6/28/2022 12:00:00 AM

Market Watch Episode 68: Is it time for brave investors to go bargain hunting?

With markets officially in Bear territory - off more than 20 per cent - are stocks at bargain basement prices?

Or are they yet to even hit the ground floor?

It's near impossible to accurately pick the bottom of a sharemarket cycle, says Pie Funds chief executive Mike Taylor.

But depending on your investment horizons the falls of the past six months may present opportunities.

Investors should always approach bear markets with caution, but clearly there were a lot of good companies trading at much cheaper prices than they were last year, Taylor said.

This month Market Watch takes a look at the arguments for and against betting against the bear.

The biggest argument for the bear case at the moment was that "it looks like, for a number of countries around the world, we're very likely to go into recession," Taylor said.

"Recessions are not good for stocks. Typically with a recession you're going go down about 30 [per cent]."

Markets were already broadly off about 20 per cent since their peak.

"So that would imply there is still another 10 per cent downside," he said.

There was also a great deal of uncertainty about the investment outlook while war was raging in Ukraine, he said.

There was potential for something happening there to further spike energy prices and cause another inflation shock.

Domestic inflation issues remained strong with labour shortages still acute and higher interest rates.

In response to that, interest rates were rising and were going to curb consumer spending - something which would likely flow through to corporate earnings.

Having said all that, market watchers needed to be alert for opportunities as share prices fell, Taylor said.

"It's very difficult to catch a falling knife and the challenge is you'll never get the exact bottom," he said.

"But for people who have longer investment horizons who've got a KiwiSaver account, this is great. You're putting money into a market that is significantly cheaper than it was last year. That's got to be a good thing if you're thinking 10 years out."

But for those with shorter horizons jumping in now or next month looking for bargains would be more akin to gambling, Taylor said.

"It's very high risk. It's not what I'd be advocating for investors."

There were some positive indicators to consider if you were brave enough to take a contrarian view.

Investor surveys were extremely bearish right now. The majority of people seemed to expect the market to go lower.

It was often at that point when everyone expected markets to go lower that they actually started to recover, he said.

Similarly, consumer confidence appeared to be at rock bottom levels unusually soon in the economic cycle.

History suggested that low points in consumer confidence often coincided with market lows.

There were some positive signs on the inflation front. Commodity prices had actually started to fall slightly in the past month.

The big investment funds would be laser focused on signs that inflation had peaked.

It was also the case that those funds were cashed up and ready to invest when they see that peak.

In fact, fund manager cash holdings were at their highest level since the early 2000s, Taylor said.

The potential for that to be unleashed in the near future added to the bullish case for markets.

Ultimately it made sense for investors to "keep a foot in both camps" for now, Taylor said.

The idea that we'll see a return of the bull market in the near future was probably overly optimistic.

But at the time all the bad news was out and in front of us then we could expect the market to bottom-out.

- The Market Watch video series is produced in association with Pie Funds. View the original article here.

Information is current as at 28 June 2022. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account?for personal circumstances or financial goals. Please see a financial adviser for tailored advice.?You may have to pay product or other fees, like brokerage, if you act on any advice.?As manager of the Pie Funds Management Scheme investment fundswe receive fees determined by your balance and we benefit financially if you invest in our products.?We manage this conflict of interest via an internal?compliance framework designed?to help us meet our duties to you.?For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nzPlease let us know if you would like a hard copy of this disclosure information.