Credit Suisse cuts UK equities to 'underweight', adds to Europe 'overweight'

Credit Suisse downgraded UK equities to ‘underweight’ from ‘benchmark’ in its latest global equity strategy note.

“With the majority of macro factors now more challenging for UK equities in local currency terms, and with a valuation which is not especially attractive, we opt to take UK weightings down,” the bank said.

CS increased its ‘overweight’ in European equities, with Germany its top pick, and remained ‘overweight’ in Japanese equities.

Credit Suisse said Europe ranks second from the top on its composite regional scorecard, scoring particularly well on monetary conditions, positioning and economic momentum.

It expects the eurozone's economic recovery to surprise on the back of pent-up domestic demand, very low SME lending rates, a clear cut recovery in exports to Russia and China, and above all, a euro that is becoming unusually cheap given the relative strength of European growth.

The bank cut the size of its ‘overweight’ in global emerging market equities and kept its ‘underweight’ in the US in a global context, saying it is the worst performing market when global growth accelerates, the USD strengthens and bond yields rise. In addition, US valuations relative to other regions are extreme, CS said.

Still, it upped its mid-year 2017 target on the S&P 600 to 2,350 from 2,200. “The key positive for 2017, in our judgement, is that investors are overweight deflation hedges (i.e. bonds) relative to inflation hedges (equities) at a time when policy makers are moving away from NIRP towards fiscal stimulus, and inflation expectations are set to continue rising.”

Other supportive factors include the fact that earnings revisions are at a five-year high and excess liquidity. However, CS said it sees a down market in the second half of next year, hence its year-end target of 2,300.