Market Comment: Markets correct; fundamentals remain strong

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Last week, global equity markets declined by around 3.5%. Declines were seen across the board, in the US, Asia and Europe. This correction comes after record gains throughout 2017 and into 2018.

Market nervousness, as measured by the VIX, an index of market volatility, has also risen in the past weeks, reflecting rising uncertainty. Year-to-date, global equity markets remain in positive territory in US-dollar terms, while in euro terms, returns are slightly less.

Why now?

The market decline is linked to profit-taking in global equity markets, based on rising market expectations related to inflation. Worries were further fuelled by a very positive US unemployment report that was released on Friday. Fixed income markets are now almost 100% pricing-in a hike by the Federal Reserve in March. As a result, US ten-year Treasury yields rose to 2.87%. Equity markets were affected, given the possible negative effect on valuations from structurally higher rates.

What should investors do?

ABN AMRO believes that the fundamentals supporting equity markets remain largely unchanged. Stock markets in 2018 are expected to continue to be supported by strong economic growth, increased investment spending and double-digit earnings growth. Economic growth around the world remains solid.
 
The ABN AMRO Investment Committee advises its investors to stay put during the current market turbulence. The favoured portfolio asset allocation at ABN AMRO continues to call for a moderate overweight in equities and a strong underweight in bonds. 

ABN AMRO’s view

We expect central banks to remain cautious and to continue to be the guardians  of economic growth. In the long-term, we also expect inflation to remain muted. After continued gains, however, stock valuations have become demanding and had been trading at above historical averages, but below peak levels. With stocks cruising at higher altitudes, markets become more vulnerable to adverse data points, such as the strong US labor data. While fundamentals are still strong, stocks could become somewhat more volatile going forward. We advise investors to remain alert to the risks and opportunities of a more volatile investing environment. A further decline in valuations could present selective buying opportunities.
 
Richard de Groot, Chair, Global Investment Committee

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