Mirroring the view expressed by Goldman Sachs earlier this week, Credit Suisse is cautious on the outlook for global equity markets, suggesting in a research note released overnight that it is “particularly complacent ahead of significant event risks in June”.
“The Q1 earnings season provided some marginal upside surprises, but did not change the fact that global earnings growth is still declining,” wrote the bank’s investment committee.
“The market offers little value at current levels and remains at risk of a further downward correction in our view.
“We stay tactically cautious on global equities, as the earlier factors that drove the rally since mid-February may be fading,” it adds. “Geopolitical risks may lead to increased volatility.”
After a more than 15% rally from the lows in early February, the bank singled out the Australian market as one that “no longer appears cheap”.
“We are taking profits and changing our outperform view to neutral,” it said in relation to the Australian market.
The chart below shows how the valuation of the Australian market ranks compared to historic norms for price-to-earnings, price-to-book and dividend yield ratios.
Elsewhere, the committee stated that it continues “to expect Europe and Switzerland to outperform, and the USA to underperform”.
Outside of stocks, the bank retains a neutral outlook on fixed income over a 3 to 6-month time horizon, although it suggests that there are “downside risks” due to bond yields remaining at low levels despite rising oil prices and a stabilisation in emerging markets.
“Compared to nominal government bonds, investment grade bonds and inflation-linked bonds look attractive, especially from a cyclical perspective,” it wrote.
The table below, supplied by Credit Suisse, reveals the bank’s current outlook on fixed income assets. From a government bond perspective, the bank holds neutral views on US, German, Italian, Japanese and Australian government bonds, but expects UK, Canadian and Swiss government bonds to underperform.
For commodities, and in particular crude oil which has has a large sway on risk asset movements over the past year, Credit Suisse retains a neutral outlook.
“The oil rally is risky as it is partly driven by temporary disruptions,” notes the commitee.
Outside of crude it has a negative outlook on industrial metals as “China’s rebound is fading again”.
The bank also suggests that the recent lift in US rate hike expectations “leaves gold vulnerable”.