Existing Customer Hub
Markets react sharply: time to panic?
To state the blindingly obvious: 'stock market corrections happen all the time!' Nonetheless, each one does make us jump a little. And it's no different this time, either. But more than that, after a virtually soporific 2017, where not a word was uttered of stock market corrections and the rate of fluctuations sank to an all-time low, some investors now seem to have been most rudely awakened.
That 2017 was an investor's year in which we remained plain-sailing in calm, untroubled waters had everything to do with 'Goldilocks'. A dream scenario for every equity investor:
But every fairy tale must end sometime. That strong, burgeoning economic growth translates sooner or later into higher inflation figures, upon which the central banks tighten their policy. Increasingly investors seem of the view that the American fairy tale is now over. The latest US labour market report was beyond compare! Yes, you needn't rub your eyes: it's an excellent labour market report that underlies this stock market correction. Things used to be different. Last Friday, it was not just revealed that a further 200 000 jobs had been created. The surprise came with the wage rise of 2.9%.That a scarce labour market leads to a rise in wages is a well-established economic pattern but many people viewed it with astonishment as a first indication of mounting inflation. All of a sudden, the financial markets fear that the US central bank (the Federal Reserve) is set to speed up raising its key rate. The consequence: interest rates up; so, bond prices and equity markets down!
The graph shows that economic growth and interest rate levels go hand in hand! The unbridled global creation of money by central banks depressed interest rates to exceptionally low levels.
Now they're starting to bring their policies back into line, it should come as no surprise that interest Rates are returning to normal levels, i.e. rising. Moreover, we're still far below the interest rate levels at which economic growth starts to suffer.
Goldilocks ain't goin' nowhere just yet. In countries where the jobs market shows signs of supply shortages, like the US and Germany, we anticipate wage rises. But this progress in labour markets isn’t present elsewhere yet. The jobs market can therefore pick up across the entire euro area, there's no shortage of labour to fill vacancies. The 2% inflation target figure advanced by the European Central Bank is therefore still very distant. Frankfurt is also considering its next step in monetary policy terms but its first interest rate rise doesn't seem to be in the offing until well into 2019.
To our mind, there are no immediate grounds to shift our stance:
(*) 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.
This document is a publication of KBC Asset Management NV (KBC AM). The information can be changed without notice and offers no guarantee for the future. No part of this document may be reproduced without the prior, express, written consent of KBC AM. This information is governed by the laws of Belgium and is subject to the exclusive jurisdiction of its courts. Publisher: KBC Group NV, Havenlaan 2, 1080 Brussel, België. VAT BE 0403.227.515, RLP Brussels. www.kbc.be. A company of the KBC group.