It is very easy to panic when the markets are falling, or we can see an event which has the potential to have a negative impact on the market, and it is at this point that humans can act irrationally
At the start of 2015, it seemed the markets would deliver double digit returns for investors.
However, sharp downward corrections in June, August and September almost eradicated any growth from the start of the year and only with the bounce (in October) did some investors see positive returns.
You could argue that 2015 displayed trends that many investors had forgotten about over the last few years. Firstly, for anyone investing at any point during 2015 a day could make the difference between positive and negative returns for the year, secondly although many will highlight June, August and September as being volatile the reality was that this was day to day rather than month to month, and thirdly geographically the returns varied wildly.
Fast forward to 2016 and we see a similar pattern. The first six weeks effectively were negative, but the bounce seems obvious (11 February). From that point the bounce was as extreme as the previous six weeks of falls and although this has slowed there are still incremental positive steps.
In this blog I want to consider firstly whether it pays to time the market, and also to identify some interesting themes emerging in 2016.
“Market timing is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.”
Market timing is a skill that although many may think they can master, in reality the opposite is true! And for those who appear to be able to make it work, they may confuse it with luck.
Taking a topical example, BREXIT. We know with certainty there are two outcomes; we either vote to stay in Europe or we vote to leave. Whatever the opinion polls tell us the reality is that no-one knows the outcome.
However, an investor may feel they know (with absolute certainty) that the outcome will be to leave Europe. To back up this conviction they sell all their investments because they know that on the day of the results, the market will “crash”. As the crash happens they have protected themselves, and as the market hits the bottom they then invest making a nice return on their investments.
Market timing perfection!
However, one thing we know about the referendum is that we don’t know the outcome. It is a flip of the coin and could go either way. If we vote to stay and the markets rally strongly on the day of the results, then the same investor will have missed the bounce. Being out of the market at this point could have a detrimental impact on future returns.
In all of this one important aspect of market timing which is often overlooked is human emotion; it assumes that humans are perfect and not prone to moments of stupidity (which unfortunately we are). It is very easy to panic when the markets are falling, or we can see an event which has the potential to have a negative impact on the market, and it is at this point that humans can act irrationally.
To illustrate how difficult it is to time the market, the table below shows that missing the best 10 days of growth over a 20-year period can significantly reduce potential returns.
Note: Table provided by Business Insider and J.P.Morgan Asset Management
If it tells us anything it is a reminder that trying to guess the movement of the market is unwise! Perhaps 2015 and 2016 are just a return to normality. There will always be events (seen and unseen) which cause short term volatility but however hard it may be the chart acts as a reminder that investors need to allow their investments time to grow and not be worried by short term movements.
The chart below shows the total return of the FTSE 100 in 2016 (to 29 February). You could argue that the best time to invest would have been around 12 to 15 February which was when the bounce was strongest. But equally investing at most points on the downward curve would have delivered positive returns for the year.
But many investors seeing sharp falls would have been nervous to invest at these points fearing the market would continue to drop (which it did) and not be able to see the bounce (which has happened).
If we dig a little deeper there is possibly another trend opening up. Value stocks are generally those that have fallen out of favour with the market and are considered bargains. The reason can be disappointing earnings, negative publicity etc. Obviously some companies are in this positon for a good reason and will never recover however good companies that have fallen on hard times have the potential to turn things around.
In today’s market we can categorise banks, supermarkets and mining companies as unloved, and companies within these sectors have seen a large re-rating downward of their share price. Normally over a period of say five years these stocks come back into favour. However, we haven’t seen this happen until now.
Taking three stocks; Lloyds Banking Group PLC, Morrison (WM) Supermarkets and Anglo American PLC. Depending when an investment was made, an investor could have benefited from significant returns, and has the potential to continue to do so moving forward. (Obviously past performance is no guide to the future and investments can fall as well as Rise!)
|Lowest point (1 Jan – 29 Feb 2016)
|Growth since low point to 29 Feb 2016
|Highest share price in last ten years
|Share price at low point (2016)
|Percentage difference in share price
|Lloyds Banking Group PLC
|-23.36% (11 Feb 2016)
|Morrison (WM) Supermarkets PLC
|-1.15% (4 Jan 2016)
|Anglo American PLC
|-26.18% (20 Jan 2016)
We cannot speak with absolute certainty but taking this data as a snapshot it does appear to show that value stocks have at different points this year seen a significant correction in their share price. For many investors because of the fall in share prices, and the negative press, it is very easy to miss these “value” stocks until it comes to a point where they are loved again. At this point there is not much room left in share price growth. If this trend does continue then for those investors holding value stocks this period could be very beneficial for them.
And it’s not just about individual share; regionally we are starting to see the same. If we look at IA Sectors, there are some really interesting trends showing:
|1 Jan – 12 Feb 2016
|15 Feb – 29 Feb 2016
|IA OE Asia Pacific Excluding Japan
|IA OE Global Emerging Markets
|IA OE Global Emerging Markets Bond
|IA OE Europe Excluding UK
|IA OE Japan
|IA OE North America
|IA OE UK All Companies
Both Asia and Emerging Markets are showing positive upward trends, especially in the debt markets. I would argue that this is not something that the press is writing about and it is conceivable that we have hit the bottom. If this is the case, then investors could see positive growth moving forward.
It is worth adding that although Asia and Emerging markets are slightly negative for the year, Europe, Japan and the UK are also all negative.
If anything all this demonstrates is that trying to guess what is in favour, and what is not, is very difficult and it is often only after the event that we can spot trends.
Market timing is about trying to second guess the market and we can sometimes get it right, but often this is nothing more scientific than pure luck. If value is back in vogue then for those investors holding direct shares in these companies, or funds that invest in these companies, over the next five years they could see significant benefits. Equally if there is an upward bounce in Asia and Emerging Markets this could benefit investors. But two months in and we don’t know, a lot can happen and if anything this just shows that timing the market is almost impossible to do. All of this could simply be a false dawn.
But it is worth ending with this thought; events will happen (BREXIT etc), and markets will react but ignoring the noise and keeping focused is often the best strategy for long term investing.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Although the author does have holdings in some of the shares and regions mentioned this is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.