Credit Suisse sees rising odds of Brexit 'lite', lowers year-end Footsie target
Credit Suisse marked down its year-end target for the Footsie but was not overly pessimistic, emphasising that it saw rising odds of a 'Brexit lite', versus a hard Brexit which would include invoking Article 50 of the Lisbon Treaty, although in the opinion of its analysts there was now a heightened risk of another Scottish referendum.
"We think that there is a 30% chance of 'Brexit lite' whereby Article 50 is not invoked and the EU compromises on the critical issues of immigration and supremacy of the ECJ. We believe that the EU might well compromise over immigration because it is a pan-European issue that is sucking support away from the establishment parties in virtually all EU countries," the Swiss broker said.
The research team led by strategist Andrew Garthwaite also thought a new Prime Minister might be paired with a Chancellor less focused on austerity, but it believed the probability of a change in government (new elections) before 2020 was low.
"The UK's fixed term parliament act requires a two thirds majority in Parliament to prompt an early election," it explained.
UK lead indicators were already consistent with a recession and wouldnow likely worsen, Credit Suisse said, while economic growth in Europe would take a 0.5% percentage point hit.
"The issue is confidence, but we struggle to see similar referenda in the euro area or a general election being turned into a proxy battle on EU membership, though the main weakness of the euro has revealed itself (a monetary union without a fiscal, banking or political union)," he said.
Euro area GDP growth in 2017 was pegged at 1.0% (and maybe higher), while the UK economy was now seen shrinking by 1.0% next year.
Garthwwite recommended buying 'European earnings' (Imperial, Vodafone) and US earnings (Carnival, Shire).
"The following UK names have underperformed their peer group and look overly cheap: Imperial and Schroders. Only retailing looks particularly cheap of the domestic sectors (Kingfisher)."
As a backdrop, Garthwaite lowered his year-end target for the Footsie from 6,600 to 6,200, that for the S&P 500 from 2,150 to 2,100 (2,000 in case of a full Brexit).
In parallel, he shifted his stance on Continental European stocks from a 'small overweight' to a 'marginal overweight', saying that European shares were trading on a 15% discount in terms of price-to-earnings multiples to their US counterparts - in effect discounting 70.0% odds of a crisis, which to him seem a "little pessimistic".
Although he continued to recommend an 'underweight' on US stocks, his choice was to funnel those additional funds into equities in the US.
"The European regions on our scorecard most vulnerable to political and economic risk are Italy and France. We stay overweight of GEM," he added.
Under a full Brexit scenario the yield on the 10-year benchmark Gilt might decline below 1.0% and cable fall under $1.30.
Economists at Credit Suisse also expected the Bank of England to relaunch quantitative easing.
Credit Suisse did not foresee a new phase of secular US dollar strength, given how it was already 14% overvalued versus the euro, for example.
"In our judgement, the UK's decision to leave the EU does not represent a Lehman-Brothers style systemic shock to the European or global financial system."