See limited downside in global equities: Credit Suisse

A: As we talk markets are forming a base and actually trading action in Europe has been very interesting today whereby we started off in the red and now we are progressing back into the green.

So far today the euro stocks are now up close to half a percent with leadership by some of the more volatile markets such as Spain and Italy which are both up really quite sharply today.

Certainly, the action today is a reaction to the sharp selloff that we saw last week. One major factor last week was the very negative sentiment that came out of the International Monetary Fund (IMF) and World Bank meetings against a background particularly a weaker data in Europe. What people were very worried about was the weak export data and the weak factory goods orders numbers that came out of Germany particularly since the expectation previously was that the German economy would lead the Euro zone to stronger growth.

Sentiment is very negative and that suggests that we could be forming a base at or close to current levels. I don’t think that I can actually say today represents the bottom in market but as we go into late October, early November a lot of the negative factors that have been driving markets in the last three weeks will actually start to ease.

I would highlight in the case of Europe where there has been a lot of concern that the weak euro with the euro now 1.26-1.27 per dollar is very positive for European exporters. The fall in the oil price with Brent now below USD 90 per barrel is likewise a positive for the global economy and particularly the German economy.

Another factor outside Europe is that we are now in the phase of the US quarterly earnings season and the numbers so far are actually looking very good.

Investors may be too cautiously positioned at the moment and we thought there was a good chance of a sell-off over the last month but actually we are now working our ways through it on the downside, I would say it is now very limited and as we go into late October, early November we will see better market conditions.Q: What is your call on the US market? On Friday it turned year-to-date negative at least for Dow Jones and we have three indices actually trading below the 200-day moving average as well. Do you get a sense that this would be the time for bottom formation for US markets as well?

A: In case of the US you are quite right to say that the Dow year-to-date is not showing negative. The S&P 500 was still up year-to-date by about 3 percent and the NASDAQ was still up year-to-date by just over 2 percent.

The negatives will be that after the very strong rally that we have had over the last two-three years, the valuation of the American market being contrast to many European and Asian markets, is starting to look little stretched with a forward P/E of 16-17. And quite rightly investors were concerned about the potential impact of quantitative easing (QE) ending this month.

Where investors have been too negative is that although QE will end as we saw last week from the Fed minutes, the Fed is going to take an exceptionally slow approach in normalising monetary policy.

By the end of 2015 the Fed fund rates will be 1-1.25 percent. Now for an economy which is growing at 3 percent and inflation of 2 percent, that is still a very easy monetary policy.

The pace of price appreciation on the S&P will be more modest over the coming months. But the risk of us moving to a sharp correction of say 10 percent plus or even a bear market is a very low.

Over the coming weeks we are going to see better data out of the US on corporate earnings which is going to be a key factor in driving market movements.