Stock markets back in favour at Credit Suisse as hopes rise of US-China trade war breakthrough

Chad Bray

Credit Suisse believes now is the time to focus on the equities market as political uncertainty has lessened in Europe, central banks are undertaking stimulus measures and hope is growing that tensions could ease in the US-China trade war.

Michael Strobaek, Credit Suisse’s global chief investment officer, said the bank is shifting the balance of its portfolio towards equities as it has become “more sanguine” about developed stock markets. In particular, the Swiss bank is favouring US equities.

“Despite widespread scepticism whether a compromise can be reached in the run-up to the US presidential election in 2020, we believe that both sides have strong incentives to de-escalate tensions: US President Donald Trump needs a strong economy and equity market to be re-elected, and China is looking to support its struggling economy,” Strobaek said in a research note.

The shift by Credit Suisse comes less than three weeks since its Swiss rival UBS declared it was taking an underweight equities position in its portfolios in its global wealth management business to reduce its exposure to “political uncertainty”.

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On September 1, the United States added 15 per cent tariffs on some US$130 billion of Chinese-made goods and China added its own tariffs on hundreds of US products, including agricultural items. It was the latest escalation in a trade war that has raged for more than a year and seen tariffs placed on more than half of all Chinese imports to the US.

Since then, the world’s two biggest economies have agreed to resume face-to-face trade talks next month and Trump has delayed another tariff increase until after National Day celebrations in China on October 1 “as a gesture of good will”.

At the same time, the Federal Reserve and other central banks have cut interest rates and are eying stimulus measures, Strobaek said.

“Central banks, too, have played an important role in improving sentiment and providing fuel to financial markets of late. The US Federal Reserve is all but expected to cut rates again in the months ahead, with our expectations currently centred on two additional rate cuts, the next one likely later this month.”

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Political tensions have also eased with the formation of a more-European Union friendly government in Italy and the risk of the United Kingdom exiting the EU without an agreement getting smaller after Parliament moved to block a “no deal” Brexit.

The UK Prime Minister had been adamant he would take the UK out of the EU by the end of October with or without a deal, but has suffered several defeats in Parliament that have made that pledge much harder to achieve.

“Recent weeks have provided yet another reminder of how rapidly things can turn – while August brought about a sudden deterioration in the backdrop for financial markets, September saw a turn for the better,” Strobaek said. “Given an easing of political tensions, renewed hopes in terms of US-China trade relations and central banks’ additional stimulus measures, we have turned more sanguine again on developed market equities, lifting their portfolio weights above strategic allocations.”

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