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Equities bounce after the storm – why?

Equity markets bounced back last week from their lows. The DAX fell 10.7% from its high and rebounded 2.7%, whereas the S&P 500 fell 10.16% and rebounded 5.82%.

Why the bounce?

Last Wednesday we got inflation data for January out of the US, which came in at 2.1% compared to the expected 1.9%. Any textbook would tell you that such a strong inflation figure would send the markets into negative territory.

However, they quickly turned direction and started trading in position territory despite the high inflation figure.

Change in Dynamics

The change in dynamics is a sign of the instability in correlations between bonds and equities, with the market focus shifting back and forth between inflation and reflation.

As technical selling has subsided, investors appear to be looking past inflation and rate concerns, and increasing allocations to equities in order to benefit from US tax cuts and further budget fiscal stimulus.

Despite borrowing costs are on the rise, investors seem convinced they’re not yet at levels that would hinder equities as economic growth accelerates.

Why am I still optimistic about equity markets?

Fundamentals remain supportive of risk assets. The robust, broad-based global expansion continues and inflation will at last accelerate in 2018. I expect these trends to evolve steadily enough for central banks to tighten monetary policy gradually as planned. Strong growth and rising interest rates (but not at a fast rate) should continue to support corporate earnings and equity valuations even as bonds yields steadily rise.

Which stocks will you be looking at picking up during this correction?

European
• BMW (ticker BMW in EUR)
• Renault (ticker RNO in EUR)
• ASML (ticker AMSL in EUR)
• Societe Generale (ticker GLE in EUR)

US
• Home Depot (ticker HD in USD)
• Mastercard (ticker MA in USD)
• Amazon (ticker AMZN in USD)
• Apple (ticker AAPL in USD

Emerging Markets
• iShares MSCI Asia UCITS ETF( ticker CEMA in USD)
• iShares MSCI EM UCITS ETF (ticker: IEMA in USD)

Conclusion

I expect 2018 to end the year with positive gains for global equities with particular preference to European and Emerging Market equities.

However, it is also true that pullbacks and volatility will become more common as investors adjust to rising interest rates. More volatility should not detail the underlying economic expansion or fundamentally dent risk assets, but it will make markets bumpier and less predictable.

Disclaimer: 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.

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