Photographer: Andrey Rudakov/Bloomberg

Adviser to $650 Billion Now Hoping for a Stock Market Correction

  • BNP strategist says valuations, low volatilty are concerns
  • Recommends overweight cash, neutral stocks, underweight bonds

With valuations steadily rising, a correction may be good for equity investors.

That’s the view of the asset allocation adviser at the money management arm of BNP Paribas SA, which has 580 billion euros ($650 billion) under management or advisory.

“It would be nice to have a bit of a sell off,” Daniel Morris, senior investment strategist, said in an interview in Oslo on Tuesday. “Some kind of good wake-people-up sell off in equities. That’s certainly possible.”

Stock markets have rallied since U.S. President Donald Trump’s election win in November as investors were encouraged by possible tax cuts and deregulation. The S&P 500 Index has climbed around 12 percent and price to earnings has risen to the highest levels since 2009.

“On the equity side the primary concern is valuation and low levels of volatility,” he said. “VIX is so low. So just normal vol would suggest you’re due for something.”

With valuations stretched, it’s harder for investors to find “attractive” stocks and a correction would give investors an opportunity to redeploy money, according to Morris. He recommends neutral weight in equities, underweight bonds and overweight cash.

“You’re a little bit nervous because it’s an environment where if nothing goes wrong equities will be fine,” he said. “But we can always think of things that can go wrong.”

And two of those is a potential election in Italy and whether the Republicans in the U.S. can succeed in implementing their agenda of market friendly measures, according to Morris.

The politics in Washington around Trump could become so “chaotic” that the Republicans get distracted by it and won’t be able to pass all the reforms, which the markets have counted on, he said.

“A real derailing of the Republican agenda,” he said. “Reasonable probability, reasonably significant impact -- certainly for U.S. equities.”

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