Brazilian multinational corporation engaged in metals and mining. Although it’s had a rough run recently it is a significant iron ore producer that is highly profitable, generates strong cash flows, and has a clean balance sheet. Investors can expect strong shareholder returns this year, thanks to a 20%+ earnings yield. Like a lot of miners, Vale can be cyclical, but the supply-demand picture does not look bad over the coming years. The valuation is pretty low today, providing for a margin of safety.
Although it is possible to stock-pick emerging markets, it can take skill and experience. A safer and easier option is to get exposure through an investment or unit trust, or exchange-traded funds (ETFs), where a fund manager buys individual company shares in emerging markets companies, and investors buy exposure to the fund.
Long-term potential
Aubrey Global Emerging Markets Opportunities, a GBP317m fund is managed by emerging markets veteran Andrew Dalrymple. The fund has a large cap growth strategy in Emerging Markets, and Dalrymple favours Consumer Cyclical and Consumer Defensive companies, playing the demographic card. The fund follows a thematic approach to investing, focused on the growth in consumption and services in emerging markets.
This distinguishes it from funds that have traditionally targeted the emerging markets as export-focused, low-cost manufacturing hubs. It is heavily weighted towards India and China and the growth of the emerging market consumer looks set to be one of the most compelling investment themes over the next few decades, as the middle classes in highly populated countries such as China and India continue to rapidly expand. This fund should appeal to investors wanting to specifically harness this theme, as well as those excited about the long-term potential for India.
Its top holding is Varun Beverages Ltd, an Indian soft drink manufacturer that holds distribution right for Pepsi, Seven-Up, Tropicana and other global brands and also has operations in other developing markets. Dalrymple’s team is keen to follow trends seen in developed markets and follow them in the countries where they invest. One idea the team has followed recently has been an increased appetite for takeaway stocks in emerging markets. Dalrymple explained that the fund was investing in Meituan, a takeaway food and grocery delivery business in China “which is much more sophisticated than Deliveroo”.
‘Wants’ vs. ‘Needs’
In a recession, consumers will batten down the hatches and try to limit their spending. However, when the market recovers, pent up consumer demand is released, and companies that reflect the ‘want’ reaction, as opposed to the ‘need’ reaction bounce back into favour once more. In a recession, most people don’t ‘need’ an expensive foreign holiday, or a new kitchen or a new house. However, as soon as the fog clears those ‘wants’ come back into focus. Moreover, consumer companies that survive a recession are often over-sold by the market, and therefore can be picked up for a good price.
One stock that might take off in a recovery phase is Easyjet LON:EZJ. The airline has had a turbulent time over the last few years. It had to ride the issues related to the Covid-19 lockdown, where global travel was more or less closed. It has not reacted well to the return to normality, being slow to bring back and train staff, and has been significantly affected by the chaos at British airports, as its main base is Gatwick, the airport where issues have been greatest.It is going to be adversely affected by high fuel costs and rising interest rates, as it carries a lot of debt (GBP3.1bnn) and will experience pain as consumers get more nervous about spending. This has been reflected in the share price with a one-year return of -52.8% and year-to-date return of -28.17%.
However, its latest quarterly results showed some signs of encouragement, with its pre-tax loss reduced by nearly two-thirds year-on-year as it raised ancillary prices for items such as luggage. If it manages to emerge from a potential recession still flying, there will be a significant amount of pent-up demand for a break in the sunshine, which EasyJet should be in position to take advantage of.
Going-out gear
Consumer goods retailers are also having a tough time. Asos’ LON:ASC share price has been locked in a death-spiral for some time, seeing a one-year return of -72.6% and a year-to-date return of -56.5%. It is also being investigated by the capital markets authority on its claims to be an environmentally sustainable apparel company and things look gloomy for the company.That said, Asos has built and maintains an exceptionally strong position in the fast fashion market, and several analysts think that it has been over-sold at near 30% it’s levels in June 2021. Despite dealing with tough trading conditions, the company reported 4% growth, and management thinks 7% will be achievable by the year’s end.
It will come under further inflationary pressure, but has a strong cash position, so should be able to ride out a downturn. As the company continues to expand into the US – it saw growth in the US of 15% – and the potential demand for going-out gear might rise in a recovery phase, Asos might be a good buy now, to take advantage of future upward spikes.
Time to snap up some bargains?
Although it has been a difficult year for smaller investors, and the sell-off in stocks across the board has made it look like a bad time to be invested in equities, in fact it could be a good time to snap up some bargains, if you have a longer-term investment horizon.
It’s never good to panic and selling into a dip can crystallise losses. Not all companies are going to do well in the next year – make sure to do your own research – and there is no guarantee that the stock market will bounce back strongly. However, by the time the news looks a little bit better, the market has already recovered. And if you miss the recovery, there’s a very good chance you’re going to make it harder to hit your financial goals.
It might have been a tough break-up, but eventually you are going to have to get back on your bike, or else you will miss out on all the good things in life. Don’t make it all about what you have lost, now is the chance to try new things out. Have realistic expectations, and take your time and work out what you want to get from a relationship with your portfolio.
