|By Cushla Sherlock|
As the global economy continues its recovery, Credit Suisse’s top investment ideas focus on carefully selected themes which aim to help you generate more bang for your buck in 2014 – from China to cash-rich companies. In this video, Giles Keating, Head of Private Banking Research, explains the rationale behind the ideas and the investment implications.
Rationale: Europe’s recovery is slowly gathering pace and Credit Suisse anticipates an acceleration in earnings growth in 2014. Valuations are more attractive than in the US.
Investment implications: Buy (or overweight) European stocks. Among countries, Credit Suisse currently favors Germany given its operating leverage towards a recovery. For higher-risk investors: Europe-wide small and mid-cap stocks, cyclicals and selected banks on low valuations. For lower-risk investors: Dividend-yielding stocks offer potentially lower risk with higher yields than fixed income markets.
Idea 2: Seeking Equity Alpha
Rationale: Equities are the preferred asset class for 2014. After a good performance in 2013, the market recovery is set for a new phase in which active style, sector, country and stock selection can generate superior returns, noting that within both US and European stock markets, correlations among equities have fallen markedly.
Investment implications: Choose sectors, styles, countries and individual stocks based on prevailing market dynamics; cyclicals and momentum stocks from the IT and capital goods sectors are recommended.
Idea 3: Emerging Markets Reloaded
Rationale: During 2014 Credit Suisse expects that most emerging markets will benefit from a cyclical upswing supported by export opportunities to the developed markets. Emerging market trend growth rates remain above those of developed markets (albeit lower than before) and could further re-accelerate with structural reforms. Deficits still a source of volatility.
Investment implications: Gain exposure to export-led, growth-sensitive countries, such as Taiwan, and also look for those where the potential for successful structural reforms is not yet fully discounted. Compelling valuations can still be found (for example, China) where long term fundamentals – like consumption, urbanization, export potential – remain key investment drivers. Take a position in companies that benefit from emerging market cyclical recovery.
Idea 4: Fixed Income in a World of Rising Yields
Rationale: The need to obtain reasonable fixed income returns at a time when duration is unattractive since yields may rise on an economic recovery and tapering, and credit spreads are low.
Investment implications: Focus on short-duration assets in areas where value still exists, like corporate senior loans (usually held via a fund), bank subordinated debt, bank CoCos, corporate hybrids and distressed debt. Credit spreads on high yield and floating rate debt are near historic lows but limited amounts of such debt from strong issuers can be included in an overall portfolio. Avoid overvalued assets such as bank senior debt.
Idea 5: Forex as the Fed Tapers
Rationale: With tapering, the USD is set to strengthen against some currencies, like the JPY, and trade at the stronger end of the range against others, for example the EUR. In portfolios, a USD long position offers diversification in times of stress.
Investment implications: Buy USD/JPY, spot or forward. Opportunistically sell EUR/USD near the top of the range. Within emerging markets, sell currencies of deficit countries against those of surplus countries and of reformers.
Idea 6: Cash-Rich Companies
Rationale: Corporate cash piles remain near multi-year highs. Rising CEO confidence levels and pressure from shareholders to invest in growth or return cash bodes well for M&A activity.
Investment implications: Moderate risk-appetite investors should favor companies with a strong free cash flow and the ability to buy back shares. Investors with higher risk-appetite should prefer companies that are the potential targets of industry consolidation or which will benefit from asset disposals through restructurings.
Idea 7: China Reform Reaccelerates
Rationale: The Third Plenary Session of China’s Central Committee announced a clear direction for structural reforms, with accelerated product and financial market liberalization which should accelerate economic rebalancing, from exports and investment towards consumption. Concrete measures are expected in the coming months.
Investment implications: Stock selection is key. Gain exposure to global, regional and domestic firms that can benefit from China’s structural reforms with a focus on the private companies, services sectors and winners from economic rebalancing towards consumption. CNY and CNH (Chinese Offshore Yuan) remain our top emerging market currency ideas and are expected to sustain gradual appreciation in the course of exchange-rate reform.
Cushla Sherlock is Editor, Credit Suiss
