Is the bear market already over? History says not

Stocks may have further to fall. But brave investors can start nibbling now, says emerging-markets guru Dr. Mark Mobius.

The uncertainty and panic surrounding the coronavirus crisis has led to rollercoaster stockmarkets. One question I am frequently being asked is: “Have we reached the bottom yet?” It all depends on how quickly we can contain the virus, how quickly a cure and a vaccine can be found, and how quickly regular economic activity can be resumed.

However, since I first started investing in emerging markets back in 1987, we have experienced a number of crises and bear markets, including the Asian financial crisis, the subprime-mortgage crisis and others. We have also witnessed and profited from the recoveries that followed. 

While this particular crisis is unique in the scale of the actions taken by governments around the world and their effect on economic activity, with respect to the reactions of global equity investors there are similarities to previous stockmarket crashes.

Some say that this bear market is different and we have never experienced anything like this before. But it’s important to remember that, as someone once said: “‘This time is different’ are the most expensive words in the world.” Human behaviour tends to follow predictable patterns because of human nature.

A wide range of declines

So what can we learn from history that will enable us to make better investment decisions in times of crisis? Looking at previous bear markets can provide some indication of what we might expect. 

We have studied 11 stockmarkets (US, Japan, Thailand, Korea, Brazil, UK, Turkey, Taiwan, China, Hong Kong and India) and their bear markets since the end of the 1980s. We have not included the current bear market as it may not have ended yet. 

We define a bear market as a decline of 20% or more over a period of at least two months. Because international investors are usually more interested in US dollar returns we have focused on US dollar indices rather than the local-currency ones. Based on these indices, the average bear market decline was about 49% across all markets but the falls ranged from 23% to 92%. 

A bear market lasted on average about 15 months from the peak of the bull market to the lowest point in the bear phase. But the range was from a few months to five years. 

As one would expect, emerging markets proved more volatile than the developed ones with more bear markets, a higher average decline of over 50% and a shorter duration – about one year. 

So where are we now? Most markets are down between 20 and 30%, much less than the 49% average. At the same time we may only be at the beginning. It was only in March that US stocks entered a bear market.

That I am giving you rough numbers on the current declines of the markets is a sign of the continuing volatility. This is not unusual. If we look at the behaviour of the indices in bear markets we see that this sort of up and down is part of the game. 

So unfortunately the recent positive movement in many markets does not necessarily mean that we have seen the worst. While no one can know the bottom, my guess is, given the severity of the current crisis and the many question marks over when and at what cost the virus might be contained, that we are probably not there yet. 

Keep some cash aside

This seems to be confirmed by the historical data from previous bear markets. However, the figures mentioned above are averages; the range can be wide. Many bear markets went down far less than 50% so it’s probably a good time to start nibbling but leave enough firepower to continue buying if the markets retreat more. 

Of the many years since 1987, when I have been investing in emerging markets all over the world, I can say that there are two conclusions that I can confidently draw. First, all emerging markets experience bear phases. Second, all emerging markets recover from those bear markets and embark on a new bull run.

The wonderful thing about this phenomenon in emerging markets is that the rise and fall of the markets is relatively frequent and the bear markets tend to be shorter than the bull markets. So if you are a patient and disciplined investor you can purchase bargain stocks in the bear phases when everyone else is selling. 

At the rate the coronavirus is spreading globally there might be worse to come, but stockmarkets are starting to price that in. And given the efforts now undertaken by governments, central banks and scientists to contain the crisis, I am confident we will see containment followed by a recovery on the horizon – but history suggests it might not happen for another one or two years.

• Dr. Mark Mobius has spent over 40 years investing in emerging and frontier markets, managing funds with more than $40bn in assets. In 2018 he launched Mobius Capital Partners with two former colleagues. The firm places a particular emphasis on improving governance standards in emerging and frontier-market companies.


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