Savers are withdrawing money at a record rate in search of better returns, but the volatile stock market can be a daunting prospect for new investors.
Savings rates have plummeted to a record low after six consecutive cuts to the base rate, with the average instant access account now paying just 0.17%.
As a result, Brits have withdrawn almost £2.5 billion from banks in the first two months of the year alone.
Need to identify safe investments
Many of these disheartened savers are looking to the stock market to boost their returns, but with even the biggest multinational companies proving vulnerable in these volatile times, it can be difficult to identify profitable stocks capable of ‘weathering the storm’.
To help investors along the way, here is a list of ten tips for succeeding in a bear market from Cartesian Capital Partners.
1: Strong balance sheets are key
Given the sheer unpredictability in the market, it’s fair to say that a number of heavily indebted companies may not survive the next couple of years.
Companies with low or sustainable gearing, and which therefore have a degree of self-determination over their future and developing their business, are relatively attractive.
2: Stick with a winning strategy
Attributes such as earnings quality and financial robustness are even more important now than perhaps ever before, and it would be a mistake to suddenly try to develop a new approach just because the market is tough.
3: Dividends must be sustainable
During the days of easy credit, many companies chose to borrow money to fund share buybacks, special dividends and supernormal dividend growth.
“That borrowing has now been completely cut off, and those companies that over-engineered their position and have cyclical earnings streams are going to be in trouble," says Cartesian founding partner David Stevenson.
4: Target resilient earnings
“Earnings are under pressure right across the market, but investors can mitigate that risk by targeting companies with more defendable earnings,” adds Stevenson.
That means companies with big franchises, big market shares and companies that have leverage over their competitors or their suppliers.
“These companies can eke out a bit more market share or a better margin."
5: Bigger is better
It may be stating the obvious, but larger companies are better placed to survive a severe economic storm than their smaller counterparts, so keep this in mind when choosing stocks.
6: Don't trust company directors' dealing
As the market moved into the downturn, there were plenty of examples of company directors buying up stock in their own companies, says Cartesian’s Stevenson.
“These directors assumed they knew better than the stock market and were bottom fishing, but so far they have been proved wrong. Now directors' activity has slowed, as company outlook statements broadly indicate that times are tough and are unlikely to improve in the near-term."
7: Keep your eye on the long term game
As a new investor, it is especially important to avoid the temptation to try your hand at short term trading.
“Investment views need to be made on at least a one year basis, and a bear market does not change that,” says Stevenson.. At Cartesian the average holding period is around two years, and that is unlikely to be affected by the current environment."
8: Don't be afraid to hold a more concentrated portfolio
"In a bear market the number of attractive stock ideas tends to fall. Over the past year, the Cartesian UK Opportunities Fund has moved to a more concentrated core of around 40 holdings. As and when opportunities arise, new positions will of course be added. However, the important lesson is not to hold low conviction stocks just for the sake of being diversified."
9: Think independently
Don't be fooled by consensus thinking or the latest fashion. Fundamental analysis of balance sheets and earnings will give a clear picture of companies' future prospects. This then allows a portfolio to be built up from individual holdings - "bottom up" - without having to worry about forming a view on overarching macroeconomic or benchmark themes.
10: Be patient
The UK stock market will recover, but not overnight. At the moment the market is still very difficult and it would be foolish to invest expecting the market to bounce back straightaway. “Cartesian expects the market to recover only when the macro statistics show that borrowing has come down (and saving going up), unemployment is peaking and the housing market has bottomed out,” says Stevenson.
