。 30 January 2019Global Equity Strategy 2Table of contents10 key surprises for 2019 3Surprise 1: China has a hard landing ........... 4Surprise 2: The RMB hits 7.5, even without a hard landing ........... 14Surprise 3: Equities end up falling another 20% in 2019 ... 16Surprise 4: Investment grade spreads widen to 200bps .... 24Surprise 5: The dollar ends up strengthening ........ 27Surprise 6: Continental Europe ends up outperforming ..... 30Surprise 7: Autos are the best performing sector in Europe in 2019 ......... 35Surprise 8: US bond yields rise above 3.5%, largely driven by the TIPS .. 39Surprise 9: We end up in a tech bubble ..... 44Surprise 10: Italy falls back into a crisis ..... 48Appendix 51 30 January 2019Global Equity Strategy 310 key surprises for 2019Each year we look at 10 surprises (see last year’s piece here). These are not our centralview but where we think the asymmetry of risk lies. For 2019, we see a number ofpotential bullish macro surprises (tech outperforms strongly, autos the best performingsector in Europe, US bond yields rise to 3.5%) and a number of bearish ones (China has ahard landing, the S&P falls 20%, investment grade spreads hit 200bps and Italy falls backinto a crisis) and some which are market neutral (Continental Europe outperforms, theRMB weakens to 7.5, the dollar strengthens).While there seems to be elevated uncertainty, we would note that over 95% of economistssurveyed by Bloomberg believe US real GDP growth will be above its long-term trend(1.8%) this year and nearly 70% believe the same for 2020 despite market concerns overthe recession. Meanwhile, 95% of strategists are forecasting a positive return for the S&P500, with more than half forecasting a return of more than 10%.Figure 1: Half of sell-side strategists are forecastingpositive S&P 500 returns for 2019 of more than10%... Figure 2: …while 95% of economists still expect theUS economy to grow above its long-term trend(1.8%) in 2019Source: BloombergSource: BloombergOur Thematic colleagues have collated a bottom-up, stock-focused approach to identifyingsurprises in 2019 in their Stocks for 2019: Surprise Packages. 0 1 2 3 4 5 6 7 8 9 Down 0-5%Up 0-5%Up 5-10%Up 10-15%Up 15-20%Up 20%+ Sell-side strategists end-19 price target for S&P 500, from current level of 2643 0 5 10 15 20 25 30 35 0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0% Economists' 2019 US real GDP growth estimate30 January 2019Global Equity Strategy 4Surprise 1: China has a hard landingCore view: China grows at 6.2% in 2019, after 6.5% in 2018. There has been only a smalldecline in consensus GDP.We discussed our central case in our last piece (see Some upside to go, but sell into therally, 17 Jan 2019).To us, China remains the biggest macro risk currently. We wouldexpect aggregate demand to continue to slow (owing to a slowdown in housing,manufacturing investment and exports and there needs to be a destocking) but we alsowould expect to see an accelerating policy response which should be enough to stabilizePMIs at lower levels. We believe that the Chinese government still has policy flexibility andnone of the preconditions for a hard landing are currently present.Risk view: China has a hard landing (i.e. real GDP growth slows to sub 5%). The lowestreal GDP growth recorded in the past 40 years (i.e. since the reform and opening up byDeng Xiaoping) was 3.9% in 1990. How could we get a hard landing1. Aggregate demand growth slows much furtherAggregate demand growth, measured as the sum of exports, FAI and retail sales, is at theweakest in 20 years.Figure 3: The last time China had real GDP growthof less than 5% was in 1990. The last recession wasin 1976 when we saw a 3% contraction in real GDP Figure 4: Aggregate demand growth (FAI + retailsales + exports) is close to the weakest on recordSource: Refinitiv, Credit Suisse researchSource: Refinitiv, Credit Suisse researchThe problem is that the key drivers of demand are likely to continue to slow:■ Exports have been front loaded and new orders suggest export growth continues tofall.■ Housing starts are expected to fall around 8% in 2019, according to our China propertyanalysts – with the fall in property transactions and the end of shantytown loans.0 5 10 15 20 25 30 35 40 197819831988199319982003200820132018 China GDP growth Nominal Real 0% 5% 10% 15% 20% 25% 30% 35% 200120042007201120142018 Aggregated demand (exports + FAI + retail sales) growth, yoy, 3mma 。。。。。。