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If the stock markets fall by more than 20% from their highs, then there is a bear market. In the stock markets, investor sentiment is not exactly the best. As an investor, how should you deal with such a bear market? A few tips.

1. Avoid the winners of the last cycle

At the beginning of March 2020, we had to deal with the corona crisis, which turned the world upside down. Stock markets around the world collapsed, only to start a strong recovery not long after. In particular, the prices of companies that benefited from the crisis shot up. Think of pharmaceutical companies, but also home delivery companies and postal companies. For example, the PostNL share price has more than quadrupled in about a year’s time, from €1.04 to €4.82.

But now that the world is trying to put the corona crisis behind it, the prices of these companies are falling sharply. After all, the heyday is over, or so investors reason. 

And with that comes an end to a cycle that has lasted about two years. The situation now is very different from then: we go out more often, but we are also facing new problems, including high inflation and a shortage of personnel.

The advice is therefore: despite the recent price beating, do not invest in the winners of the last cycle. Instead, look for opportunities in lower-valued companies that generate strong cash flow, advises Capital Group’s portfolio manager Lisa Thompson. She sees telecom companies in Europe, Mexico and Japan in particular as promising.

2. Separate the wheat from the chaff

For years the money sloshed against the plinths. Central banks continued to print money and inflation was low. That is different now: central banks worldwide are raising interest rates to curb the sharp rise in inflation.

Consumers are becoming more cautious. Nextdoor stocks ipo is found online.Realtors are already reporting decreased interest in the housing market. Life is becoming more expensive and that brings with it the necessary changes. Consumers are less likely to buy a new, expensive telephone or to refrain from air travel. In short, there is a lot of uncertainty. And that is what investors are not waiting for. They want stability.

“You can no longer buy and hold on to the fastest growers without looking at the profit. That is why we are now seeing a renewed focus on fundamentals,” said Don O’Neal, also a portfolio manager at Capital Group. He expects stocks with continued good fundamentals to hold up better. “As far as I’m concerned, it’s time to only hold the investments with your highest conviction. So separate the wheat from the chaff.”

3. Choose dominant companies

As an investor, you can use some certainty in an uncertain period. Asset manager Jody Jonsson therefore advises investing in dominant companies that generate solid cash flow, have a strong competitive position and can finance their own growth.

So don’t take too much risk with young companies with promising prospects. It remains to be seen whether such companies can live up to expectations. And during periods of investor skepticism, these stocks typically don’t perform as well. With interest rates currently rising, these companies are also paying much more for the debt they raise to finance future growth.

“So I look for companies with reasonable, understandable valuations based on short-term earnings and cash flows,” says Jonsson. As an example, he cites suppliers of aids in the healthcare sector, or non-banking financial companies, such as insurers and stock exchange operators.

4. Grab the opportunities

Stock markets go through a crisis every so often. “The market invariably fluctuates between excessive enthusiasm and extreme pessimism,” said asset manager Steve Watson.

“An investor with a reasonable degree of objectivity can profit by selling during the excitement and buying during the pessimism. It is an approach that often hurts, but usually pays off in the early stages of market recovery, when pessimism gives way to optimism.”

So a bear market can also be an opportunity for an investor to pick up stocks at a lower valuation. “Provided he remains calm and patient, and focuses on the short term,” warns Watson.