When markets seem bearish, sleep on it

THE world is going through one of its mad phases. It’s deeply unsettling, especially for fair-weather investors who know only the pretty solid gains markets have made since the 2008 implosion.

You shouldn’t be too surprised by what is happening. It’s long overdue — the August Chinese currency devaluation was really just an excuse for a shake-out.

If you managed to wade through former US Fed chairman Alan Greenspan’s The Age of Turbulence, you realise that nothing in markets or economies is certain. It is ironic, though, that the current bout of market turbulence is in part due to regulations recommended by Paul Volcker — Greenspan’s predecessor at the Fed — who was asked to come up with proposals to prevent another 2008-style calamity.

It’s known as the Volcker Rule. It restricts US banks from making certain kinds of speculative investments that do not benefit their customers — effectively, it banned proprietary trading, using customers’ deposits to trade for the banks’ own accounts.

That was instrumental in fomenting the last crisis. The regulations were implemented in January last year, and as Fed chair Janet Yellen removed the safety net of quantitative easing, volatility picked up.

Until then, the big investment banks had been acting as intermediaries for markets and were useful shock absorbers — but their removal from markets means volatility is here to stay.

Hywel George, director of investments at Old Mutual Investment Group, says it’s the unintended consequence of regulation designed to prevent a repeat of the 2008 financial crisis. Ironically, it is likely that regulators will have to act again if that volatility undermines confidence to a point when it perpetuates a more sustained sell-off.

So what’s the difference between a pullback worth investing in, and a bear market? Technically, a decline of about 10% is seen as an opportunity akin to a fire sale. A bear market is when shares are down 20% and falling. How do you know which it is? You don’t know whether the first 10% decline is volatility or the beginnings of a bear market.

The Volatility Index provides a bit of a clue. Recently, markets have been through their most volatile period since 2008. Volatility is measured by the VIX — also known as the “fear index”. A level of 10-15 is considered normal. Markets are getting edgy in the 20s and, by the time you get into the 40s, exchanges are putting in contingency plans to pause trading. There was a point on Monday August 24 where the VIX hit 50 — briefly.

They’re calling last month Awful August. In the US, the Dow Jones Industrial average saw its biggest monthly fall in five years. The JSE looked flat, but the depreciation in the rand after the devaluing of the yuan by China means you are poorer than a month ago.

There’s no sign there will be a respite from considerable market volatility and cash flowing out of emerging markets soon. So brace yourself for a bumpy ride.

The biggest risk facing retail investors is that they lose faith in markets. Volatility, so beloved by stockbrokers because it generates volumes of trade, tends to put people off buying shares.

Perhaps it’s time to follow the example of private equity investors. They are taking big bets on the future of Africa.

Private equity group Actis, which manages assets of $7.6-billion (about R103-billion), this week bought a chunk of furniture maker Coricraft. In the past year, it has taken up big stakes in Paycorp out of the Transaction Capital stable, fabric company Vlisco Group, snacks business Edita and footwear retailer Tekkie Town.

More than 40% of Actis assets are in Africa, with more than $3-billion invested in 23 countries.

Right now, the rand is weak, the dollar is strong and, despite a near heart attack over China and Greece and questions when interest rates in the US will go up, US markets are enjoying one of their most sustained bull markets in history.

This, too, will change. It’s at times like this when you need to tune out the noise a bit. Invest in good companies for the long term, or give your money to a unit trust manager with a long low-panic track record to make the calls for you, or put a direct debit in place where money leaves your account and buys an index regardless of what happens to markets.

Then act like a bear. No, don’t sell your investments. Hibernate.