How a Bear Market Can Become a Unique Opportunity for Investors

The last few days have not spared investors' portfolios. The American, European and Swiss markets have suffered severe corrections, due to budgetary policies that were accommodating for too long. It is certainly possible to live beyond one's means for a while, but when it becomes a habit and one always wants more and more, it is called an addiction and then it becomes downright problematic.

Developed countries are aging and we have to find a way to pay the retirement of the many baby boomers. These have lived prosperous years compared to the generations that followed, and, in addition to the problem of their numbers, there is the problem of the standard of living that they must more or less be able to maintain. Whether the pension system is based on the distribution of resources or on capitalization, it does not change much. On the one hand, the working population is deducted from its salary to pay an annuity to retirees, on the other hand, they pay rent to a pension fund which itself pays an annuity to a retiree. Tweedledum, Tweedledum. Ok, there are still the happy owners there in the middle who have understood the system...

On the other hand, we have tried so hard to make the middle and lower classes believe that the consumer society was fully open to them that we have pushed credit to the limit, allowing them to be impoverished even more for the benefit of the richest. Left-wing policies have not done any better because by dint of wanting to ensure public service for all, we have levelled down quality, while increasing costs.

In short, all this is to say that our aging societies are doing badly because growth cannot come from youth, nor from the wealth of the middle classes, nor from the state who has already done far too much. However, every crisis has its good side. It allows us to correct dysfunctions and start on new bases. We may criticize the markets for the pressure they put on governments to take austerity measures, but it is the only way to put politicians who only have a medium-term vision facing their responsibilities.

On the stock side, the good news is that we are gradually getting closer to affordable valuation levels again. The companies' results are good, or even excellent. As of August 2, the Total market capitalization ratio to GNP US thus rose to 90.5, which is practically in the valuation zone considered correct. Let us recall that these moments have been rare since 1997. Worse, since that date the market has been moderately undervalued only twice, at the beginning of 2003 and at the beginning of 2009. This means that we started from very high and that we are still paying today for the euphoria of the end of the '90s. Warren Buffett had predicted it, shortly before the bursting of the Internet bubble. Everyone had then treated him as a "has-been".

The other good news is that the stratospheric rise of the CHF against the dollar and the euro has forced the Swiss National Bank out of its hole, with a rate close to zero and an increase in liquidity. It was high time. It is a good start, even if it will probably not be enough. Daniel Kalt, chief economist at UBS, believes that the BNS could attempt a new currency operation, as in 2010. Last year it cost the central bank almost CHF 20 billion, but given the current exchange rate the operation would now be appropriate, he believes. He also believes that an intervention by the Bank of Japan on the currency market could also promote a fall in the franc. Voices are also being raised from the political world for the Swiss government to also take measures against the strong franc.

We were worried about last January already on the market valuation. Of course, we could not have known at that time the troubles that followed (Fukushima and government debts). Nevertheless, what we know, and it is obvious, is that the more expensive you buy, the more risks you take. Similarly, if you focus on cyclical or high beta stocks, you expose yourself to the stock price falling even more heavily than the market. For this reason, the long positions of our portfolio were in the minority until now (but in retrospect we say that they could have been even more so) and above all they focus on defensive stocks, which allowed us to beat the S&P 500 market and the CAC 40. However, we are still bad with CHF as reference currency, because of the strength of the Swiss currency.

With more attractive stock valuations approaching, and also the hope that the Swiss currency is at least starting to stabilize, the opportunities will become great to buy solid dividend-paying companies at a good price. This means obtain a better income from a given capital. This is how dividend investing should be viewed: income is the most important factor, the price is secondary. This means that bearish phases are more easily experienced because dividend payers are less sensitive to the market, but in addition, new sources of income can be acquired at a low cost. It is paradoxical, but dividend-oriented investors should be happy about a bear market. To do this, they should of course focus on quality companies! A comparison can be made here with investing inreal estate : periods of decline are opportunities to buy a good price for a property that will generate monthly payments and could possibly be resold much later, when the market is doing better.