by December could be a big month for central bankers. The Federal Reserve is expected to make its first rate hike in nine years on December 16, while the European Central Bank is expected to announce further easing measures on December 3. The Swiss National Bank is likely to follow the ECB’s footsteps, sending deposit rates in the country even further into negative territory. Those moves, particularly combined with the divergence from American monetary policy, should provide a boost to European and Swiss equities. Credit Suisse’s Investment Strategy & Research team expects the ECB to cut deposit rates to at least -0.3 percent from -0.2 percent, although that still means that commercial banks will have to pay even more to deposit funds at the central bank overnight. But even that slight change should bolster corporate earnings in two ways. First, lower interest rates tend to increase the supply of credit, which in turn stimulates the economy. Increases in the money supply have led European earnings growth by 12 months over the last 26 years. In addition, when the money supply grows faster in Europe than in other economies, European equities tend to outperform. With the Federal Reserve likely to begin tightening monetary policy, and therefore the money supply as well, Eurozone equities should outpace American stocks.
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Ashley Kindergan considers the following as important: Central Banks, divergence, Europe, Interest rates, Investing: Features, Monetary Policy, Switzerland
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December could be a big month for central bankers. The Federal Reserve is expected to make its first rate hike in nine years on December 16, while the European Central Bank is expected to announce further easing measures on December 3. The Swiss National Bank is likely to follow the ECB’s footsteps, sending deposit rates in the country even further into negative territory. Those moves, particularly combined with the divergence from American monetary policy, should provide a boost to European and Swiss equities.
Credit Suisse’s Investment Strategy & Research team expects the ECB to cut deposit rates to at least -0.3 percent from -0.2 percent, although that still means that commercial banks will have to pay even more to deposit funds at the central bank overnight. But even that slight change should bolster corporate earnings in two ways. First, lower interest rates tend to increase the supply of credit, which in turn stimulates the economy. Increases in the money supply have led European earnings growth by 12 months over the last 26 years. In addition, when the money supply grows faster in Europe than in other economies, European equities tend to outperform. With the Federal Reserve likely to begin tightening monetary policy, and therefore the money supply as well, Eurozone equities should outpace American stocks.
Any interest rate cuts will also help exporters, at least in the short-term. German companies, which rely more heavily on exports than companies in other European countries, should outperform within the euro zone. Growth stabilization in China should also benefit German companies, since Germany’s share of exports to the Middle Kingdom has increased over the last decade. Automakers and industrial companies should see a particularly strong bump.
Swiss companies tend to be export-driven as well, particularly the large multinational firms that dominate the country’s equity market capitalization, and should therefore benefit as the Swiss franc weakens. Healthcare, a sector that Credit Suisse expects to outperform around the globe, makes up 36 percent of the MSCI Switzerland – another reason to be optimistic about Swiss equities in general.
Within the Swiss equities universe, Credit Suisse prefers small- and mid-cap stocks to large-caps. Like the large multinationals, many of these companies are sensitive to currency fluctuations. They tend to produce their goods in Switzerland, incurring costs in francs, and sell them abroad for dollars, so the weakening franc will benefit them disproportionately. But in addition to the currency argument, these companies have a higher degree of operating leverage than larger ones, meaning that they have a greater ratio of fixed costs to variable ones. For that reason, revenue growth translates more directly into earnings growth, and the slight acceleration in global growth that Credit Suisse foresees in 2016 will benefit them more than it will larger firms. Finally, small- and mid-cap firms have more attractive valuations than their large-cap peers.
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