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Brace for a 30% correction next year, warns LGIM

Brace for a 30% correction next year, warns LGIM

by Michelle McGagh Dec 07, 2017 at 12:50


The end to central banks’ quantitative easing (QE) programmes will cause an asset price correction next year with more than 30% wiped off valuations, predicts LGIM chief investment officer Anton Eser.

Eser said 2018 would mark the end of the eight-year bull market that has pushed shares and bond prices to record highs.

Although he noted the ‘synchronised global growth, a pick-up in global earnings and subdued inflation’ as well as central banks’ ‘relatively dovish’ stance, he warned there was a big risk looming.

This risk comes from global central banks removing and cutting back QE programmes, which Eser said would create a ‘big change’ over the next 12 months.

‘If you take what’s expected in terms of gross issues in the government bond market across major economies… [you have] tightening in the US and a rundown of the European Central Bank’s QE programme, and what the Bank of Japan will do with their QE,’ he said.

‘We have calculated what we see as happening in 2018… where there’s been issues is in the big amount of debt being taken out of the system with QE, now that will change.’

He said the supply of government bonds would switch from net $300 billion taken out of the market to net supply of $500 billion.

‘The net supply will crowd out the private sector,’ he said. ‘QE forced people to buy investment grade bonds and equities and in 2018 that shifts.’

It is not just the scaling back of QE that will push a correction, Eser argued. He said the reduction in credit in China as it tries to get a grip on its shadow banking problem would also have an impact.

‘Shadow banking has been very important in terms of growing credit,’ said Eser. ‘It has pushed up bond yields in China.’
He said the conditions that created tailwinds for credit and asset prices generally would move to ‘head winds’.

‘As we are looking into 2018, this low volatility, high asset price environment, there is a potential trigger for volatility. Timing it is very difficult but sometime next year there will be a pick-up in volatility and it will lead to a repricing of the risk premium.’

Eser said the scale of the correction was hard to predict but that price-earnings ratios on US equities were at least 20% to 30% more expensive than historic norms so a correction of the same degree should be expected.

‘When you go through any type of repricing you always overshoot on the downside,’ he said. ‘It could be well in excess of 30%.’

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Comments  (28)

  • Ali B: 

    Any correction requires a catalyst though surely? So while this may end up being true, whats the actual trigger?

    15:04 on 07 December 2017

  • seaside observer: 

    suppose l and g will sell all their shares then

    pity they cant they are too big

    then they could always do an "odie" and short the market trouble there is

    you might lose big time if the market doesnt fall.-but if you are sure it will

    then put your money etc

    15:35 on 07 December 2017

  • Mark Stringer: 

    I'd be very grateful for the exact date.

    15:35 on 07 December 2017

  • joseph o neill: 

    Kind of agree,however what's the alternative to equities with banks offering zero rates meaning inflation will erode your savings.

    15:37 on 07 December 2017

  • The Pensioner: 

    Share prices may fall but will dividends be affected. If not, then just take the dividends and wait for the eventual recovery.

    15:43 on 07 December 2017

  • Gleaner: 

    The trigger - this type of article maybe

    15:51 on 07 December 2017

  • Alison Bundles: 

    Exactly. That's the question a lot of us want answered. Come on, clever people, what is it!

    15:52 on 07 December 2017

  • Mark Stringer: 

    "The Trigger"? Jeremy Corbyn even getting a whiff of No10!!

    16:08 on 07 December 2017

  • Jim99: 

    I think it will be mid-May, around the time of my birthday, which is an increasingly depressing occasion anyway.

    16:14 on 07 December 2017

  • Chris Clark: 

    So far,, every time I check these sorts of apocalyptic forecasts 12 months after being made, nothing at all disastrous happened. Will this turn out to be just another one I have diaried to check next December?

    16:14 on 07 December 2017

  • Alison Bundles: 

    And the answer to The Pensioner?

    16:19 on 07 December 2017

  • joseph o neill: 

    Also from what level might we see this correction?,7500,8000 on the FT100, or will the small cap or FT250 lead ,my personal take for what' it's worth is we haven't had Euphoria yet?.

    16:27 on 07 December 2017

  • The Pensioner: 

    Many decades ago (I'm in my 8th decade) I remember one of the Fidelity fund managers saying 'don't try and second guess the market .. the number of people who can actually do that, successfully, you can count on the fingers of one hand". I've followed that advice ever since and it hasn't failed me ... yet.

    16:33 on 07 December 2017

  • Craig Ross: 

    Why do they even report this nonsense? If you knew the future you could profit mightily and you wouldn't be telling anyone else about it. Talk of corrections almost always involves chatter for a year about (say) a 20% fall, a market rising by (say) 17%, and then - at some point - a ten percent fall for a day which is hailed as the great proof that the Nostradamus was right.

    Loose stool water. Bottom gravy of the worst kind.

    16:40 on 07 December 2017

  • John Griffiths: 

    Much better to spend "time in the market" than try "timing the market". I did once [pull everything into cash ahead of a correction - never tried to repeat the exercise. The distortions of QE and these super-low interest rates are things we have no experience to draw on. Clearly the slowing of QE will drag things down - all depends how fast it is done and whether two countries go together to do the reduction.

    16:41 on 07 December 2017

  • Jonathan: 

    I can see you'll think that cheap money supply is ending if you listen to central bankers. But they would say that wouldn't they, they've been telling us cheap money is going to end for the last 8 years and it hasn't. They tell us this because them just saying this supports the value of the local currency, nothing to do with what they are actually going to do. President Trump is looking to increase the deficit. This is a signal of more cheap money to come.

    16:51 on 07 December 2017

  • Nick-: 

    Fall of 30%, because the base rate changed by 0.25%!

    The author responsible for this needs a holiday.

    17:22 on 07 December 2017

  • Thrugelmir: 

    A certain quote springs to mind.

    "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch

    17:48 on 07 December 2017

  • richard tomkin: 

    How does the Legal and General man come up with the figure of 30% ? Why not 20% or 45% ? Are his predictions of any greater value than those of the man on the omnibus ? Numbers out of a hat ! In any case,if L&G's own shares were to fall 30%,they would still be some eight times the level to which they fell in 2009.

    18:47 on 07 December 2017

  • Andrew Stevenson: 

    "“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

    Warren Buffett

    19:41 on 07 December 2017

  • Nick-: 

    @Andrew Stevenson.

    Excellent quote.

    19:55 on 07 December 2017

  • King Lodos: 

    You don't *need* much of a trigger – the Tech crash was triggered by a pet supplies website going down.

    The key is what happens to savings rates and treasury yields .. When a 10yr Bond gives you a risk-free return of (say) 3 or 4%, what's going to happen to European Junk Bonds with yields of 2%? .. Or stocks on earnings yields of 3%?

    That's what happened in 2000 .. Stocks had crept up to average PEs of 50 (2% earnings yield) when you could briefly buy 10yr bonds nearly yielding 7% .. Soon as endless upwardly revised company earnings estimates fade, there's a huge rotation out of risk assets into government bonds .. The uncertainty is whether we'll be able to withdraw stimulus

    20:32 on 07 December 2017

  • Robbed again: 

    Highly paid persons like him love controversy as it adds to their profile and remuneration package! Please will his employers check his prediction next year and if he is wrong reduce his salary accordingly. He is trying to talk the market down to create a self fulfilling prophesy for his own gratification and advancement. I have diariesed to check this and will buy a share to be present at the next AGM to vote against his remuneration package if he is wrong.

    22:31 on 07 December 2017

  • Mr Helpful: 

    "He said the supply of government bonds would switch from net $300 billion taken out of the market to net supply of $500 billion."

    That's the trigger. A reversal of $800bn in the Central Banks cash-flow.

    Trump needing to borrow more money will only worsen that situation.

    QE succeeded in avoiding financial mayhem, deflation and depression, but at the cost of driving all Asset Classes to seriously high valuations.

    30% downside seems a reasonable estimate, but whether 2018 will be the year is open to question.

    Markets today could be likened to the cartoon character (Road Runner?) running off a cliff edge, continuing on in mid-air without problem until looking down. Oops!

    08:34 on 08 December 2017

  • richard tomkin: 

    My best forecast is : I don't know.

    09:06 on 08 December 2017

  • richard tomkin: 

    My best forecast is : I don't know.

    09:06 on 08 December 2017

  • Bestmate: 

    Craig Ross "Loose stool water. Bottom gravy of the worst kind."

    Whatever happens in the future, Craig's quote above is priceless. Onomatopoeia at it's apogee.

    18:27 on 08 December 2017

  • Craig Ross: 

    @ Bestmate. Stolen from Stephen Fry, I'm afraid!

    16:10 on 09 December 2017

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