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Equity sell-off next year as China starts printing money, says this Swiss bank

Global equities are set to enter a difficult period in the second half of 2017 and a confluence of three major factors will see a sell-off in stock markets, according to analysts at Credit Suisse.

"(We) anticipate a sell-off in equity markets," an equity research team, led by Andrew Garthwaite, at Credit Suisse said in a note on Friday morning.

Gazing into the distance, the team sees investors being confronted by sharply accelerating U.S. wage growth. Wages remain a hot topic in the U.S. seven years after the global financial crash. The issue has been raised on the presidential campaign trail in the U.S. and major retailers such as Target and Wal-Mart have already announced an increase to wage floors.

China printing?

Secondly, Credit Suisse suggests that fears over a credit binge in China would have reached a head by mid-2017. It believes that Chinese lenders may have already hit a loan-to-deposit ratio of 100 percent. This ratio essentially shows a bank's total loans against its total deposits. A high number means that a bank might not have enough liquidity to cover any unforeseen funding needs.

The bank said that the country might thus be "unable to roll-over NPLs (non-performing loans) without printing money."

And lastly, Credit Suisse believes that equity investors would have at this time discounted any fillip from a trend in fiscal policy over monetary policy. The latter has seen central banks buy up bonds in large quantities which directly benefits the fixed income market. However, more fiscal planning by governments - as seen by Japan this week and hinted at by the U.K. finance minister - is expected to lead investors towards inflation hedges like equities and will see bond yields creep higher.

Bullish in near-term

Traders work on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Traders work on the floor of the New York Stock Exchange.

Nonetheless, Credit Suisse are fairly bullish on stocks in the short term. On Friday, it raised its year-end targets to 2,250 points and 3,100 points for the S&P 500 and Euro Stoxx 50 from 2,100 points and 2,950 points, respectively. It also introduced mid-2017 targets of 2,300 points and 3,200 points.

Market participants have took a pause for breath earlier this week after the post-Brexit rally. However, stocks were back en vogue on Thursday and Friday after an injection of stimulus from the Bank of England.

Peter Oppenheimer, chief global equities strategist at Goldman Sachs, told CNBC Tuesday that a 10 percent drop in developed market equities could happen in the coming months. Tim Drayson, head of economics at LGIM, believes that better data - particularly in the U.S. - could mean markets sink lower in the coming months and spoke to CNBC Monday on the risk of a "near-term melt-up."