Panic selling a window to start accummulating

(Feb 12): The panic selling in global equities resumed after a brief reprieve on Feb 6. The S&P 500 index shed another 3.75% overnight on Feb 8, bringing its total losses to 8.5% since the correction started. While investors’ concern on rising rates was a commonly-cited reason for the correction, the unwinding of exchange-traded products (ETPs) that bet on volatility is another plausible factor accentuating the situation. Volatility could well stay at elevated levels in coming weeks, dragging markets lower.

But the positive macro backdrop of global synchronised recovery and positive earnings momentum do not change overnight. It is also premature to suggest that the current stock market weakness has impacted the economy in a negative way. We believe that rationality will eventually triumph panic – for two reasons:

First, the positive outcome from this correction is that valuations are no longer expensive for the US market. And indeed, the S&P 500 index trades at 16.6x forward earnings after the sell-down and this is below the long-term average (Figure 1). So beyond the near-term gyrations in asset prices, the current bout of weakness actually provides an attractive entry point for longer-term investors.

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