Equities turn unattractive for Credit Suisse; cuts rating to underweight

Markets, Credit Suisse said, had factored in excessive hope and not enough economic realities ahead of the Jackson Hole Symposium

Equities as an asset class have turned unattractive for analysts at Credit Suisse from a 3 – 6 month horizon, who have downgraded them to an ‘underweight’ rating. That said, Credit Suisse believes investors should not lose faith and would be ill advised to exit markets completely given high levels of inflation. 

Market participants, Credit Suisse believes, are now confronted with an environment of slowing growth, rising probability of recession, elevated inflation and – after the Jackson Hole Symposium – central banks that are determined to hike interest rates, and stay the course. 

“This signals a return to the asset price volatility that we witnessed in the first six months of the year. The next few months are thus likely going to be painful as markets adjust to this new reality. Risks are skewed to the downside. That is why we decided to reduce our tactical position for equities to underweight,” wrote Michael Strobaek, global chief investment officer at Credit Suisse in a recent note.

The absolute return outlook for both developed and emerging market equities, Strobaek said, is outright unattractive too. Markets, he said, had factored in excessive hope and not enough economic realities ahead of the Jackson Hole Symposium. 

“The narrative of the summer rally in financial markets that central banks might slow or even reverse rate hikes soon is now clearly out of the window. At a portfolio level, that means we are reducing equity positions to levels below the strategic allocation for the first time in several years. For now, investors should continue to keep diversifying portfolios as broadly as possible, including alternative investments and private markets. Being underweight equities does not mean a complete exit from the equities markets,” Strobaek said.

Corporate earnings

A slowing economy across geographies, Credit Suisse said, is exacerbating pressure on market dynamics and that risk assets, especially corporate earnings, face further downward adjustments in the months ahead.

“Demand is weakening, while supply chain conditions have loosened significantly. Commodity prices — first and foremost oil — have slumped as demand has moderated amid higher prices. However, services remain an outsized driver of price growth in the US, driven by tight labor and housing markets. And that is exactly the part of inflation that is not transitory,” Strobaek said.

On the other hand, investments that can profit from this new regime such as private market solutions that have a longer-term focus, or emerging market hard currency bonds which offer a substantial yield pick-up to developed market bonds, are interesting opportunities in the current environment, Credit Suisse said.