Global equities will end the year higher - Credit Suisse
By Abigail Townsend
Date: Monday 17 Jun 2019
(Sharecast News) - Credit Suisse believes equity markets will end the year higher, despite a range of global tensions continuing to weigh on equities.
In a note outlining its current global equity strategy, the investment bank argued that financial markets would be higher by the end of the year, with upside of around 6% for the MSCI All-Country World index.
It pointed to a range of factors working in equities' favour, noting: "We have seen the longest spell of negative global macro surprises on record, and our base case remains that global purchasing managers indices are close to a low."
Credit Suisse continued: "The 13-week moving average of earnings revisions has decoupled from falling PMIs, and when earnings revisions trough, markets typically rise by 13% on average, compared with around 2% so far."
And it concluded: "Central banks around the world are entering a new easing cycle at a time when US financial conditions are already very loose and consistent with further rises in markets."
But despite this, Credit Suisse believes markets will remain close to benchmark "until we get more clarity around the trade war, a rise in Chinese money supply and US PMIs, a non-inverted yield curve and confirmation that earnings revisions are turning higher".
It continued: "Many US survey indicators and, most importantly, the US yield curve (3 month/10 year) are consistent with no GDP growth, yet US cyclicals are pricing in ISM New Orders of 64, around 2.5% GDP growth."
And it warned: "Trade tensions may not abate until closer to the November 2020 elections, depressing chief executive confidence, which remains consistent with a fall in US capital expenditure."
Alongside a possible decline in capex, Credit Suisse outlined other potential threats to the US economy. "Nearly all the US return on equity improvements over the past 15 years have come from taxes - with the effective tax rate at a record low - leverage, which is at a record high, and margins (at record highs). None of these will get any better in our view.
"US free cash flow has just fallen below dividends and buybacks, limiting payouts. This happened one and two years ahead of the two most recent bear markets."
The bank concluded that it was addressing cyclical risk by being overweight in US growth stocks - "which outperform around 80% of the time the Federal Reserve cuts rates" - European cyclicals, which are "pricing in zero European growth", and the cyclical regions, such as Japan, where there is "strong valuation support".
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