Base, worst and best case scenarios from Coutts
It still attaches a high, 25 percent chance to a partial or complete euro zone breakup and has been recommending its investors to position very defensively.
The chart below shows their base-case assumptions of S&P 500 index at 1,300 (about 3% below the current level), along with best and worst case scenarios.
“Our base-case scenario – where the euro zone manages to hold together this year while experiencing a mild-to-normal recession – sees fair value for the S&P 500 at around 1300, with a possible trading range of 1170 to 1430,” Coutts says.
“However, within our base-case scenario we expect periods when euro zone crisis fears flare up and a break-up gets partially priced in, although ultimately avoided.”
During these uncertain times, like last September, VIX could go up to 47, which would imply a potential decline in U.S. equities of roughly 10% from current levels. This in turn would create an opportunity to add to U.S. equities at good value.
And the worst case scenario?
“We would envisage U.S. equities falling close to levels seen in past severe U.S. recessions. In such recessions, prices have tended to fall much quicker than profits, pushing the S&P 500’s price-toearnings (PEs) ratio down as low as 7.9,” Coutts says.
For more on a euro zone breakup scenario click here