Credit Suisse downgrades UK equities; sees risk of November rate hike
Credit Suisse downgraded UK equities to ‘benchmark’ from ‘overweight’ and cuts its FTSE 100 year-end target to 7,000 from 7,450.
The bank pointed to sterling resilience, exposure to global emerging markets and its negative view on oil.
“The predominant issue is that nearly 80% of UK earnings come from outside the UK and thus the currency is the chief determinant of the UK relative performance,” it said,
As far as UK sectors are concerned, Credit Suisse took UK non-food retailing down to ‘benchmark’ from ‘overweight’, remained ‘underweight’ REITS and homebuilders and kept banks at ‘overweight’.
It said banks are very closely correlated to two-year note yields and have underperformed European banks by 46% since 2013.
It kept UK life companies at ‘benchmark’ saying they are expensive and have ceased to be rate-sensitive.
Credit Suisse said the market is pricing in an 80% probability of a first rate hike occurring by February 2016 and a 30% probability by November 2015.
The bank, however, said that if anything, the chances are higher.
“Our head of European economic research, Neville Hill, believes rates will rise in February, but sees a risk of a November rate hike.”
Among the reasons why rates may rise earlier than expected, the bank pointed to the fact that although economic lead indicators have dipped, they still show an economy that is growing above trend.
In addition, it said there appears to be limited spare capacity in the labour market and labour is gaining pricing power.
Credit Suisse also pointed to the global cycle and the Federal Reserve.
“Leading indicators such as PMIs are stabilising and the potentially destabilising shock of a Grexit has diminished. This has featured very strongly in the July MPC meeting.”
As for the Fed, on three occasions, Yellen has signalled that she is looking to raise interest rates in 2015, said the bank, adding that its economists see a move in September.
The bank also noted the fact that mortgage rates have been falling.
It said that on a two-year view, US rates should rise more than those in the UK, but near-term sterling/dollar should remain range-bound.