“There are some things you learn best in calm, and some in storm.” — Willa Cather.

In

the last two weeks, we witnessed some serious panic selling with some bond prices falling by 15 to 20 points, which is considered a steep fall.

This was precipitated by some adverse news on Deutsche Bank which struck the market into a very fearful state. It wasn’t enough to punish Deutsche Bank’s stock and bond prices, they extended the “punishment” to many of the major European banks.

Firstly, let us start with a little synopsis of the problem and the subsequent events. Deutsche Bank — the largest bank in Germany — announced larger than expected losses for 2015. Unfortunately, the bank had been given enormous fines for rigging the Libor rate and violating US sanctions.

One could devote an entire article to all the things they were fined for and even fines that they will have to pay in 2016 — but that is not the point of the article. The Libor rigging scandal was not confined to Deutsche Bank and in fact many of the huge European banks were also involved, just to add a little context. However, the impact of the fines was to severely harm their bottom line and resulted in their suspending their dividends for two years in a bid to improve capital levels and also laying off 25 per cent of their workforce.

One would expect that the market would want to punish Deutsche Bank for their poor showing; however, it was unwarranted that they would choose to punish even banks in strong financial positions, not to mention the effect on the US equity markets which also took a beating when the news was released concerning the German bank. It was panic selling at its best.

Many of the Bloomberg analysts and our research team looked into the situation and there was no earthly reason for the market to overreact the way they did. The banks were actually doing better than they had in a while, with very strong capital ratios in line with Basel III. So why then did the market react as if all hope was lost?

Did investors really think that Germany (the largest economy in Europe) who bailed out Greece would let their largest bank fail? It turned out that that wasn’t even a consideration as Deutsche Bank swiftly announced a buy-back of US$5.4 billion of their bonds, which wouldn’t be possible if it were cash-strapped.

Then Jaime Dimon, CEO of JP Morgan, reported his purchase of his company shares using an entire year’s salary (a whopping US$26.6 million!). Wouldn’t you love to earn his salary???? In addition, Credit Agricole (another European bank) announced earnings that beat estimates and they were joined by Commerzbank (another German bank). All of these events caused an immediate turnaround in the market and prices went back up and calm was restored. And they all lived happily ever after (if this was a fairy tale).

The lessons learned are as follows: when everyone is panicking, before you run for the exits, do your due diligence. Analyse the numbers, ask yourself if their behaviour is justified.

The research showed that the market was oversold and Jaime Dimon profited handsomely from keeping a calm head. Deutsche Bank also profited from buying back their banks’ debt at a cheaper price. There was lots of money to be made for people who kept their cool and dived in the deep end.

The trend is for the markets to make emotional moves, there is a tendency to expect the worst and to look for any excuse to get out all positions. It is not only Jamaica where “herd” investing is in play.

The good thing is that the clear-headed investors can wait for these golden opportunities, and make nice additions to their nest eggs.

Remember to always have a balanced portfolio while doing the necessary due diligence on the company’s fundamentals before you buy stocks or bonds. There is really no need to panic. There are investment strategies for bear markets (down markets) and bull markets (up markets)! Happy investing!

Yanique Leiba-Ebanks is the assistant vice-president, Trading & Business Development at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm