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Here’s your dip

Stock markets in 2021 so far have shown the shortcomings of the ‘buy the dip’ approach. To start with, there was no real dip at all in the first eight months. So there was nothing to buy into and that meant missing out on most of the upward move until late summer. Then, last month, the dip came and it was for good reasons.

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Key take-aways

  •  ‘Buy the dip’ looks good on paper but only few have the guts to stick to it. That is why we advocate being fully invested by default or getting there in a staggered approach.
  •  We lower growth prospects for China and trim our 10-year US Treasury yield forecast below 2%. We see opportunities, though, in risk assets.

First, the ‘buy the dip’ community was confident and bought into the first downleg just to realise that the September pullback was deeper for fundamental reasons. This is the second flaw in the approach: you never know whether the dip will turn into a correction (more than 10% down), a cyclical bear market (more than 20%), or – God forbid – a structural bear market (not making money in stocks in ten years or more).

It feels like being in limbo just writing about this. Looking at any long-term data series, the far superior strategy has been to be invested all the way. Whenever you are underinvested, you should go back to normal – in one go or, if needed, in a staggered approach – and, whenever your risk assets go completely bananas, trim your exposure to your target. Or maybe it is even easier to have somebody act on your behalf accordingly after all.

China’s growth holding up
At this juncture, we acknowledge that there have been good reasons for the recent dip. Hence, we have curbed our forecasts for both Chinese growth and 10-year US Treasury yields given the dislocations in the global economic system. That said, we still see China’s growth holding up into 2022 and US yields reconnecting with economic reality (which means that they will still go up – just less than previously expected). Whether you ‘buy the dip’ or not, we still consider this the time to be fully invested. Investors are currently obsessed with bad news from supply-chain disruptions, political interference, and energy shortages. Good news, such as the further containment of the pandemic, is shrugged off for now. We think that this opens opportunities to buy back into risk assets.

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