International stock markets have fallen sharply in recent days, with prices some 6% lower in Europe and the US. In a number of emerging markets, the decline has been even more pronounced.

Does this mark the beginning of a reversal in the trend or is it a temporary correction?

What has happened?

• The trigger for the decline in share prices was – as has often been the case – a tweet by US President Trump. Everyone had thought that talks on a trade agreement between the US and China were back on track after Trump and his Chinese counterpart Xi had met in Osaka.
  However, the US President felt that not enough progress had been made. The imposition from September of a 10% tariff on 300 billion US dollar's worth of Chinese exports to the US that were exempt from duties was intended to speed things up. China reacted immediately with a currency weakening and restrictions on imports of US agricultural products. The US promptly responded by labelling China a ‘currency manipulator’.
• This development was one concern too many for the markets, coming on top of a number of things that have been undermining confidence for a while:
  • Sentiment among business managers in the industrial sector has deteriorated considerably over the past few months worldwide. Not only the ongoing conflict between the US and China, but also the increasing likelihood of a hard Brexit at the end of October and smouldering trade conflicts between Europe and the US have been a source of worry to them.
  • Although corporate earnings for the second quarter may be slightly better than expected, they are not exactly great. In Europe, earnings are down for the third quarter in a row, while in the US, they are hardly increasing at all.
  • The hopes pinned on the central banks were dashed last week when the Fed announced that it would cut interest rates now, but that it did not see the need for pursuing a much more flexible policy in the months ahead.

Now what?

• Stock markets react to sentiment, which means they are sometimes over-euphoric at and other times over-pessimistic. Corrections can therefore happen at any time and should be regarded as a reality check. As far as reality itself is concerned, there is no reason for panic.
  While it's true that economic growth has slowed down somewhat and industry is having a tough time, there are no signs at all of an economic recession (a worst-case scenario for the stock markets). The climate remains decent in the service sectors and consumers feel really positive too. They still tend to be optimistic in both the US and Europe and are supported by new jobs and by wage increases that are boosting purchasing power.
• We therefore believe that the decline in share prices is a temporary phenomenon and that there is no reason for fearing a reversal in the trend.
  Although an escalation cannot be ruled out, we are working on the assumption that – in the interests of both parties – the Sino-American trade conflict will start easing a little again. Even a potentially disastrous hard Brexit will probably be avoided on account of a new postponement or an agreement at the eleventh hour.

Our investment strategy(*)

• It had been clear for some time that the market was ripe for a correction. In our investment strategy, shareholdings had already been reduced to below their long-term benchmark.
• A further reduction in our positions is not on the cards just yet:
• The global economy is not slipping into recession.
• Central banks are ready, if necessary, to lend even stronger support to the economy by lowering key rates and purchasing bonds. The markets have already factored this in to a large extent, causing market rates to fall sharply. This makes bonds and cash very unattractive as an alternative to shares. The (gross) dividend yield of a well-diversified global equities portfolio quickly amounts to between 2.5% and 3%.
• We have adopted a wait-and-see approach to stepping up our holdings of shares. That could materialise with the publication of somewhat better economic indicators and/or by some easing of tension in the prevailing conflicts.

 

(*) The investment strategy described in this document relates to all investment funds (undertakings for collective investment) managed by KBC Asset Management NV, which make explicit reference in their investment policy, as laid out in the prospectus, to KBC Asset Management’s investment strategy.
The stated strategy is not, therefore, altered in the case of other investment funds, the investment policy of which does not refer directly to KBC Asset Management’s investment strategy. It is possible that these investment funds are managed in a way that differs from the investment strategy. You should always read the prospectus and the Key Investor Information Document for the relevant investment fund.