Low chances of a major market correction as behavioural dynamics improve

08/08/2018

Improving market dynamics, including better investor sentiment, low positioning and positive price momentum, means the chances of a major equities correction of 10%-plus are low. The likelihood is lessened further by strong corporate fundamentals, as demonstrated by one of the best US earnings seasons in Q2 of the past years; good macro data pointing to consolidation at a healthy level; gradual and predictable central bank policies; and the start of targeted Chinese easing to counter the growth slowdown and negative trade impact.

While some market jitters were sparked recently by the unwinding of crowded trades in some of the ‘FAANGs’, including Facebook and Netflix, these developments were not significant enough to derail the market, especially as divergence in their prices and performance means investors do their homework to assess the relative qualities of each company.

Patrick Moonen, Principal Strategist Multi Asset, NN Investment Partners, explains: “Some market watchers see these events as the start of a bigger and broader market correction. However, we tend to disagree.

“In recent weeks, we have mainly seen an improvement in market dynamics. This of course does not alter the fact that in certain market segments such as the FAANG shares in which positioning is extreme, substantial corrections can or will occur on the basis of an adjustment of expectations.

“For the time being, I do not yet see any contagion to other market segments. However, one thing we have done in our allocation is to reduce the weight of US equities in favour of Emerging Markets, in other words a shift from a relatively expensive to a relatively cheap region. We stay neutral Eurozone equities.

“All these elements are evidence that a broad correction in risky assets has a low probability. Of course, if the trade dispute between the US and its main trading partners escalates further, we will see lower growth expectations and broad-based weakness in risky assets. The latest data on factory orders in Germany were weak and may be a sign that investment spending is getting affected. On the other hand, the outcome of the meeting between Juncker and Trump has shown that trade risk can go both ways. Escalating trade wars is not our base case or even the main driver of our investment strategy.

“Still, none of this detracts from the fact that in some crowded, momentum-driven market segments, we may occasionally witness sharp corrections. It is up to us to steer clear of these vulnerable segments by combining fundamental and behavioural analysis and overlaying a quantitative approach with qualitative insights.”

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About the author

Patrick Moonen

Patrick Moonen

Principal Strategist

Experience since 1989

Business Experience

2018-to date Patrick is Principal Strategist

2015-2018 Head of the Macro & Strategy team within the Multi-Asset Boutique of NN Investment Partners. He is responsible for tactical sector, region, size & style call within the top-down global equity strategy

2007-2015 Senior Strategist within the Multi-Asset boutique at NN IP

2002-2007 Head of Asset Allocation & Marketing Support Team in Brussels at ING IM

1994-2002 Portfolio Manager of Institutional Mutual Funds & Discretionary Mandates, at ING IM

1989-1994 Financial analyst, BBL Asset Management (now NN Investment Partners)

Qualifications

Junior Management Program at the Vlerickschool for Management in Ghent in 1995

MSc in Applied Economic Sciences from the from the Antwerp University in 1988

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