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When did a 2% dip become a market correction?

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“The recent market correction has also taken stocks’ valuations to a more attractive level, which leaves room for equities to rise into the final months of 2017,” said Paolini in a note, dated 7 September.

But wait a minute, I can hear you think: ‘What market correction?’. Don’t worry if you just returned from your holiday: equity and bond markets have been calm over summer, and a magnifying glass would come in handy to analyse their movements.

Paolini was referring to the second week of August, when the MSCI World Index ‘plummeted’ by a hefty 1.85% (which they have again almost recovered from as we speak). Admittedly, it was the biggest price fall in months, and European and Asian stock markets were down slightly more, but it was far off from what investors generally consider a market correction: a fall of at least 10%.

 an you see the market correction Can you see the market correction?

It has now been 19 months since we last saw equity markets decline by that much, and we even haven’t seen a 5% fall since then. We must go back to well before the financial crisis, to the boom years of 2003-2005 to be precise, to see a longer period without a 5% price fall.

Buying on dips

But the ‘buying on dips’ mentality remains alive and well, even in the absence of a real market correction, as confirmed by my recent discussions with fund buyers.

“We bought an EM equity ETF in a tactical move in August after markets had dipped slightly, taking our equity positioning from neutral to a 3% overweight,” said Tanja Wennonen-Kärnä, a senior portfolio manager at Evli Bank in Helsinki.

Bart van de Ven of the Belgian wealth manager Accuro also chipped in extra money in a global equity ETF on 6 September “on behalf of some clients” after a small downward move in the MSCI World Index. “There is so much liquidity around with central banks staying in easing mode for the foreseeable future, and private investors still have a lot of cash on the sidelines,” he said.

A real market correction could still be a long way off. In the meantime, investors will continue to treat negligible falls in asset prices as buying opportunities. The alternative is to go take a long holiday. But you’ve only just come back from one. And the need to justify their presence is a human characteristic after all.

Perhaps Paolini was both exhibiting and playing to that trait when urging investors to step up their allocation to risky assets now. In fact, he had recommended investors to “dial down risk” just two months earlier, citing “a chance the ECB could end up making a policy mistake by prematurely ending policy accommodation”.

But the recent rise in the euro shows markets already expect the end of QE in the eurozone to be nigh, making it unlikely the ECB will surprise on the hawkish side. You may therefore just stay at your desks and treat the next 1% price fall as another market correction and buying opportunity.

Part of the Bonhill Group.