Credit Suisse cuts global equity weightings to most cautious stance since 2008

The bank reduced its weightings in equities to a small ‘overweight’ and cut its mid-2016 target for the S&P 500 to 2,150 from 2,000 as it introduced a 2016 year-end target of 2,150. CS said it was more constructive on equities outside the US.

It noted increasing macro headwinds, pointing to deflation exported by China and the first Fed rate rise in 9.5 years. In addition, it said US equity valuations are now at fair value and highlighted several warning signals such as the widening of credit spreads and the fact that earnings momentum is at a four-year low.

CS increased Global Emerging Markets to a small ‘overweight’ from ‘benchmark’ and cut the size of its ‘overweight’ in Japan, making Continental Europe its biggest 'overweight'.

The bank has an end-2016 target of 3,850 on the Euro Stoxx 50. Its view on European equities is supported by “a very compelling macro recovery” aided by lower oil prices, a weaker euro, looser fiscal policy, immigration and a dovish European Central Bank.

It lifted Germany back to ‘overweight’ from ‘benchmark’ saying that GDP growth there is set to positively surprise.

It remained ‘benchmark’ UK equities with a 6,700 end-2016 target on the FTSE 100.

“Excluding resources, the UK market is not cheap, and has defensive characteristics, and is thus not suited to an acceleration in global growth. In addition, there appears to be a greater than realised slowdown in domestic growth momentum,” said CS.

On the upside, however, it noted that with 78% of FTSE sales coming from outside the UK, the main support for the UK is the possibility of a weaker sterling.

Credit Suisse remained ‘underweight’ the US, pointing out that the Federal Reserve is the most hawkish central bank globally.

The bank justified its ‘overweight’ stance on equities by pointing out that many of the challenges facing US stock markets are significantly less pronounced in the case of non-US equities.

“We find that when US equity returns have been modestly negative (between 0 and -5% over a quarter), non-US equities (which account for around 57% of global market cap) have achieved positive price returns around 40% of the time,” said CS.

“The gap between non-US equities and US equities in terms of valuation, profit margins, stage of the economic cycle and monetary policy is extreme,” it added.