Our Global Equity strategists believe that the inverse bonds-stocks prices correlation will not break
down. Indeed, the correlation normalized very quickly which, in their view, will act as an automatic
cushion for the market. Also, they note that when VIX spikes, such as what happened last week, equities
are higher 90+% of the time over the next 6 and 12 months, outside recessions. For the recession to
become a base case, one needs to see a sharp deterioration in the labor market. They expect Q3 results to
be challenging, as analysts’ expectations are high and activity has decelerated and they think this will
be a much bigger problem in Europe than in the US. Within the DM, they keep OW on US vs Europe. Within
Europe, they believe periphery – Italy – will continue underperforming. They stay OW Tech vs Banks, and
exporters vs domestic plays
With majority of systematic selling behind (~80%), more attractive valuations and still strong
fundamentals, the team believes the recent sell-off is a temporary correction. The recent sell-off is
similar to the one in February with technicals largely driving the market lower. Similarly, the decline
came at a time when market depth was very poor, and more than 2/3rd of corporates were in earnings
blackout. Investors were already positioned defensively before this correction; this leaves more room for
an easier bounce back led by mega-cap cyclical and secular growth helping lift the market higher. We find
the current equity multiple attractive at only 15.5x (ex-cash ~14.8x based on 2019 earnings), which is
below the long-term average of 16.0x in an environment where global rates are still low and equity supply
continues to shrink (the S&P 500 divisor fell to levels last seen in 2001). In their view, Small-caps has
the best risk-reward—earnings are expected to grow by 21% NTM (vs. 11% for large-caps) but trade at the
same multiple. They remain positive on Small-caps given their higher domestic footprint, disproportionate
benefit from pro-growth policies and deregulation, stronger organic growth, and M&A
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