Equity market liquidity is no longer what it used to be.
It is now clear that the inevitable correction after the historic rally off the 23 March low has begun.
The first phase of this correction was characterised by profit-taking in the leading sectors of the US market in favour of value stocks. In a context of growing uncertainty about the continuation of the economic recovery, it was only a flash in the pan.
We remain of the opinion that it is premature to return to value stocks as long as inflation does not show its nose and the recovery is more pronounced thanks to broad and comprehensive fiscal support. On the other hand, we do not think that we are witnessing the beginning of a bear market.
We expect a correction of between 10% and 20%, depending on developments in early November at the time of the US presidential election.
In the short term, one should therefore not be moved by the volatility of equity markets, which is, in fact, exacerbated by a structural change in the market. Nowadays, the depth of the market, i.e. its capacity to absorb large short-term selling flows, is much more variable than in the past due to the importance of high-frequency traders among liquidity providers. In fact, these traders provide most of the liquidity in organised markets (equities) these days. However, they have an unfortunate tendency to disappear when a correction begins. As a result, the depth of equity markets fluctuates much more than in the not-so-distant past. This is a short-term technical phenomenon and we think it is important to be aware of it in order to avoid these sudden downward moves from generating unfortunate selling impulses.
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From the long-term perspective to short-term explanations of what is going on in the economy and markets – our Group Chief Investment Officer shares his views.