Credit Suisse sees big stock market fall in 6 months

SINGAPORE (Reuters) - Credit Suisse (CSGN.VX) sees a big correction in world stock markets by the end of this year, once interest rate increases in Japan have begun to accelerate, an economist for the Swiss bank said on Thursday.

"We could see a continuous uptrend over the next six months, driving valuations perhaps above the fair value, and then we see a significant pullback before a longer bull market can resume," Giles Keating, head of research at Credit Suisse's private bank and asset management business said at a briefing.

"Valuations are by no means silly."

He said that while stock markets, such as the S&P 500 Index, had risen to levels last seen at the height of the dot-com bubble in 2000, corporate earnings were around 50 percent higher than at the time, leaving equities undervalued.

"So in a sense, equities have still got the potential to rise further to perhaps get a bit expensive, and then suffer from a bit of a pullback as the next big round of monetary tightening does come through."

He said any selloff could hit Asian stock markets much harder than others, and could last as long as seven months.

Asian markets have been rising since 2003 and the benchmark MSCI ex-Japan is up 24 percent so far this year.

Keating said the yen-funded "carry trade" -- investors borrowing cheaply in low-yielding currencies to fund purchases of higher return ones -- was likely to end later this year.

"When the Bank of Japan moves to a faster pace of rate increase, when the currency volatility increases, then it becomes less attractive to borrow yen and less liquidity will flow out of Japan. Then some of the liquidity-driven rise in the market that we expect in the coming months will get reversed."