Deutsche Bank says 5-10% stock market correction likely before year end

A Deutsche Bank (DB) survey revealed on Monday that investors are expecting a market correction of between 5% and 10% by the end of the year.

In the lender’s latest survey of more than 550 market professionals, it found that 58% of respondents forecast a change of up to 10%, a cautious sign that the bull run could come to an end.

One in 10 (10%) are expecting a sharper sell-off in the equity market, while almost a third of investors (31%) believe the markets will reach 2022 without a decline.

The survey, which was conducted between 7 and 9 September, found that the biggest risk to the current relative market stability was new variants of COVID-19 that bypass vaccines, with 53% of those surveyed most concerned about this factor.

This was followed by concerns over higher than expected inflation, weaker-than-expected economic growth, a central bank policy error, and waning vaccine efficacy.

Other causes for concern included geopolitics, fiscal policy being tightened too quickly, a tech bubble bursting and worries about the debt burden.

Last week Binky Chadha, chief strategist at Deutsche Bank, said: “With the current cycle advancing very quickly, the risk that the correction is hard is growing.”

Over the last year, global stock markets have staged a strong recovery from the coronavirus pandemic thanks to central bank stimulus, government spending, and vaccine rollout programmes.

Markets across the globe have almost doubled since the crash in March 2020, with the FTSE 100 (^FTSE) also up almost 8% year-to-date, the S&P 500 (^GSPC) more than 20% higher, and the STOXX 600 (^STOXX) advancing 16%, at the time of writing.

However, as the Delta variant of COVID-19, which was first detected in India, begins to spread, economists are fearful that recovery is starting to lose pace, as seen in recent data from the US and China.

The survey also found that 44% of global investors expect lockdown restrictions to continue as they are, whilst a third (34%) believe further restrictions are to come but without a full-scale lockdown.

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It comes as a fifth of the market professionals told Deutsche Bank that they hadn’t returned to the physical office since the start of the pandemic. This figure rises to a third in the US.

Elsewhere, banks including Bank of America ((BA)C), Morgan Stanley (MS), Citi (C) and Credit Suisse (CS) told clients to trim exposure to stocks last week.

BNP Paribas (BNP.PA) said in a client note last week that it expects the S&P 500 to be at its current level at the end of the year.

“Given the risk of higher taxes and interest rates, we are broadly neutral on US equities and see more upside in European stocks,” BNP Paribas said.

Morgan Stanley’s chief investment officer Mike Wilson also told Yahoo Finance last week: “You should always be expecting a 10% correction. If you’re investing in equities, you should be prepared for that at any time.

“A 20% correction, which is really more disruptive, where people might want to try and position for, the catalyst for that is going to be once again an ice scenario.”

Watch: September’s markets will wrestle with whether the economy or monetary policy matter more