Financial Markets: 10 surprises for 2016

9 years ago - Published in Expert opinion

China and oil price are the two topics that have dominated financial markets all over the world in this start of year. But there are other risks that could increase pressing on the stock markets in the next mounths: from US economy to Brexit. Here, the list of the top ten risks for 2016, in the opinion of Credit Suisse:

1) US GDP growth slows to 1% 
US economy grows by 2.2%. Financial markets (yield curve, credit spreads), ISM new orders, many capex
indicators and profits are all consistent with c1% US GDP growth.

2) The S&P 500 falls into bear market territory
With no recovery in ISM new orders or credit spreads, equities should fall 8% on our model (made worse if US bond yields were to rise). We think the risk of a Fed policy mistake is very high. If China lost control of its capital account, then there would likely be a contraction in global liquidity.

3) China hard landing
We are structural bears of China in the long term, but don’t expect a hard landing in 2016. The backdrop of a triple bubble (credit, investment, real estate) and preconditions of a bubble bursting are in place (we have seen a record fall in FX reserves, house prices and producer prices). The three catalysts for a hard landing are: house prices fall 15%, the loan-to-deposit ratio rises to 100% or FX outflows accelerate. However, we think there is near-term stability in some of the China data.

4) The RmB depreciates by 20%
A mild depreciation of the Renminbi against the dollar (to USDCNY 6.78 in 12 months).

5) Non-disrupted sectors re-rate sharply
A modest re-rating for telecoms and pharma. The internet, China exporting its excess capacity, regulation and cuts in commodity-related dividends mean that sectors that offer a combination of pricing ability, quality and a largely undisrupted business model could re-rate sharply. This highlights pharma, telecoms and tobacco.

6) Euro area GDP grows more than the US
Euro area GDP growth of 1.9%. 

7) The Euro/$ strengthens to 1.20

8) GEM is the best performing equity market
We have a small overweight of GEM equities.

9) The oil price
The oil price falls to $20pb followed by a rebound to c.$45pb over the next 18 months. Our house view is $58pb in 2016.

10) Brexit
The UK votes to leave the EU.

 

By Credit Suisse

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