The ECB warned of a significant correction movement – Experts knock out

Deputy Governor of the European Central Bank Luis de Guindos warned on Wednesday of a significant correction movement threatening the market. According to De Guindos, investors are currently overly optimistic and underestimate the risk caused by geopolitical tensions.

Nordic rescuer Antti Saari disagrees with the ECB.

“Based on the data we’ve looked at, it’s hard to argue that investors are overoptimistic,” says Saari.

According to Saari, investors are more cautious if market valuations are compared to future profit expectations.

“The profit outlook for the next twelve months has risen more this year than the stock market prices in Europe and especially in developing countries and the United States,” says Saari.

“In my opinion, it’s rather the opposite. The valuation multiples have fallen, which means that investors are even a little cautious about the future.”

According to Saari, at least for the time being, the situation is not such that the long-term outlook has weakened substantially. However, the situation may change.

“If the situation in the Strait of Hormuz were to change in such a way that it would not be justified to wait for calm within a few months, then it could be possible that some kind of correction movement would be seen.”

On the other hand, even then, it would probably end up in a situation where the oil from the Strait of Hormuz would be successfully replaced with oil from elsewhere, and the increased supply would lead to a drop in oil prices before long. Replacement production would be put into use within a couple of years at the latest.

Saari reminds that a bigger repair movement was already seen after the United States attacked Iran.

“Now we are surprised that the rates rise so quickly after that. There is actually nothing extraordinary about it, especially when you take into account the improved profit prospects. The market works exactly as it should.”

Nordea still maintains an overweight of about five percent in the shares compared to the normal situation. An investor with an investment horizon of more than ten years can have a bigger share weight.

“Yes, there are still good opportunities for the shares to produce well in the rest of the year.”

“We’re not terribly negative”

Also S-Bank rescuer Tanja Wennonen-Kärnä found the ECB’s comment surprising, but does not disagree as strongly. According to Wennonen-Kärnä, the situation is not clear-cut.

“Our equity and interest weighting are neutral. We see that there are quite a lot of risks and last week we reduced the equity weighting so that we could repatriate profits before such a possible situation”, says Wennonen-Kärnä.

“But at the same time, we are not terribly negative. Really strong profit development, especially in the United States, and artificial intelligence companies with their investments support this whole.”

According to Wennonen-Kärnän, a larger correction movement would require a re-escalation of Iran’s attacks and the certainty that an agreement will not be reached in the longer term.

On the other hand, he does not rule out the possibility that the situation in the Strait of Hormuz and, among other things, the upcoming midterm elections in the United States would cause some kind of volatility in the stock market around the end of summer.

“If there is a decline, it could perhaps be around 10 percent, which is part of a normal stock market year. So it is by no means the beginning of a recession,” Wennonen-Kärnä estimates.

“If such a correction comes, it will probably not strongly affect European shares, because Europe and Japan are the only markets that are only close to the end of February, when the war started. Other markets have risen much more strongly,” Wennonen-Kärnä estimated.

According to Wennonen-Kärnä, investors have not seemed particularly optimistic.

“Investor confidence figures are really weak, as are preliminary PMI in France.”

Wennonen-Kärnä encourages you to continue investing, keeping in mind broad diversification. For example, stocks in the United States are driven by strong investments in artificial intelligence, which have so far been covered by the companies’ cash flow.

“It’s not about going heavily into debt and investing with debt money. I think this is still a very healthy whole.”

Earnings growth expectations are still globally good, which supports equity investors, although geopolitical tensions cause risks.