Credit Suisse recently reiterated their call to buy the dips (see here for the original call). Despite being bearish overall on 2010, they maintain that the first half of 2010 could be a fairly constructive year for equities (see their full year outlook here). In the near-term, they continue to like stocks due to 5 primary reasons.
Over the last few months the markets have been roiled by sovereign debt fears, China tightening fears, Fed actions, and bank regulation. Credit Suisse says these fears are all overblown.
First, they say the fears in Greece are substantially overblown and will not lead to a global bond funding crisis:
1) Fears of a global sovereign credit crisis are overdone: US, Japan and German bond yields have fallen, as has gold (hardly the sign of a funding crisis). The problems in peripheral Europe are akin to those of California in the US: Severe deflation is required, but the problem is confined. A global bond funding crisis will not be seen, in our opinion, until private sector credit growth returns (probably in 2011)—government interest payments as a % of GDP are still low, at 1.3% of GDP in the US. The risk, in our view, is that the UK could end up with a minority government, which might bring forward a UK funding crisis.
Second, CS says the fears about China are overdone. Growth remains robust in China. Other countries can only wish to have such a problem. As of now, it is not a major concern:
2) Worries about China tightening: We believe China is likely to grow at around 10% until there is major economic, as opposed to financial, overheating, which would be reflected in a sharp acceleration in wage growth and export price inflation.
A lot has been said about the end of quantitative easing and what will occur in bond markets when the Fed stops buying. CS says demand for bonds will remain high regardless of the Fed’s actions.
3) The end of QE: We think banks will replace central banks as the major buyers of bonds—and overall monetary conditions are still extremely loose.
Regulation is unlikely to change the fundamental picture of the big banks. Banks are and have been cheap for some time. Regulation will not change their value and CS still likes the risk/reward in the sector.
4) Obama-ing the banks: Even assuming regulation reduces banks profitability to pre-1990 levels, this would leave the fair-value tangible book multiple at 1.1x. This implies only about 10% downside for Continental European banks and 15% downside for US banks. Meanwhile, bank lending conditions have loosened significantly.
Lastly, CS sees improvement in the jobs market in the coming months. The one great hurdle during the recovery has been and remains jobs. Job growth should lead to higher equity markets in the coming months.
5) Worries about US employment momentum stalling: We think corporates have over-shed labour (hours worked are down 9% and GDP is down 2% from peak) and we believe non-farm payrolls will continue to improve.
As the equity markets overcome these near-term negative trends the equity markets could surge above 1200 according to CS. That, however, is all likely to change in the second half when new headwinds hit the market.
Source: Credit Suisse
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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