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5 Ways to Survive the Bear Market

KLCI dips below 1,400 points? 5 ways to survive in this Market

This week we saw the KLCI dipped below the 1,400pt level! The last time it went that low was in 2011, which was almost a decade ago. The market sentiment turned sharply volatile following the World Health Organisation’s (WHO) move to declare Coronavirus Disease 2019 (Covid-2019) as a global pandemic. 

Pandemic /panˈdɛmɪk/

adjective
(of a disease) prevalent over a whole country or the world.

noun
an outbreak of a pandemic disease.
“The results may have been skewed by an influenza pandemic”

At the time of writing, there are close ton 130,000 reported cases around the world.

Over in the U.S of A, Wall Street has been enjoying a historically longest bull-market rally – Topping the bull market in the 1990s that lasted for 113 months. The current bull run has been lasting over 130 months with mild interruptions in between, which was finally put to an end as the U.S. Equities took a dive into the bear market territory. With these conditions affecting global markets, it increased the possibility of a global recession by 100%! (against approximately 25% predicted at end-2019 to now 50%)

However, even before that, there were already warning signs of a global market meltdown with the 2-year and 10-year U.S. Treasure yields inversion in recent times with the latter falling to a historic low. So with volatility taking shape and global equities entering into the bear market territory, we will be looking at Five Strategies to navigate the volatile market.

Avoid over-leveraged stocks

At time’s like this one should be wise enough no to be overexposed to the current market downturn. Stock picking must be selective, avoid companies that are overleveraged (high debt/equity ration). During an economic downturn, companies with relatively high gearing may face tighter cash constraints as funds will be re-located to service their borrowings which would impact their bottom line.

The Oil & Gas (O&G) plunge in 2014-2016 is a key example, where several O&G companies were confronted with the sudden plunge of crude oil prices. This event resulted in works being halted, leaving machineries/equipments idle duet to shrinkage of contracts, whilst servicing high-interest expenses from their ballooning debt level.

oil gas

Source: The Edge Markets

Once a darling to investors, these companies’ share prices took a dive alongside their financial performance. Instead, stocks equipped with a healthy balance sheet and positive operating cash flow typically see their share price fall at a slower pace.

Hit-And-Run Technique

Well in a bear market, it doesn’t mean that you have to avoid the market altogether. During a downturn, stocks typically stage a short and sweet rebound – which coined the term Dead Cat Bounce. At this point in time, certain investors/traders may jump into position to capitalise on the potential recovery.

Do beware! The recovery will be short, potentially on intraday or a couple of days before volatility takes the driver’s seat again.

dead cat

Source: Investopedia

Hence, it is advisable for investors/traders to keep their trades short, adopting the hit-and-run technique. Any rebound should be taken as an opportunity to lock in recent gains or to trim current losses in order to protect the capital in the portfolio from a further slide. There is a fat chance of losses ballooning in the current portfolio should investors continue to hold onto their holdings for a longer period of time.

Keeping trades short also allows for investors/traders to minimise their losses and re-strategise their trading plan! Realising losses doesn’t necessarily mean that you are bad at trading, but admitting that you have taken a wrong selection and getting out before it is too late proves that you are more successful than the rest!

Put Warrants

Trading in a volatile market is definitely not a smooth and effortless journey for many, even for veterans in the market.

So, how do you avoid catching a falling knife and trade according to the trend?

With the market diving into bearish territory, we could consider trading structured-put stocks.

To simply put it, Structure-put stocks or put warrants are a type of security that gives the holder the right (but not the obligation) to sell a given quantity of an underlying asset for a specified price on or before a specified date. Typically put warrant prices increases when the underlying share price decreases.

put warrants

Source: M+ Online

For instance, when the FBM KLCI and its’ futures (FKLI) tumbles close to 100 points in a single day, the FBM KLCI-H shares outperformed. However, traders/investors should take note on the mechanism of each structured warrant that has their own distinct parameters (liquidity, maturity date, gearing, premium, exercise level).

(To learn more on Put Warrants. Check it out on Macquarie’s website. Click here)

High-Quality Dividend Stocks

Generally, dividend-paying stocks are usually profitable for a long period of time. These stocks generally face lower volatility, providing long-term investors with a recurring stream of income over time. Investors who possess long-term holding power may look into stocks that payout handsome dividends over the years

dividend

source: M+ Online

On Bursa Malaysia, while the REITs sector that is defensive in nature owing to the recurring stream of income from tenancy lease agreements delivered on an average dividend of 7.1%. Most people tend to forget the note-worthy higher-than-average dividend-paying sector would be banking and utility sector. However, do keep in mind that the yields may not be maintained at current levels as a slowdown in business may affect profitability and in turn affect future dividend pay-out.

Risk Management

Now that you’ve known the right method and stocks that you can trade, adopting a proper risk management strategy is still critical. Here are 3 guidelines that you might want to follow.

  1. Set a risk tolerance level and act accordingly.

    When you purchase a share commit to a tolerance level and should the share price fall to said level you should stick to the plan and cut your losses!Example: Individual X bought a share at RM2.00 and sets a risk tolerance of 10%. Should the share price drop RM1.80 (-10%), Individual X should follow his plan and cut losses.
  2. Avoid taking large positions during a downturn

    Holding too many positions may cause a fire sale of your portfolio should any trade go against your expectations.

  3. Using margins to trade/invest

    This is not a great option as losses may be compounded over the longer term. In this market, it is advisable to trade within the amount that you can afford to lose, avoiding margin calls from brokerage firms, which may liquidate your position should share prices fall to a certain level.

The bottom line.

As you can see, we need not fear the bear market but to be prepared both strategically and mentally to face the market, it’s definitely not sunshine every day in the market, but hey ain’t that the fun in stock trading? Just make sure to tread carefully in this bear market and we shall be able to survive and prosper.

To learn more on trading in this market visit our website at mplusonline.com