You're reading: Business Sense: The million-hryvnia question – when is the right time to start buying?

The March rally in equity markets from Hong Kong to New York stirred interest among investors floundering for a place to store capital. History has proven that stock markets begin the long road back well before the real economy recovers, and last month’s numbers on leading equity markets are impressive, to say the least. One-month average index returns across the FTSE 100, Dow Jones Industrial Average, DJ EuroStoxx 50, Nikkei 225 and the Ukrainian PFTS Index exceeded 20 percent. However, many market players believe the current stock market optimism is nothing more than a classic bear market rally, only to be reversed in the coming days or weeks, back to the steady decline of the past 18 months.

And economic concerns remain. Jobless claims out of the United States, traditionally a bellwether of the world’s largest economy, continue to deteriorate. Weak housing starts hardly herald the imminent end of economic troubles, and the number of leading economies reporting growth dwindles quarter by quarter.

Brokers who believe the price rally will continue may well be proved wrong, yet the rally gives a flavor of what the potential equity market rebound may look like. As a recent Economist magazine article said: “Investors might be showing such exceptional foresight at the moment, or they may simply be spotting imaginary signs of life in a dead parrot.”

Pose the million-hryvnia question, and the truth shall set you free: When is the right time to start buying? When the market hits bottom! How can you spot the bottom? When everyone starts buying! The circular wit embodies investor attitudes right now, but it also encapsulates key investment strategies that form the backbone of investors’ arsenals in tough market conditions.

Three key ideas to hold close to your chest are: stimulus, defensive and rebound investing. Each is tailored to varying levels of risk appetite and return ambitions. For many, these strategies are not earthshaking and not the sort of run-to-the-phone-and-call-your-broker-screaming-BUY ideas. Yet they are well worth a second glance in the framework of global trends taking hold.

The first strategy is driven by stimulus injections, anchored in the Keynesian tenet of wide-scale government spending and subsequent economic growth. The most high profile of all, the colossal Obama spending plan – at $787 billion – is seven times that of Ukraine’s gross domestic product, and 4.8 percent of U.S. gross domestic producct, dwarfing Roosevelt’s New Deal. But it targets infrastructure, alternative energy, education, and health care. Germany and China, as well as the Group of 20, have announced similar spending as a way of mitigating the effects of the economic crisis.

Investing in companies that will benefit from the capital injection is a sound strategy, though carries a measure of risk that some are unwilling to shoulder. For those risk-averse individuals among us, defensive investing is the weapon of choice. The defensive investor aims to minimize risk by creating and managing a diverse portfolio of low-risk assets: bonds, cash-equivalents and low-risk stocks. Accordingly, and following the age-old wisdom big risk-big reward, the traditional defensive return is smaller, but that being said, also more stable.

In equity markets, the key is cross-sector diversification and choosing blue chip names that thrive in poor economic conditions, whose product is still in demand when the waters turn choppy. These stocks are marked by a low volatility owing to a lower correlation with the business cycle. Stocks of essential goods providers with stable cash flows, including utilities companies, low-end retailers, and even tobacco and alcohol producers, tend to outperform stock markets when economic activity slows. Large international names downgrade the risk of corporate governance concerns so prevalent in underdeveloped stock markets.

The third and riskiest strategy is pro-cyclical investing – buying stocks of companies whose earnings are heavily influenced by the business cycle, and therefore carry a higher risk. In today’s market it means buying into the coming rebound. Financials, commodity names, technology stocks, and real estate companies are all fine examples of pro-cyclical stocks, and the key is targeting larger players that will rise with a broad-based market rebound.

Investing in equities on the way down expecting to capture the near- to mid-term rebound is the essence of pro-cyclical investing. When markets do rebound, gains are heavily front-loaded, and offer the highest returns for investors who remain invested in the market.

Of course, that brings us back to the original issue of calling the bottom, which truly boils down to simple guesswork. Is a market rebound possible this year, this quarter, this month? Of course! Could the bear market continue for another year or more? Absolutely!

In the framework of different strategies, investment horizons are fundamental factors and an investor’s main asset is time. A longer investment period averages out short-term volatility risk. Historical market data has shown that a diversified portfolio has consistently generated positive returns on any five-plus year holding period.

Investing in bear markets is not an easy feat, but familiarizing oneself with on-hand strategies can prepare you to take advantage of the stock market upswing and capitalize on returns. The key is risk appetite and return ambition, and remembering that time is always on your side.

Danylo Spolsky is an analyst with Kyiv-based brokerage Galt & Taggart Securities, a leading investment bank in the frontier markets of the former Soviet Union, and a former editor at the Kyiv Post. He graduated from the University of Toronto in 2007 with a B.A. in Eastern European Studies.