The current market turmoil represents a mid-cycle pullback, not a secular shift, says UBS Securities Canada Inc. in a new report.

“Though another week of volatility has investors questioning their basic assumptions about the economy and markets, our message remains the same – this looks like a mid-cycle pullback that should see an overall drop of 10%-15% over 4-6 months, and hence is most of the way there,” it says.

Looking ahead, “we believe prospects for equities already look appealing on a 6-12 month horizon,” it says.

“While some may take little comfort from the fact that the TSX is ‘only’ at our fair value estimate (having fallen from being 10% above), importantly, it is still poised to grow noticeably over the next year,” UBS observes. “Specifically, because earnings levels are high, book values would still rise by about 5.5% even if earnings declined 10%, and realistic scenarios show about a 10% increase in fair value.”

“In addition to that rising floor of fair value, we also highlight that following two month drops in the TSX that have exceeded 10%, its performance in the subsequent 3-, 6-, 9- and 12-month periods has typically been positive,” it adds. “Moreover, the probabilities and percentage gains following these declines were considerably more positive in non-recession periods – as is now the case.”