Credit Suisse would slash FTSE 100, Euro Stoxx 50 targets on Brexit

In its latest global equity strategy note, Credit Suisse said it would cut its FTSE 100 year-end target by 6% and its Euro Stoxx 50 target by 12% in the event of a Brexit.

The Swiss bank said that in a full Brexit scenario – where Article 50 of the Treaty on European Union is invoked almost immediately – its FTSE 100 year-end target would drop to 6,200 from 6,600, while its S&P 500 target would decline to 2,000 from 2,150 and its Euro Stoxx 50 target would slip to 2,950 from 3,350.

“Our key concerns with regard to equities are: i) equities are overall priced at fair value; ii) we forecast almost no US earnings growth; and iii) there is unusually high political, economic and business model risk at a time when governments are trying to redress the imbalance between owners of capital and labour.”

However, CS said it was not yet ready to turn ‘underweight’ on stocks as bonds look very expensive, while equities are only at fair value.

“We still expect a large asset shift from bonds into equities when yields start to rise; and some sentiment indicators remain too negative.”

Based on correlations with gilt yields, sterling and PMIs, the bank said the worst performing sectors into a Brexit were likely to be financials, real estate and transport. It remains ‘underweight’ REITs and Berkeley Group.

On the other hand, the best performers would be pharmaceuticals, consumer staples and energy.

Credit Suisse reckoned the FTSE 250 would underperform the FTSE 100 by 10% to 15% as mid caps are significantly more domestic than large caps and tend to underperform when sterling weakens.

“Of the domestic sectors, retailing looks overly cheap relative to the UK market and its global peers (though we note it is structurally very challenged). Aerospace, commercial services, specialty retail, auto components and luxury look cheap versus their global peers and have underperformed since February.”

As far as sterling is concerned, CS reckons GBP/USD would weaken to 1.20 in the aftermath of a Leave vote.

The bank said the pound could even weaken against the euro.

“Although we expect the euro to weaken if the UK leaves the EU, we still, on balance, think sterling will continue to be weak against the euro, with the UK having a record trade deficit, of 4.8% of GDP, with the euro area and sterling not looking cheap against the euro.”

Still, it said a Leave vote is not the only reason for taking a negative view on sterling, adding that it would remain structurally cautious for a number of reasons. Among them, the bank pointed to the UK’s large and persistent current account deficit and the likelihood that foreign direct investment inflows would fall.

In terms of growth, a full Brexit scenario would see UK GDP fall sharply, with a contraction of 1% in 2017, the bank said.

In addition, the Bank of England would potentially re-start quantitative easing and the gilt yield might fall below 100 basis points. Eurozone growth would initially be hit by around 0.2% in 2016 and around 1% in 2017, CS said.