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● A few weeks ago we cut our S&P 500 year-end target to 1,220 (see
Macro and market scenarios, 25 August). We regarded this as our
‘capitulation call’. We now cut our year-end target again to 1,180
and take our weightings in equities down to benchmark from a small
overweight, although the change in weightings is rather cosmetic.
● We highlighted that our year-end target of 1,220 was based on the
following probabilities: 50% chance of a sub-trend growth, a 20%
chance of mild-recession, 10% chance of a severe recession
(likely following a policy mistake or Euro break-up), 15% chance
that policy makers in Europe will only react with a Eurobond
solution when there is an acute crisis and finally a 5% chance of a
sunshine scenario.
● On the basis of the bearish data releases over the past two
weeks, we think the probability of a mild recession has increased
to 25% from 20% (with the probability of our core scenario of
below-par growth of 3% globally and widespread pre-emptive QE
having fallen from 50% to 45%).
● In combination with our severe recession scenario, this takes our
total probability of a recession to 35%. In consequence, the
probability-weighted average of the S&P fair-value level falls from
1,220 to 1,180 (which we adopt as our new year-end 2011 target).
Figure 1: Index targets
Source: Credit Suisse research
Why the probability of a mild recession has risen
Growth. Our indicator of US growth has now fallen to 0.7% (from 1%
two weeks ago), implied US employment growth on our model has
fallen to 0.3% (from 0.8% a week ago), PMIs in Europe are consistent
with 0% to -1% GDP growth (and this is before the impact of fiscal
tightening of 1.5% of GDP, the delayed impact of Euro strength and a
partial credit crunch in the region).
Commodities. Food prices (a third of GEM CPI) are not falling, Thai
rice prices are set to rise significantly on the back of government
subsidies. US gasoline prices are only 7% off recent highs.
Europe’s political leadership stays poor. Can the ECB continue to
provide the leadership lacking from politicians in terms of funding the
peripheral Europe (which de facto amounts to a fiscal transfer)? The
fear is that only an acute crisis will forge a more sustainable Euro
solution.
Policy reactiveness in the US. The risk that all the fiscal tightening
scheduled for in 2012 will happen (equivalent to 2.5% of GDP) is
rising, in our view – and the November 23rd deadline for the Super
Committee proposals looms.
The dove-hawk split on the FOMC is getting worse. In Japan, the
new prime minister Noda has presented himself as a fiscal hawk.
China. The surprise de facto increase of the RRR has yet to be offset.
Other concerns. There is no clear-cut capitulation on sentiment (as
opposed to the risk appetite indicators); the US profits share of GDP
has been revised up 30%, in a way that it is now close to the all-time
high (suggesting margins are more vulnerable); earnings revisions
took a lurch down earlier this week.
Our core scenario (45% chance) remains 3% global growth, QE in
developed markets and 1,350 on the S&P 500, with loose monetary
policy forcing investors into cheap inflation hedges (i.e. equities), an
ERP of 7.6% versus a warranted ERP of 6.2% and a 1.5% GDP
breakeven for US profits. If we could confine ourselves to the “new
gold standard” (corporates with a CDS spread below that of the
average G7 government, a dividend yield above the average G7 bond
yield, high international earnings), we would stay overweight equities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● A few weeks ago we cut our S&P 500 year-end target to 1,220 (see
Macro and market scenarios, 25 August). We regarded this as our
‘capitulation call’. We now cut our year-end target again to 1,180
and take our weightings in equities down to benchmark from a small
overweight, although the change in weightings is rather cosmetic.
● We highlighted that our year-end target of 1,220 was based on the
following probabilities: 50% chance of a sub-trend growth, a 20%
chance of mild-recession, 10% chance of a severe recession
(likely following a policy mistake or Euro break-up), 15% chance
that policy makers in Europe will only react with a Eurobond
solution when there is an acute crisis and finally a 5% chance of a
sunshine scenario.
● On the basis of the bearish data releases over the past two
weeks, we think the probability of a mild recession has increased
to 25% from 20% (with the probability of our core scenario of
below-par growth of 3% globally and widespread pre-emptive QE
having fallen from 50% to 45%).
● In combination with our severe recession scenario, this takes our
total probability of a recession to 35%. In consequence, the
probability-weighted average of the S&P fair-value level falls from
1,220 to 1,180 (which we adopt as our new year-end 2011 target).
Figure 1: Index targets
Source: Credit Suisse research
Why the probability of a mild recession has risen
Growth. Our indicator of US growth has now fallen to 0.7% (from 1%
two weeks ago), implied US employment growth on our model has
fallen to 0.3% (from 0.8% a week ago), PMIs in Europe are consistent
with 0% to -1% GDP growth (and this is before the impact of fiscal
tightening of 1.5% of GDP, the delayed impact of Euro strength and a
partial credit crunch in the region).
Commodities. Food prices (a third of GEM CPI) are not falling, Thai
rice prices are set to rise significantly on the back of government
subsidies. US gasoline prices are only 7% off recent highs.
Europe’s political leadership stays poor. Can the ECB continue to
provide the leadership lacking from politicians in terms of funding the
peripheral Europe (which de facto amounts to a fiscal transfer)? The
fear is that only an acute crisis will forge a more sustainable Euro
solution.
Policy reactiveness in the US. The risk that all the fiscal tightening
scheduled for in 2012 will happen (equivalent to 2.5% of GDP) is
rising, in our view – and the November 23rd deadline for the Super
Committee proposals looms.
The dove-hawk split on the FOMC is getting worse. In Japan, the
new prime minister Noda has presented himself as a fiscal hawk.
China. The surprise de facto increase of the RRR has yet to be offset.
Other concerns. There is no clear-cut capitulation on sentiment (as
opposed to the risk appetite indicators); the US profits share of GDP
has been revised up 30%, in a way that it is now close to the all-time
high (suggesting margins are more vulnerable); earnings revisions
took a lurch down earlier this week.
Our core scenario (45% chance) remains 3% global growth, QE in
developed markets and 1,350 on the S&P 500, with loose monetary
policy forcing investors into cheap inflation hedges (i.e. equities), an
ERP of 7.6% versus a warranted ERP of 6.2% and a 1.5% GDP
breakeven for US profits. If we could confine ourselves to the “new
gold standard” (corporates with a CDS spread below that of the
average G7 government, a dividend yield above the average G7 bond
yield, high international earnings), we would stay overweight equities.
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