Equity markets undergoing correction

B.If you look back over the past two weeks on the stock exchange, the Dax’s conclusion is more than disappointing: less than 9 percent or more than 1200 points. Over the past five trading days, the leading German index fell by more than 4%. The news on Friday also shows that the market is in a correction phase: the hedge fund Bridgewater of the stellar investor Ray Dalio has bet at least 6.7 billion dollars on the decline in stock prices in Europe. This clearly smells of a bear market, meaning further price losses.

Accompanying the sell-off in equity markets around the world is a sharp rise in bond yields, which is also the result of a sell-off. Since the beginning of June, the yield on 10-year federal bonds has risen from a healthy 1.0 percent to 1.9 percent. Thanks to the European Central Bank’s (ECB) calming pill, which after an emergency meeting on Wednesday announced the flexible reinvestment of maturing bonds from its purchase programs that expired in late June, bond markets have recovered slightly.

The 10-year Bund yield was 1.65% on Friday. The yield on ten-year Italian government bonds fell even more sharply, from a good 4 to 3.6 per cent. However, investors are now turning their attention to bonds after avoiding this asset class in recent years due to negative interest rates.

Priced at 85 percent, the 10-year federal bond is now worth considering again as a surefire security for many investors. Because when it’s due, you’ll get 100 percent back. In view of the longer term, however, this calculation hides many uncertainties. The fact that private investors are looking more and more at bonds shows the extent to which doubts on the equity markets have increased. High inflation and increasingly aggressive interest rate hikes by central banks in the US, Britain and even Switzerland, coupled with concerns about energy supplies, fuel expectations of a recession.

Lagarde under pressure to act

The fact that the ECB does not plan its first interest rate movement until July cannot be justified as a wait-and-see approach to economic development. Because their main task is to maintain monetary stability and thus take decisive action against inflation. This is where ECB President Christine Lagarde comes under increasing pressure to act. This is demonstrated by the 8.1 percent inflation rate in May, confirmed Friday by the Eurostat statistical office in a second estimate.

Even though interest rates on bond markets have risen, investors should be aware that they are still relatively low and, after deducting the inflation rate, are clearly negative. The current phase of equity market correction was long overdue, especially after the turnaround in interest rates and inflation was accompanied by new geopolitical conditions due to the Russian invasion of Ukraine. The question is, what else can you invest right now? Good advice is expensive in this case, but high dividend stocks from stable companies right now are worth considering as they can offer attractive long-term entry levels.

For example, James Rutherford, head of European equities at Federated Hermes wealth manager, favors companies that can be more offensive than defensive and that have strong free cash flows. This allows them to invest in research and development and to buy back their shares. Such companies could emerge stronger from the turmoil.

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