The recent market turmoil is cause for concern, but no reason to panic. That’s the message Credit Suisse is sending to clients. In a recent research report they described why they see near-term headwinds, but no reason to turn bearish on the equity markets:
“In the very near term, we think that there are several headwinds that also need to be considered, which make us slightly more cautious. First, the decelerating earnings momentum in core markets: after several quarters of above average earnings surprises both in terms of EPS (73% positive surprises in the US) and revenue (69% positive surprises), the number of surprises could well come down during the second phase of this earnings reporting season and in the quarters ahead. Figure 1 shows the evolution of earnings revisions for the MSCI World, which highlights the deceleration in momentum.”
“Second, the cyclical deceleration in leading indicators, such as the PMI, makes us believe that the strong uptrend in equity markets, which we recently experienced, might take a breather. Our third concern revolves around the development of interest rates. While we are in a period of historically low interest rates, equity markets need to adapt to the fact that the zero interest rate environment will eventually end, and gradually factor in an increasing interest rate cycle into valuations.
Taking all these considerations into account, we believe there is no reason to abandon our strategically positive stance on equities on a 6–12+ month investment horizon, while maintaining a slightly more cautious view in the very near term, as the risk-reward of rushing into the equity markets is not particularly attractive right now. However, we would use setbacks of several percentage points to close underweights relative to personal benchmarks.”
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