How do you explain the recent correction
Can identify four main causes: first, the primary market of corporate bonds is closed at this time, which raises questions about the cycle of the LBO. This movement affects especially sectors cyclic (including mining, equipment and motor vehicles), where many transactions mergers & acquisitions and divestments was expected. For example, DaimlerChrysler must get out of Chrysler through an LBO. Then, investors are facing a lack of transparency and disclosure of financial groups. The Fed Chairman Ben Bernanke spoke about 50-100 billion in losses related to the crisis of the "sub-prime" (risky loans), but is still unknown companies which will be most affected. For investors, the "usual suspects" are the financial and sell without distinction. Third reason: in the current context of reacceleration expected the US economy, the strength of the price of oil concerned. Markets have questions on the strength of the consumer and, also, the financial suffering. Finally, the uncertainty leads to the sale of more risky assets, but the largest purchasers of risk are alternative management. To finance their margin (via optional markets) calls, the Fund must sell assets of quality, which contributes to weigh on the major indices.
What should be the extent of this period of turbulence Can you compare it to other major crises
This crisis is probably more profound than that of February-March and May 2006: it is not only concerns affecting the market but the actual losses on the "sub-prime". European markets could decline by 7 to 10 in all, returning to (the CAC 40 lost 5.26, last week, Editor's note). In fact, everything will depend on the evolution of the different variables that triggered it and, in particular, the communication on the effects of the "subprime". At the moment, we are in a process where the market sells the rumour. As soon as the investors know more, uncertainty, generator of risk aversion, will decrease.
Also, the next few months, the trend should be more volatile but remains bullish. We entered a period where there will be more "sport" in the markets! We did change our forecasts on major indices to end of 2007 (the CAC 40-6.300 points, the DAX 30 to 8.300 points, the S & P 500 to 1.575 points, Editor's note). There is not, for the moment, risk of a large correction: in history, large busts are are triggered when valuations were very tense. However, today, is not the case for large values European and American.
Which markets and sectors focus on
Insofar as European indices have made great progress, Europe is more affected. When there is further volatility, American investors tend to fall back on their domestic market. It is therefore better prefer actions across the Atlantic. We prefer rather defensive sectors. In particular, we put emphasis on pharmacy, where one could see in addition to programmes of share repurchases, in the wake of GlaxoSmithKline. The financial are now cheap and have opportunity to purchase, but will need to respond to the case by case basis according to the communication of the various groups. Finally, we recommend to stay away from the capital equipment and mining. It must also be vigilant on the average values, which could suffer more risk aversion.