It´s not 2008 all over again, Credit Suisse says, but China risks have risen

Credit Suisse on Tuesday downgraded its recommendation to clients as regards global equities, marked down its year-end target for the S&P 500 and cautioned that it saw an increased risk of a 'hard-landing' in China, although outside the US it believed markets remained "cheap".

The global equity strategy team led by Andrew Garthwaite lowered its stance on global stocks to 'benchmark' and pared its end-2016 target for the S&P 500 from 2,150 points to 2,050.

Garthwaite´s more cautious stance followed the 3-4% bounce he had predicted for stocks, the risk of a slightly higher equity risk-premium and the more "complicated" macroeconomic backdrop.

That backdrop included both risks to US GDP growth - he estimated there was a 40% probability that GDP was in fact growing at less than 1.5% - and wages.

Ironically, if the consensus was right in predicting GDP growth of 2.5% then wage growth might rise above 3%, in turn weighing on corporate earnings, Garthwaite explained.

Regarding China, the strategist said the country´s property data, loan-to-deposit ratio and control of FX reserves had all been worse than he expected.

Contributing to his views, the US central bank, the Federal Reserve, appeared to be unusually focused on lagging indicators of activity.

"Clearly, the Fed matters because the dollar is the world's reserve currency at a time when US monetary and financial conditions have both tightened sharply."

This is not 2008, but the risks of a 'hard-landing' in China have risen

Is this like 2008? Garthwaite asked rhetorically.

"In our view, no: ten factors are better, five are worse."

"What is needed for markets to stabilise? A stabilised oil price, clear evidence that it's different in the US this time around (i.e., the savings ratio falls and employment stays robust), China to stabilise capital flight, high yield spreads to narrow or, failing all of this, a Fed response."