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Equity markets: overdue correction or long-term deterioration?

Luxembourg, 07 October 2021 – Equity markets declined heavily in recent days, indicating the beginning of a correction. “Following the highs of past months, this is actually quite healthy and opens up new performance opportunities afterwards”, said Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “The sharp rise in energy prices, however, could lead to a more permanent deterioration.”

The price of natural gas quadrupled this year, which in turn led major customers to switch to oil, thus driving up the oil price. “It is interesting to see that it is predominantly in Europe that the price of gas has risen so sharply”, Gerlinger pointed out. “This is where additional supply constraints seem to play a role.” Nevertheless, energy demand remains huge in other parts of the world as well.

In many provinces in China, for example, energy supplies have been rationed. The availability of electricity is often no longer predictable, even for industry. “This leads to real losses in growth because full production cannot be achieved due to the lack of energy”, said Gerlinger. Increased energy prices could therefore also leave longer-term marks on the global economy.

All the more so as expensive energy is also driving inflation. September inflation data for the eurozone show a sharp rise, with the inflation rate reaching 3.4 per cent, its highest level in 13 years. “If this trend continues for longer, central banks will be forced to act and could then put additional pressure on economic growth by ending their loose monetary policy”, Gerlinger cautioned.

Additionally, last winter was very cold, so that gas storage facilities in Europe ran dry – and have not been refilled to date. Now they have to be refilled while, at the same time, increased consumption resulting from the strong economy has to be met. That is driving demand, whereas supply remains essentially unchanged. “A mild winter would ease the situation considerably”, said Gerlinger.

Lower prices also entail positive effects for investors: “The price setback was due, so that now some positions could return to valuation regions where they look more attractive”, Gerlinger indicated. Those who wanted to take advantage of a lower price level to enter the markets are now getting their chance. Investors should, however, always keep an eye on whether inflation is steadying or just experiencing a brief peak. “Steadying should be a cautionary tale”, Gerlinger advised.

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