* Equities: We increase our mid-year 2017 target on the S&P 500 to 2,350 from 2,200. The key positive for 2017, in our judgement, is that investors are overweight deflation hedges (i.e. bonds) relative to inflation hedges (equities) at a time when policy makers are moving away from NIRP towards fiscal stimulus, and inflation expectations are set to continue rising. Other supportive factors are: earnings revisions at a five-year high; a still reasonably elevated equity risk premium; excess liquidity; and rising economic momentum.
However, we see a down market in H2 2017, hence our year-end 2017 target of 2,300. The second half challenges include the potential negative impact of US bond yields above 3% (3% being the CS view for end-2017); the growing pricing power of US labour squeezing profit margins; and the risk of China refocusing on reform rather than pro-growth policies. We continue to prefer equities to both bonds and gold.
The macro backdrop is one of a modest acceleration in global GDP growth, with upside risks to the CS view of 3.0% global GDP growth in 2017.
Regions: We add to our overweight in continental European equities (Germany remaining our top pick, upgrading France to benchmark, reducing the size of our underweight of Italy) and we remain overweight in Japanese equities. We reduce the size of our overweight in GEM equities (focusing on China, Taiwan and Korea), and downgrade UK equities to underweight from benchmark. We stay underweight the US in a global context as it is the worst performing market when global growth accelerates, the USD strengthens and bond yields rise; and valuations relative to other regions are extreme.