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We view the recession risk as minimal, so we treat the sell-off as a correction. Our fundamental analysis, combined with recent sell-off dynamics, concludes this a good buying opportunity, with the upside potential bigger than the downside risk.

Main conclusion

−The sell-off was triggered by rising rates,higher inflation expectations and fears of central banks being behind the curve.It was fuelled by the prolonged period of low volatility, a benign macro and earnings environment resulting in an all-time high amount of short-volatility strategies and excessive equity exposure in value-at-risk mandates, margin accounts and active managers in general.

−We believe inflation scares are overdone. We think that structural forces and an underappreciated output gap will keep inflation down. Even if we are wrong though, this should stay a benign environment for equities, as we expect both GDP and earnings forecasts to be revised up in the months ahead.

−Fiscal policy has turned extremely expansionary, which is highly unusual at this stage of the cycle. Given the size of the stimulus following US tax cuts and the latest budget agreement, any concerns about a recession or slowdown should be eliminated.

−Current yield levels are supportive for both companies and the broader economy. Both nominal and real yields are low, even after the recent uptick. Even though we expect yields to move gradually higher from here, we do not see them as an obstacle for equity markets. Historically, periods of rising yields have been periods of rising equity markets as well, in both the short and the long term.

−Macro is still strong, earnings results are coming in as we expected (revenue beats are impressive and broad based). In our view, earnings revisions and the earnings outlook for 2018 are underappreciated by investors and will be a major tailwind ahead.

The sell-off put into perspective

−Big magnitude but short lived. An 8% sell-off or more usually takes longer, suggesting this is not over. However, we see good reasons why the worst should be over.

−Absence of real economic threat. It is this cycle’s first sell-off with a strong macro environment, suggesting it will be shorterand milder and that equities will reach the previous high more quickly.

−We see most similarities with the sell-off back in autumn 2014, suggesting the recovery could happen quickly.

−We should not neglect the downside risk but the upside potential is bigger and offers an attractive asymmetric return outlook.

Investment implications

We remain strongly Overweight equities and Underweight fixed income and cash. We are Overweight emerging markets in a global context. Within sectors, we would focus on cyclicals and growth over value. We expect 10-15% equity return over the next 12 months.