On Monday we noted that Credit Suisse had upped its targets on the S&P (both mid-year and year-end) and on the Euro Stoxx 50, the FTSE 100 and Nikkei 225 (year-end).
Specifically, this is what the bank had to say:
Following the reaching of our mid-year S&P 500 target, we raise both our mid-year and year-end S&P targets to 2,400 and 2,500, respectively (from 2,350 and 2,300). We continue to see a clear-cut risk – as highlighted in our piece, Surprises for 2017, 20 January – that we get an overshoot to the upside in equities that then reverses later on; more realistically, this reversal is likely to be a very late-2017 or 2018 event. We leave our mid-year targets on the Euro Stoxx 50 and the Nikkei 225 in place at 3,500 and 20,500, respectively, but on the back of the change to our S&P 500 target, we also increase our year-end targets for the Euro Stoxx 50, the FTSE 100 and Nikkei 225 up to 3,700, 7,500 and 21,000, respectively (from 3,450, 7,000 and 19,800). We also revise our FTSE 100 mid-year target to 7,400 from 7,100.
Well on Tuesday, SocGen is out getting a bit more bullish on stocks thanks to what can only be described as an exceedingly benign take on the outlook for the reflation narrative.
Put simply: the bank seems to think everything is going to go right and you know, when that’s your baseline, it’s kind of hard to argue with a bullish outlook for risk assets. [Of course that’s no our baseline, but whatever.]
It’s a long note, but something tells us you don’t really care to read too far into it, so we’re going to simplify things this morning and just hit you with the high points. To wit…
Clearly improving global growth and inflation momentum in the coming quarters, more impetus for necessary infrastructure spending, the Federal Reserve and other G10 central banks moving away from super loose monetary policies, no hard landing in China this year, a continuation of a strong M&A cycle, and a scaling back of (at least) US regulations (energy, healthcare, finance) all favour a further reallocation from bonds into equities and other growth-related assets, like commodities and some assets in emerging countries.
We thus continue to raise our equity weighting (+5pp to 63%) and further decrease our fixed income weighting (-5pp to 24%). We still recommend strong exposure to commodities (7% of the total allocation), adding again to our euro exposure (+1pp to 46%) and starting to decrease our exposure to the US dollar from a strong base (-7pp to 41%). By doing so, we increase the value (or cheap) content of the allocation, as protection and volatility control. We keep the cash position unchanged at 6%, but we double our EM currency exposure (+6pp to 13%).
Bond exposure reduced again
The rebalancing from monetary policy in developed countries is clearly a negative event for a bond market heavily supported for years by extensive quantitative easing programmes (read: bond buying) and tight fiscal policies that reduced supply. We thus expect a less bond supportive supply/demand equilibrium from now on. After a further reduction of sovereign bond exposure (-3pp to 11%), we now have a balanced allocation with corporate bonds (10%).
Accelerating growth and inflation outlooks might also bring down fair valuations, strongly influenced by nominal GDP growth over the longer period of time. We don’t even find US Treasuries attractive (our target is 3% by year-end for the 10y benchmark yield), as the cost of hedging the US dollar is very high, eating into the carry for those who don’t want to hold currency risk. We remain overweight on inflation-linked bonds to hedge against rising inflation fears, with 3% exposure.
Equities have tailwinds
Accelerating nominal GDP growth should help boost the corporate earnings cycle and end the drag coming from the earnings recession we have been experiencing for the past few years. If equities clearly dislike rising bond yields, however, the change in the macro environment would also make the little “g” (long-term earnings) increase faster in the coming years, more than offsetting the former element.
Within corporate assets, M&A dynamics should also continue to force the reallocation from corporate bonds into equities.
Although certainly not cheap, US equities maintain a backing from new US economic policy, given the agenda to boost growth (corporate tax cuts, infrastructure spending, tax rebates for offshore cash repatriation) and scale back of regulations in key sectors.
Japanese equities (8% of our MAP) offer good leverage to the late normalisation of monetary policy there (risks on the yen remain, so we fully hedge the position), and euro area equities might benefit from cyclical improvements in the region, while the risks of extreme populism remain constrained.