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The onslaught of bad news won out last week as global stock exchanges endured a heavy correction and investors retreated in a massive flight-to-quality. At a time when some observers already see a buy opportunity in the recent slide, we continue – given our view of the macro-economic and geopolitical situation – to take a protective stance in the near term. There are four main reasons behind this:

1- None of today’s geo-political conflicts (Iraq, Gaza Strip, in Ukraine-Russia or South China Sea) seem to be ending anytime soon. The multitude of conflict zones and the extreme complexity of the present situation could well indeed fuel investor risk aversion.

2- The European economic picture has taken a bad turn. The lack of domestic growth drivers, amid an environment of soft global trade, has trumped the economic recovery. Current forecasts are no longer tenable and news in the coming months is sure to lead the market to revise its forecasts on future growth markedly downward.

3- The ECB is behind the ball when it comes to fighting deflation. Its intervention, if it ever sees the light of day, will not have the same impact on the markets as Fed action, particularly for the banking sector where all signs point to a sustained downturn.

4- Anticipations of a Fed rate hike have diminished due to recent international developments, which helped in limiting the damage on the US equity indices. However, the postponement of Fed normalization cannot be perpetually seen as good news.

Given the wealth of evidence, the correction that started several days ago is likely to continue. Our recommendations remain:

• Steering well clear of the equity markets, including in the emerging markets.
• Beefing up exposure to sovereign bond markets (the configuration of the T-bond market strengthens our scenario of a drop towards 2.25% for the 10Y), including for peripherals in southern Europe.
• Increasing exposure to precious metals.
• Easing exposure to the euro vs. the dollar over time.