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Europe’s selectors preparing for big market correction

Europe’s selectors preparing for big market correction

An overwhelming majority of European fund selectors surveyed at Expert Investor events across the continent expect a significant market correction in developed equity markets over the next twelve months.

Almost 80% of fund selectors at Expert Investor Deutschland in Frankfurt in May said they expected a market correction (in excess of minus 10%) in developed equity markets over the next twelve months.

At Expert Investor’s Brussels event in late-April, meanwhile, 17 of the 23 fund selectors present (73%) said there was a “substantial risk” of a significant developed market correction over the next twelve months.

There was also an expectation of a downturn among fund selectors at Expert Investor Portugal in Lisbon during the same month –  61% said there was a “substantial chance” of a developed market equity correction (of more than -10%).

Rising rates

Chief among investors’ concerns is the impact of rising interest rates, pushing up the cost of borrowing, which could depress economic activity with a knock-on effect on the stock market.

Yields on benchmark 10-year US Treasuries are hovering at around 3% and with further rate rises expected this year, yields are expected to rise further which will likely encourage risk-averse investors to plump for bonds over equities.

A further significant rise in the 10-year Treasury yield this year would lead to a dramatic decline in the stock market, according to Goldman Sachs.

“While our base case looks for a gradual rise in the 10-year rate to 3.25% by year-end, we next stress test the outlook for a larger increase to 4.5%,” Goldman Sachs economist Daan Struyven wrote in a note to clients earlier this year. “A rise in rates to 4.5% by year-end would cause a 20-25% decline in equity prices.”

Inflation risk

Another concern for investors is inflation. Speaking at Expert Investor Portugal, T. Rowe Price fixed income specialist Stephane Fertat said rising inflation was the one of the biggest risks to global growth.

“We are starting to see signs of inflation picking up, such as more wage inflation,” he said. “We worry this could derail growth because it would lead central banks to increase rates and put the fragile growth dynamic we have at risk.”

This year has, of course, seen a surge in volatility across global markets. Thirty eight percent of fund buyers surveyed by Natixis in April said they expected the rise in volatility to have a positive effect on portfolio performance.

David Robinson

David Robinson is the editor of Expert Investor. He has 18 years’ experience as a business journalist and editor. In the past he has written for the Guardian newspaper and The Telegraph, and worked as...

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