A higher level of volatility is expected in the markets but positive returns after the fall of the Dow Jones, says Profuturo AFP specialist
Last Monday the New York Stock Exchange recorded the largest percentage decline since 2011. That day, the Dow Jones, the main indicator of this stock market, fell by 4.6%.
To understand the reasons for the fall and know what may happen later, El Comercio spoke with Gino Bettocchi, Investment Manager of Profuturo AFP.
What explains the fall of the Dow Jones?
The fall of the Dow Jones, as well as the fall of the stock market in general, is due to factors such as the high positioning in equities and the excessive optimism of investors after a rise of 35% since 2017. In addition, the rate of interest of the 10-year government bonds of the United States, which serves as a reference for the cost of global financing, had a strong upward movement reaching a maximum of 2.88%. In this regard, the possibility that the Federal Reserve will increase its reference rate to a greater extent this year generated uncertainty about the possible effect on the growth of the US economy and the behavior of the markets.
What is dragging this downside and how does it affect expectations in the short and long term?
The fall of the Dow Jones corrects to some extent the speculative effect (ratio price / profit) in this index that in 2017 registered a growth of 25%, while the profits of the companies grew 14%. Therefore, this correction is healthy for the market. We expect a higher level of volatility but positive returns, in line with the best prospects for global growth.
– What kind of instruments are those that have been most affected?
The correction of the stock market has affected both equity and fixed income instruments. In this sense, those of variable income have been more affected given that they imply a greater level of risk and are also those that have shown a greater performance in the last year. In this regard, the Dow Jones had a return of 25% at the end of 2017, while the Global Fixed Income Index (Global Aggregate) yielded 7%.
– What can be expected from this index for this 2018?
For 2018 we expect positive returns but with a higher level of volatility. The tax reform of the United States, which was approved at the end of last year, is projected to boost business growth. It is also important to mention that growth is not only happening in the United States, but that companies around the world are reporting higher profits based on higher consumption, higher levels of confidence, lower unemployment and higher wages. In general terms, we continue to expect that equity assets will continue to perform better than fixed income assets.