This Bear Market Has Changed the Rules

Editor's Views: This bear market has been a long time in the making and will change the investing rules - and why income investors need to be cautious

Holly Black 3 April, 2020 | 11:55AM
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The weird thing about this sell-off is that nothing is behaving as it “should”. The traditional market theory goes: equities down, bonds up. Uncertainty? Head for gold. Developed markets looking dodgy? Go to emerging markets. Investments are often a bit of a seesaw with opposite assets behaving in opposite ways and, for the most part, that’s nice and easy to understand.

Not so this time round, it would seem. Sure, the gold price initially soared but it also then fell back; fears about a recession have pushed down the price of corporate bonds; and export-reliant emerging economies are having to cope with the double whammy of a collapse in the oil price and the coronavirus pandemic. The upshot is pretty much everything is down. There have been few places to hide in this sell-off.

And there are a few reasons for that, I think. Firstly, the past decade was not called the “Most Hated Bull Run” for no reason. Despite the 10-year upward march across most global markets, few investors ever truly seemed to believe in the bull market that defined the last decade. As a result, I think many investors have embraced the sell-off with a sort of fervour. People feel validated now: I knew this was coming, I knew it couldn’t last. Sell-offs become self-fulfilling when they are accepted so wholly and willingly.

Let's also not forget that markets have changed massively over the past decade. Think about the rise of exchange-traded funds (ETFs) over that period, which you might know better as tracker funds. Billions upon billions have poured into these products in recent years. Indeed, they have helped propel the markets up and up over that time: as new money floods into a funds that tracks the market, it follows that more money flows into that market, pushing it further up. This attracts more money. We have not yet seen what happens when that system kicks into reverse.

In fact, there is a lot that is untested in a bear market in the investment world. Sustainable and ESG funds have, for the most part, only ever been seen in a bull run. Indeed, it’s been a criticism that they have not yet been tested in a down market. You could say the same for most Absolute Return funds, too.

In this bear market, it seems as though many of the investment rules that people have relied upon for years are being ripped up, and a few are being rewritten too. Whenever we emerge from the other side, we will surely be the wiser for it. 

Don't Pay Over the Odds for Income

Income investors are having a rough time of it at the moment. When the going gets tough, the dividends get going.

When UK banks were told to scrap their dividends this week, investors saw an eyewatering 14% of the FTSE dividend pool disappear in an instant. One could argue, of course, that is a problem with relying on the FTSE 100 for dividends. It is dangerously concentrated, with about half of the dividends coming from just 10 companies. But, that’s a discussion for another day.

You can’t blame companies for putting dividends on hold at such a time as now – they are, after all, something of a luxury really. But that’s not much solace for the retirees relying on the regular income payments they need to live on, or for those reinvesting the payouts to boost their pension pot or Isa.

This is a time when other assets could shine; areas such as infrastructure and renewable energy are going to be in demand in the coming months, particularly when the government needs to spend more to revive the economy.

These are sensible additions to a portfolio, but there’s one thing you should be keeping an eye on if you’re about to hit the buy button. Many of these assets are only available through investment trusts, which can start trading at hefty premiums if there’s a surge in demand. If a trust jumps to a 20% premium you are effectively paying £1.20 for £1 worth of assets. You might weigh it up and decide it’s worth it for the income, but remember if it falls back down to par value your initial investment is down 20% - and it takes a lot of dividend payments to make up for that sort of loss.

Use it or Lose it

The tax year ends on Sunday, so if you haven’t used up your annual Isa allowance it’s time to get moving. Now might not seem like the most appealing time to invest but Morningstar analysts are confident there are plenty of bargains to be had after the sell-off.

Hopefully you’ve picked up some tips this week for funds for your Isa, or options for the Junior Isa you’re saving into for children or grandchildren. Cautious investors might simply consider tucking a bit more away in cash or perhaps exploring other assets such as P2P loans.

Whatever your preference, we’ve got tips and explainers, so do get moving – most providers will still accept transfers in right up until the midnight deadline – although it’s probably worth acting a bit sooner. After all, what else have you got to do while you're self-isolating?

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor,


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