A recent report by Credit Suisse stated that equities as an asset class have turned unattractive from a 3–6 month horizon. The global brokerage Credit Suisse has downgraded equities to an ‘underweight’ rating. However, it believes investors should not lose faith and would be ill-advised to exit markets completely given high inflation level.
"Market participants are now confronted with an environment of slowing growth, rising probability of recession, elevated inflation and – after the Jackson Hole Symposium – central banks that are determined to hike interest rates, and stay the course," the research firm stated.
"This signals a return to the asset price volatility that we witnessed in the first six months of the year," it further pointed out.
The brokerage believes that the next few months are likely to be painful as markets adjust to this new reality. Risks are skewed to the downside, added CS. Amid this backdrop, the brokerage reduced its tactical position for equities to underweight.
The absolute return outlook for both developed and emerging market equities is outright unattractive too, said CS adding that the markets had factored in excessive hope and not enough economic realities ahead of the Jackson Hole Symposium.
The narrative of the summer rally in financial markets that central banks might slow or even reverse rate hikes soon is now clearly out of the window, noted CS.
"At a portfolio level, that means we are reducing equity positions to levels below the strategic allocation for the first time in several years," it explained.
For now, the brokerage advised that investors should continue to keep diversifying portfolios as broadly as possible, including alternative investments and private markets.
However, the brokerage clarifies that being underweight equities does not mean a complete exit from the equities markets.
Going ahead, the brokerage believes that a slowing economy across geographies is exacerbating pressure on market dynamics and that risk assets, especially corporate earnings, face further downward adjustments in the months ahead.
“Demand is weakening, while supply chain conditions have loosened significantly. Commodity prices — first and foremost oil — have slumped as demand has moderated amid higher prices. However, services remain an outsized driver of price growth in the US, driven by tight labor and housing markets. And that is exactly the part of inflation that is not transitory,” it noted.
On the other hand, investments that can profit from this new regime such as private market solutions that have a longer-term focus, or emerging market hard currency bonds that offer a substantial yield pick-up to developed market bonds, are interesting opportunities in the current environment, Credit Suisse advised.