The correction do not herald a long-term decline in equity markets

08.11.2018

Rising interest rates, market divergence, trade war and Italian budget turmoil. The potential triggers for the correction in October are many and resulted in a decline in the global equity markets. Cyclical sectors (industry, materials, etc.), Emerging Markets, Japan and small-cap equities were hit the hardest.

In our assessment, the background behind the current correction is a combination of several of the above factors. Over a long period of time, several markets - including large parts of EM, Europe and Japan - have already been in a correction phase while global equities have been upheld by a strong US equity market, especially the IT sector. It all changed in October when US equities over a few days fell by more than 11%.

The slowdown in macroeconomic key figures, which we have observed in large parts of 2018, continued in October. However, the US economy still shows some strength, and the weaknesses are more of a European and Chinese phenomenon, cf. chart.

Source: Bloomberg

Contrary to the "normal" picture of falling interest rates when the equity market declines, interest rates have remained very stable and are actually currently higher than at the beginning of October. By the end of the month and in the first trading days of November, we have experienced rising prices in the equity market, and thus we end the month with a decrease of approximately 5% for global equities.

We do not believe that the current correction evolves into a long-term decline in the equity market. A larger decline typically requires that the US economy is facing a recession, which seems far from the case. This do not mean that an extensive correction in the range of 15-20% is impossible, but as long as a recession is not part of the scenario, it will be a buying opportunity. In the slightly longer term, our position therefore continues to be that larger price falls should be used to increase equity exposure as long as the US do not face a major macroeconomic downturn.