Secrets of f theth professionals:f i l ‘This‘Thi i is how we will spot the end of the bear market’

British shares have lost more than a quarter of their value as coronavirus has bred panic and economic chaos. Markets are likely to remain depressed and volatile until the crisis has been overcome, but what should investors look for as a signal of when to buy again?

The best returns, of course, are made if you can invest at the very bottom of a crash. However, this inflection point is extremely hard to identify.

We asked some professional investors, who have been through this before, what indicators they will use to spot the bottom.

VIRUS UPDATES

The first thing investors should look for is any sign that the virus is being contained. Unlike other recent market crashes, this one has been caused by a specific external event. The first sign of a market recovery may be that the medical crisis itself is starting to ease.

David Coombs of Rathbones, the investment firm, said: “Sadly, before any prolonged upturn in markets, death rates would probably have to peak and lockdowns would need to end.”

William Dinning of Waverton, a rival firm, added that any good news on how healthcare systems were coping would reduce the panic in markets.

TECHNICAL FACTORS

Bond markets can be a good measure of investors’ optimism. Since the outbreak, the price of “safe-haven” Government bonds has risen as investors have sought to shield themselves from an expected recession. At the same time, the price of bonds issued by companies, known as corporate bonds, has fallen as investors feared the risk of missed repayments from businesses affected. Any change in this dynamic would suggest the germination of a stock market recovery.

Philip Smeaton of Sanlam, a fund manager, said corporate bond prices usually started to rise before stock markets. Charlie Morris of Atlantic House Fund Management, another fund house, said a rebound in stocks would start with a lessening of “short-selling”, a technique used by some investors to profit when share prices fall.

Such investors will abandon short-selling and start to buy shares again if they believe that prices have no further to fall.

Any fall in the share prices of “defensive” stocks such as utilities is another signal, as it would suggest that some investors are willing to take a risk on other stocks to get a better return.

Richard Buxton of Merian Global Investors said no single indicator would allow investors to spot the bottom, but a combination would.

Mr Buxton also recommended monitoring the “Vix” index, a measure of the volatility of the American stock market. When this starts to fall, corporate bond prices rise and safe-haven currencies such as the American dollar and Japanese yen stop rising, the market is near the bottom, he said.

WHEN BAD NEWS DOES NOT MATTER

James Henderson, who runs the Lowland Investment Company, said that if the market started to rise when there was bad news it would be the final sign that the worst was over. This occurs when sellers stop taking money out of the market, while a small number of buyers put money back in. “It builds from that point,” he said.