Credit Suisse: Five reasons why yields moved higher
The recent price correction on the global stock markets does not change the fundamentally positive assessment of the equities asset class. Michael Strobaek, Credit Suisse's Global Chief Investment Officer, sees this as a healthy correction that may turn out to be a buying opportunity.08.02.2018 | 11:29 Uhr
A healthy correction
Remember that equity markets were somewhat overbought going into 2018, and were due for a healthy correction, which we think this one is. The move last week was broad-based, and it has brought back a bit of value into a somewhat expensive market. As long as the yield curve moves up in a rather parallel manner (and the front end does not shift too fast), credit spreads do not blow out, and long-term trend lines in equities are not broken, the sort of correction like last week’s is healthy, in our view. We still consider the equity bull market to be intact and to have the potential to go further. Yet, as we have said on numerous occasions, the bull market is not going to be as good as what we saw in 2017, and it will be associated with high levels of volatility, as short rates and now yields have left their bottoms and are moving higher.
Buying opportunity
However, yields are not yet a threat to equity markets, in particular in the face of the solid economic and earnings growth that we are seeing. So for clients who have cash on the line, we believe the latest developments offer a buying opportunity. Yet clients do need to be patient and take one step at a time. Overall, we retain a positive stance on equities. For clients who are interested in seizing the longterm potential of specific themes such as infrastructure, an aging population and technology, our Supertrends framework offers attractive longterm investment propositions.
USD likely to stay soft
What has been most “puzzling” to many clients is the foreign exchange side, in particular the weakness of the USD. The USD has not been able to rally, despite solid economic data and higher yields. Why is that? First of all, it is perfectly normal for the USD to stay soft in an environment like this, also com- pared to similar phases in history. The USD tends to become really strong going into “crisis times,” but we are clearly not in such a phase right now. Hence, the USD can likely stay soft, and this is one of the reasons why we have begun to systematically hedge our US equity exposure in mandates. However, this hedging is with a five-year horizon in mind. On a tactical horizon, we see the USD becoming somewhat stronger – it appears to have become too weak too fast. However, we do not expect a rapid rise against the CHF, which tends to stay firm in a risk-off environment.
Protect gains
We issued a “warning” in the last IC Report, telling investors to again “protect their gains” either outright or to seek shelter in multi-asset solutions. We still think this is valid, but far less attractive than two weeks ago at the current volatility levels. We also expect that we will finally see a rotation into more defensive and value-oriented stocks (including certain financials), and that the heavy outperformance of technology stocks may be coming to an end. Furthermore, we believe that yields at 3% would be interesting again. Lastly, as long as US yields do not rise significantly above 3%, we believe that the recent developments make emerging market assets attractive.
Right here and now, we are comfortable still being positive on equities, and see last week‘s move as a healthy correction more than anything else.
Here you can read the complete note.