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Now neutral view on equities considering balanced risks
We change our outlook on global equities to neutral from unattractive. Though still slowing, growth is proving more resilient than feared and earnings have surprised positively. In addition, central banks are now close to the end of their tightening cycle.
After a strong performance in absolute and relative terms, we no longer expect communication services to outperform the MSCI World and turn neutral on the sector.
Reflecting a more balanced outlook for equities, the Credit Suisse Investment Committee has changed its return expectations for global equities to neutral from unattractive. We believe that we are approaching the peak in central bank interest rates, with the US Federal Reserve in particular having completed its hiking cycle in our view. Moreover, momentum in industrial activity is rolling over and the lagged effects of interest rate hikes should lead to a further gradual slowing of growth. Yet, labor markets still look strong, and the services economy remains a source of strength. On top of that, savings rates are still elevated (particularly outside the USA), supporting consumption. In addition, equity exposure of professional investors is muted, according to positioning data.
Earnings more resilient than expected
Earnings could therefore be more resilient than we expected, as seen in the Q1 earnings season. Q1 blended sales and earnings per share (EPS) growth for the MSCI World are now at +3.6% and +4.3%, respectively, significantly above the +2.0% and –2.0% expected at the beginning of the season. True, expectations for the Q1 earnings season were low, but resilient consumer demand and progress in cost cutting (esp. in technology sectors) fueled positive surprises. Regionally, Europe fared better than the USA, while in sectors, financials, consumer discretionary, industrials and communication services were the main drivers.
Looking forward company guidance has been mixed. Some companies expressed concern about slowing growth and likely lower consumer spending going forward, while others voiced relief that inflation is slowing, and supply chain bottlenecks are easing. Against this backdrop, EPS growth estimates for the 2023 have now stabilized at around 0%, significantly below the 8% expected last summer. This gives us some confidence that the worst of the downward revisions in earnings is now behind us. We therefore expect global equities to deliver cash-like returns and thus take the weight of the asset class to strategic levels in a portfolio context. Emerging market equities are kept at strategic levels.
Investment opportunities in equities
In developed markets, we prefer Switzerland (defensiveness and strong earnings outlook), Hong Kong (China reopening and attractive valuations) and utilities (defensive sector with solid fundamentals). Quality, i.e., companies that have a high return on equity, stable earnings growth, and low financial leverage, remains our preferred equity style. In emerging markets, we prefer Chinese equities (China reopening) and Latin America, particularly Brazil (appealing valuations). In sectors, we no longer expect communication services to outperform the MSCI World after a strong absolute and relative performance since adopting the call on 9 February 2023.
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Monthly “90 seconds with” podcast: September 2023
Still focused on quality
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