In a note to clients on Tuesday, Credit Suisse’s top equity strategist Andrew Garthwaite summarized “four key macro trends impacting asset prices in the coming months.” Here they are verbatim:
- Accelerating global GDP growth: year-on-year global GDP growth is accelerating for the first time in three years (from 2.7% in Q2 2013 to 3.5-3.75% by Q4 2014);
- Falling macro uncertainty: our proxy of US macro uncertainty has recently fallen to a six-year low – and we think it is set to drop further as the US budget deficit continues to fall (the CBO projects a 2015 deficit of only 2.1% of GDP), Europe is recovering and banks’ deleveraging is diminishing;
- Slowing growth in EM relative to DM: in spite of the recent rebound in EM lead indicators, we think growth in emerging markets continues to disappoint relative to that in DM, due to EM excess private sector leverage, commodity exposure and limited spare capacity in the labour market;
- Bond yields continue to rise: our US rates strategists expect 10-year US Treasury yields to rise to around 3.1% in Q2 2014.
What does all this mean for the stock markets?
“Underweight US equities relative to global markets: the US tends to underperform when global growth accelerates and has demanding relative valuations, which should come down as macro uncertainty (and the US’ perceived ‘safe-haven’ appeal) declines,” recommended Garthwaite.
Still, he like equities as an asset class.
“Overweight equities: lower macro uncertainty means the [equity risk premium] (currently at 5.4% on our EPS estimate) should fall further towards our target level (4.5%),” he added. “Accelerating global growth is good for the performance of equities relative to bonds. Relative valuations remain favourable until 10-year bond yields rise to 3.5%. We highlight developed market corporate spend plays.