MANAMA: Equities might be at record highs, with sentiment overextended on nearly all fronts, but this does not necessarily point to a bubble.
Saxo Bank, the online multi-asset trading and investment specialist, has published its quarterly outlook for global markets and key trading ideas for Q1 2018 with focus turning to bubbles: how they form and how to spot them.
It does, however, mean that a correction is likely and investors should be watching price action for signs of super-exponential growth, as well as central bank policy and of course inflation.
Peter Garnry, Head of Equity Strategy, said: “For Q1 we acknowledge the strong price momentum and upbeat expectations together with what will likely become a strong earnings season. This is causing us to believe that equities can push higher in the very short term, but that in the second half of Q1 macro data will begin to disappoint against expectations causing an equity correction above 7%.”
“Investors are expecting almost 20% growth in EBITDA in the S&P 500 this year, something that has not been realized since 1991. Hopes are understandably high given the end we saw to 2017, but the low implied volatility should not cause investors to doze off – quite the opposite. A policy mistake in China or the US is still possible and inflation, whether it under-or-overshoots, will be the most important trigger in global markets for 2018.”
“Sentiment is so overextended that investors can only be disappointed. Many indicators are elevated, often to an unprecedented degree, which increases the likelihood of a larger setback should macro data disappoint.”