Equities
Global Market Sell-off: Is This An Opportunity?
Posted onUS stocks tumbled last week on 10 October, as the S&P 500 dropped nearly 5% since its all-time high on 20 September while the Nasdaq Composite retreated 7.5% over the same time frame. Over the past 20 days, sectors that were market leaders – such as Technology and Consumer Discretionary – slumped 7.2% and 7.8% respectively.
Asia markets followed suit on Thursday, as mainland China markets tumbled more than 5% and Japan's Nikkei index fell almost 4%. While Citi analysts believe there were a few factors behind last week’s stock sell-off, a trigger for such a sharp move lower is not obvious – although the sharp rise in UST yields over the past several weeks may have been a major contributor, with 10-year yields reaching 3.24% on the same day as the sell-off.
Other contributing factors include: risk reduction ahead of the midterm elections in November; a rise in US-China tensions beyond trade as the US accuses China of meddling in US elections and corporate spying; anxiety ahead of the US Treasury’s report on currency manipulation; the IMF’s global growth downgrade from 3.9% to 3.7%; and early signs that the US growth momentum may start to ease.
Citi believes last week’s stock sell-off is following the course of many routine corrections that have been followed by recoveries, which could be an attractive opportunity for investors as valuations recover. Citi analysts point out that the S&P 500 and Nasdaq have still returned 6% and 8% respectively this year, despite last Wednesday’s sharp sell-off.
Citi is neutral on US equities as Citi analysts believe the late-cycle stimulus from the Trump administration’s 2017 tax cuts contributed to US equity outperformance so far, but future gains may be limited as the stimulus fades – with US corporate earnings growth likely to top 20% this year but narrowing to a more gradual 9%-10% in 2019, bringing it in line with other markets.
Citi is overweight EM, particularly Asia, due to attractive valuations and positive longer-term economic prospects throughout the region – contributing to a forecasted 12% earnings-per-share growth.
