Credit Suisse Group AG (NYSE:CS) June Macro Core Views report highlighted key changes in Global Economics, Global Equity Strategy and Global Fixed Income Strategy .
Credit Suisse Group AG (NYSE:CS) expect global growth in 2013 to be similar to that in 2012. Their central scenario for the global economy envisages GDP growth of 3.1 percent in 2013 and 3.9 percent in 2014. Both developed and emerging markets should expand at about the same rates as those in 2012 (1.1 percent and 5.1 percent, respectively), with the growth gap between EM and DM remaining close to its narrowest level in ten years.
They expect global growth to quicken in Q2 following a stabilization in Q1. The pace of expansion should continue to increase in 2H and accelerate further into next year, supported by a more synchronized rebound in the global economy, namely recovery in the euro area, a quickening US economy and a moderate pick-up in China’s economic growth. They expect global growth to reach an annualized quarterly rate of 3.9 percent by year-end.
The most visible risk to realizing Credit Suisse Group AG (NYSE:CS) forecast for economic performance lies in the realm of financial conditions. They expect financial market volatility to cruise at higher levels than those that prevailed last winter. Nonetheless, they do not expect interest rates to rise or financial instabilities to intensify to the point of imperiling the modest economic growth encompassed in Credit Suisse forecast. But the direction of risk is clear.
Credit Suisse Global Equity Strategy
Credit Suisse think equity markets are likely to rise by another 15 percent over the next two years, given that: (1) relative valuations are still attractive; (2) global economic momentum is troughing; (3) the outlook for earnings is improving; (4) pessimism on the impact of tapering is overdone; (5) long-term investors are still cautiously positioned.
Regional & country allocation: They favor the UK, Germany, Italy, Korea, and Japan. Credit Suisse Group AG (NYSE:CS) upgraded Japan to 16 percent overweight (from 6 percent). The upgrade was paid for by Credit Suisse downgrade of Continental Europe and modest downgrade to emerging markets (where they remain overweight). They are underweight the US, which tends to be a defensive market, and accordingly underperforms as global macro momentum accelerates.
Sectors: In Europe, they are overweight cyclicals (having upgraded in May) and financials. Their top overweights are software, media, airlines and REITs and main underweights are mining, retailing, capital goods and energy. They are overweight cyclicals in the US (having upgraded in December).
Key investment themes: US corporate discretionary spending, they think will surprise positively; GEM consumer discretionary spending growth is set to be 13 percent a year in real terms over the next ten years; the US housing recovery is accelerating; the theme of China as a competitive threat is still underestimated. They think growth will continue to outperform in 2013.
Credit Suisse Global Fixed Income Strategy
Risk Appetite: US Duration Risk Appetite entered “Panic” , driven by aggressive market pricing for Fed tapering. Meanwhile, the broad sell-off in EM bonds and equities has pushed Global and Equity-Only Risk Appetite sharply lower, with the latter close to “Panic.”
Growth: Global growth is likely to re-accelerate after summer, led by a resilient US and a stabilizing euro area. Manufacturing surveys in the US have mostly strengthened in June and core capex continued to expand. Euro area consumer confidence rose to a one-year high and business sentiment steadily improved. However, downside risks in China and Emerging Markets have grown.
Policy: The period of “unending” policy-accommodation from the Fed has given way to expectations of tapering QE and eventual rate hikes. Meanwhile, European policy has shifted tone to become much more focused on growth and the European Policy Uncertainty Index has fallen to a two-year low. In China, excessive tightening of lending policy poses growth and financial risks.
Market: Markets continue to adjust to a world with less accommodation from the Fed. Large capital outflows from risky assets has put EM markets under severe pressure and supported dollar strength. However, there are signs of growth-driven market actions, leading to outperformance in US and European equities and a decisive move higher in long core rates.
Bottom Line: They expect Risk Appetite to remain low despite the resilient growth. But growth should reassert itself as a driver for markets in the medium term.