Blue Horizon: A correction, not a bear market

Blue Horizon: A correction, not a bear market

Thomas Trauth, Blue Horizon Wealth Partner AG (Foto: Blue Horizon).

Zurich – Leading US indicators suggest that the US economy is well on the recovery path. GDP grew 4.0% QoQ annualized in Q2. This is without doubt a strong reading, but it has to be put into perspective on the back of the very weak first quarter, when US GDP fell 2.1% QoQ annualized, due to bad weather conditions and some sta-tistical peculiarities. In addition, the US ISM index rose to 57.1 from 55.3 in June, and labor market data remained very robust.

At the same time, European data were mixed. Italy slid back into recession with Q2 GDP falling 0.2% QoQ after a drop of 0.1% in Q1. The central bank statements did not add significant news or new guidance. However, we were surprised at how explicitly ECB’s president Draghi tried to talk the Euro down at his press conference on August 7. He offered a long list of reasons why the Euro has fallen and seemed to be pleased at the prospect of a weaker Euro boosting the fragile European economic recovery.

Typical risk-off environment 
Until the last few days of July, markets performed in line with recent months: major equity indices performed positively and US yields were gradually moving up. On July 29, however, we saw equity and credit markets starting to sell off on the back of rising geopolitical tensions. In early August we observed a typical risk-off environment with risky assets selling off and government bonds rallying. We think this has been due to the geopolitical tensions and to a lesser extent to Eu-ropean growth concerns. Equity markets started to sell off at the end of July July started with positive equity markets. However, during the last few trading days of July, markets started to correct. Developed markets lost 1.67% in the month, while emerging and frontier markets were able to maintain positive monthly performance figures with 1.4% and 1.3%, respectively.

Emerging markets provide better value than developed markets 
Our view that emerging markets provide better value than developed markets paid off in July. The sell-off was accompanied by steeply rising implied volatility levels. The VIX index, which fell to a very low level of about 10 in early July, rose steeply at the end of the month to a level as high as 17 (compare Fig. 6). While a level of 17 is still well below the historic mean of 25, the cost of insuring equity exposures has risen very significantly. In our view, fundamental factors, like economic growth, earnings, valuations still support equity markets in general, being helped also by still very accommodative central banks. We regard the recent sell-off as a typical risk-off movement in the market, predominantly driven by geopolitical concerns, and we remain constructive on the further outlook for equities.

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