The surge in developed market equities since the U.S. election has pushed stocks deep into overbought territory. A correction is likely over the next few weeks.
Markets tend to swing from one extreme to another. This time last year, investors were fixated on secular stagnation. Now they are convinced that we are on the edge of a new global economic boom. Neither position is justified. Global growth has picked up, and this should provide a tailwind to risk assets over the next twelve months. However, as discussed in the prior two Insights, there are still plenty of headwinds around. This suggests that the recovery will be a halting affair, with plenty of setbacks along the way.
We expect global equities to fall by 5-10%, paving the way for higher returns over the remainder of the year. Once that recovery begins, European and Japanese stocks will outperform their U.S. counterparts in local-currency terms. We continue to expect EM equities to lag DM.