A complicated week that the stock markets have experienced, very marked by the fear of a return in inflation that slows the economic recovery, which has penalized equities in combination with the rise in bond yields. Most experts still do not want to worry about this circumstance, and also the majority continue to trust that the rises in the indices will persist.
Credit Suisse joins this large group and is clear that the cuts that are being seen in recent times in the indices should not worry. They are a consolidation, not a correction, affirms, although it recognizes that this consolidation will continue.
After the inflation data published this past week, especially the US CPI for April, which rose 4.2%, higher than expected and at levels not seen since 2008, the debate over inflation and the accompanying rise in bond yields has intensified. Credit Suisse recognizes that, in the short term, there will be “a little more impact of inflation” on equities, but that is “increasingly discounted.”
The main question remains whether the “inflation blow” will be sustained or not over time., and the dominant answer now is no. “The vast majority of our clients believe that the rise in inflation is temporary, as do central banks,” notes Credit Suisse, adding that the “key elements” that would make the blow more permanent are politics and wage growth.
“We expect the Federal Reserve to keep an abnormally flexible policy until the 10-year inflation break-even point is 3%, and that it focuses on lagging activity indicators, as well as on the real unemployment rate, “they point out from the firm.
POSITIVE FOR BANKS, VALUE AND ‘SMALL CAPS’
In the short term, however, Credit Suisse acknowledges that there are inflationary factors, such as signs of rising wages, money supply (M2 is up 24% YoY), commodity prices (12-year bear market in oil has reversed), demographics (as labor supply slows relative to labor demand) and the need for a sustained period of negative real rates to deleverage.
“The rise in inflation expectations is negative for the dollar, positive for commodities and normally positive for cyclicals (especially banks), value and ‘small caps‘”, they point from Credit Suisse.
Thus, their strategy is to remain overweight in the financial sector, while they especially like companies with formal or informal links to inflation (BT, Snam, National Grid, Fidelity National Information Services, Capital Health, CK Infrastructure, Power Asset Holdings), they conclude.