Credit Suisse Is Now the Most Cautious It's Been on Equities Since 2008
It's been just a few weeks since Credit Suisse released its 2016 forecast for the S&P 500, and already the bank is downgrading it.
"We reduce our weighting in equities to a small overweight, our most bearish strategic stance on the asset class in seven years," Credit Suisse analysts, led by Andrew Garthwaite, said in their 2016 global equity strategy outlook published today.
It's a change of stance for Garthwaite, who has long been bullish on stocks, predicting in mid-2013 that the S&P 500 would rise 15 percent to hit 1,900 in 2014 (it did). In fact, and as noted above, it's a tweak to Credit Suisse's most recent call for the index, too.
In mid-November, the bank reiterated its previous call for the S&P 500 to reach 2,200 by the middle of next year. But the analysts seem to have since changed their minds and now expect the index to trade at 2,150 both at midyear and at the end of 2016, which would equate to a rise of just over 2 percent from the S&P's current levels.
Why the change? The firm sees a few reasons, which it addressed in previous notes but has apparently become more worried about in recent days and weeks. Here are some of the key concerns:
Macro Headwinds Remain
Specifically, China and the Federal Reserve. "China's economic growth has never slowed to such a degree when it has been such a major component of the global economy," Garthwaite says. And you can't forget that the Fed is about to embark on its first rate hike in nearly a decade. "Historically, the drawdown in equities has averaged 7 percent after the first Fed rate hike, but the first rate hike has not marked the end of a bull market, however, with equities, on average, rising 2.2 percent in the six months after the first rate hike. The risk on this occasion is that the first rate hike has not occurred this late into the profit margin cycle."
Valuations look fair
In other words, there's not much upside here. According to Credit Suisse's two preferred measures for valuations, the equity risk premium and a fair-value price to earnings model, only about 2 percent upside is left. "Our fair value P/E model for the S&P 500 suggests a target multiple of 16.9x compared to 16.6x now, suggesting only 2 percent upside," Garthwaite notes.
Disruption, regulation and emerging markets—oh my
The firm says it has a number of "bottom-up concerns." Over the past few years, regulation has more and more been threatening to strangle innovation both domestically and internationally, according to the analysts.
"We struggle to recall another time when so many sectors have faced threats from disruption, regulation, or emerging markets," they say. "Moreover, we believe that the competitive threat posed by Chinese corporates continues to be under-estimated as China continues to over-invest, driving down the gap between the [return on equity] and the cost of debt, as well as moving up the value added curve."
All is not lost, however, as long as you don't mind investing in equities outside the U.S. The team points to data showing that when U.S. equity returns suffer, non-U.S. equities fare better. "We find that when U.S. equity returns have been modestly negative (between 0 and -5 percent over a quarter), non-U.S. equities have achieved positive price returns c.40 percent of the time."
Always a silver lining.