Last Monday was a day many investors want to erase from their memory as the stock market wiped out substantial amounts of profit from their portfolio. The aggressiveness of the sell-off led to comparisons with the stock market crash in 2008 as investors worried that the slowdown of the Chinese economy could send the developed world back into recession.

On grizzly Monday, it wasn’t just the equity markets that got slaughtered. On the same day that the Euro Stoxx 50 gave up 5% of its gains during the session, so did the price of crude oil, with WTI trading below the $40% level.

The sell-off in crude oil was a result of heavy short selling on the commodity as traders forecasted a lower oil price on the back of lower expectations from China.

The similar price movements of oil and the stock markets is not a coincidence. If economies do well, demand for oil increases and so does the price of oil. An improving economy also means businesses are generating more profits and stock markets go up.

That day, markets painted a very bleak picture of the outlook of the global economy and both the stock markets and the price of crude reached their low for the year.

However, not everyone was a loser that day. There were contrarians who waited a long time to be able to pick up stock at such attractive valuations. It is in times of increased volatility that they build positions aggressively to pick up the pieces after the storm.

After having worked in the financial industry for 10 years, it doesn’t come often to be able to pick up stocks at bargain prices. Companies like BMW, Allianz, Daimler and BNP are all trading on an earnings yield greater than 10%. For an investment manager, the excitement is the same as going into a store and buying something you always wanted at a huge discount. It’s something you don’t leave on the shelf, pretty much like Black Friday in the US.

But why did valuations become so cheap? The burst of the stock market bubble in China led to panic in equity markets in the developed world albeit values in Europe and the US being much more attractive than those in China. Before the burst of the Chinese stock market bubble, the Shanghai composite returned 150% to shareholders making Chinese valuations at least three times that of their US and European peers. During the same period the US and European markets were up only 10%. The sell-off erased the premium built in European equities after the ECB announced QE. It doesn’t come every day to get a second chance like this!

However, after the panic selling which priced in the developed world moving back into recession, we started getting data out of Spain and the US that defied what was happening in the markets.

Spain which is considered one of the weak links in the European Union, reported that gross domestic product expanded 1 percent in the second quarter and 3.1 percent from the same period a year earlier. The Spanish economy has now added eight consecutive quarters of growth.

The same positivity can be said for the US economy where U.S. gross domestic product grew at a 3.7 percent annualized rate in the second quarter beating analysts’ expectations.

The positive data out of the developed world led to a rebound in both equity and crude oil prices. I can say with conviction that at these levels European equity prices remain at very attractive levels from a fundamental standpoint. We are also seeing a move towards a reversal in technicals moving closer towards a convincing buy signal.

With regards to oil, I am no expert in the commodities market. But having looked at the correlation of equity markets and that of crude oil, I expect to see a pick-up also in the oil price albeit at a slower pace due to the heavy supply of crude oil even at distressed prices.

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.