According to an investor, in the next two months, a market correction could happen.
“We believe there is a certain probability for a market correction over the coming two months, however, there is no inevitability for this to happen. What would be required is a trigger,” Lothar Mentel, chief executive officer and chief investment officer at Tatton Investment Management, said.
After the strong stock performances in Europe and the U.S. since the start of the year, many investment managers and analysts have been talking about a market correction. Europe’s Stoxx 600 is up by about 3 percent year-to-date and the S&P 500 is up about 10 percent since January this year.
“We are approaching a peak, if we haven’t reached it already, and I think we are due a correction anyway and we’re going to be seeing some good reasons for that,” said
David Marsh, managing director of OMFIF, an independent think tank, earlier this week durinig a television interview.
Investors have made in half of the year what they used to do over an entire year for the past 90 years as in just under half a year in 2017, the total return of the S&P 500 index hit its annualized average (over the past 90 years). Attracted by positive economic data and strong earnings, investors have also run to European equities throughout the year. However, if the right trigger takes place the party could come to a close soon.
“In our opinion, the highest risk/probability for such a trigger event is still a slowdown in China – not (yet) North Korea or Trump,” Mentel from Tatton Investment Management said.
Due to its pile of debt and lower economic growth, China is seen by many as a great risk to the world economy. China could spark the next financial crisis, warned the International Monetary Fund last month.
“The growth outlook has been revised up reflecting strong momentum, a commitment to growth targets, and a recovering global economy,” the IMF said last month. “But this comes at the cost of further large and continuous increases in private and public debt, and thus increasing downside risks in the medium term.”
Jitters have also been sent across global markets by the recent escalation of words and actions between North Korea and the United States. With the currency index down nearly 10 percent, the dollar has lost some strength since January. As a result, safe haven assets such as gold and the Japanese and European equities are the places where investors have flocked to.
“In general, going into Autumn with European Central Bank (ECB) and Federal Reserve meetings ahead, some misinterpretation/miscommunication (central bank failure) could lead to market stress with rates moving higher substantially, spread widening, equity market drop, etc,”said Christian Hille, head of multi asset at Deutsche Asset Management, though highlighting that this isn’t his base case scenario.
However, monetary policy is the second highest risk to a market correction, according to Mentel from Tatton Investment Management.
“The second highest is in our view that markets throw a tantrum over the U.S. quantitative easing unwind announcement,” he said.
The U.S. Federal Reserve continuing to raise interest rates and slowly removing its stimulus is the assumption that the markets have been working on. However, with investors worrying about lack of policy delivery by the U.S. administration, which has promised a range of fiscal policies including tax cuts and infrastructure spending that could support Fed’s normalisation policy, such assumptions have recently become less clear cut.
(Adapted from CNBC)