Is the ASX a grizzly or a gummy bear?

Australia is set to enter a bear market – but it’s likely to be one of the sweet, gummy kinds. Photo: Achim SassOnce markets have dropped 20 per cent and enter bear territory, there are two types of bears they can encounter: savage grizzly bears, or the chewy, sweeter and decidedly less terrifying gummy bear.

Chances are that Australian investors will meet the sweeter variety this time around, according to analysts at Credit Suisse. Australia’s benchmark S&P/ASX 200 index has lost about 18 per cent since it last came close to the 6000-point level in April last year. This week, it fell as low as 4803.9 points – narrowly avoiding the 20 per cent bear threshold, but with markets around the globe entering the woods, it’s likely Australia will soon follow.

As analysts are preparing for the local market to sink there, the discussion now revolves around what type of bear it will likely encounter.

“There is the grizzly bear, which is more vicious and involves further large declines in price indices, after the first 20 per cent setback,” Credit Suisse analysts Hasan Tevfik and Damien Boey wrote in a note to clients.

“Then there is the Gummy Bear variety.” ‘Sweeter, less dangerous’

The “sweeter and less dangerous” bear is more common and is marked by gains of an average 20 per cent in the 12 months following the slide, the analysts said.

And with stagnant earnings, aggressive corporate restructuring and largely reasonable share price valuations, “the potential coming bear market in Australia is likely to be one of the gummy kind,” they said.

The bleak start to 2016 for the sharemarket has a number of drivers – from weaker Chinese growth, the oil slump, banks writing down commodity companies’ debt and the effects of a strengthening US dollar.

Further declines in the S&P/ASX 200 will result in the 13th Australian bear market in the past 40 years, the analysts said.

Looking at the previous troughs, for two out of every three times the index slumped, the levels rebounded and ended up higher a year later.

Forty years of Aussie bears – not many were biting for long. Graphic: Credit Suisse

“So an investor buying into Aussie equities, once the 20 per cent decline is triggered, has a two in three chance of making money over the next 12 months,” Mr Tevfik said.

While Credit Suisse viewed this as a buying opportunity for some investors, Clime Asset Management reckoned the market’s retreat from last year’s high is a reflection of fundamental domestic problems, rather than simply an overreaction to overseas turmoil.

“The Australian sharemarket has arguably been in a bear market for the past nine months,” the fund manager said in a blog post. “The stimulation from a weakening currency, growing employment, historic-low cash rates and substantial inbound tourism growth is simply not transferring itself into higher reported profits.”

Only one thing seems clear to everyone: current share prices have the ASX teetering on a bear market – gummy, grizzly or stuffed.

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