Equities, “new hard currencies” and real estate in 2013

Global Research Private Banking Investment horizon: 6-12+ months Research Monthly December 2012 Top 30 portfolio stock: Chev-Buy ron A leading energy-related recovery investment. US Real Estate Investment Buy Trusts US real estate has upside poten-tial, as the rental market has bot-tomed out. REITS still offer value. Investment Strategy Equities, “new hard currencies” and real estate in 2013 page 3 Performance review 2012 Performance of Top Investment Ideas for 2012 page 5 Top investment ideas 2013 Top 2013 Investment Ideas page 6 Risk scenarios Alternative macro scenarios and their strategy implications page 8 Important disclosures are found in the Disclosure appendix. Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could af-fect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For a discussion of the risks of investing in the securities mentioned in this report, please refer to the following Internet link: https://research.credit-suisse.com/riskdisclosure 2 27/11/2012 Credit Suisse - Research Monthly Editorial Giles Keating Head of Research for Private Banking and As-set Management giles.keating@credit-suisse.com, +41 44 332 22 33 In this issue Investment Strategy Equities, “new hard currencies” and real estate in 2013  page 3 Performance review 2012 Performance of Top Investment Ideas for 2012  page 5 Top investment ideas 2013 Is it right to assume that lackluster economic growth in de- Top 2013 Investment Ideas  page 6 veloped economies will continue for several more years? Such projections rely on three broad ideas: Assertions that technolo-gical innovation has slowed; demand constraints from the un-wind of excess leverage; and existential threats to the euro. Risk scenarios Alternative macro scenarios and their strategy implications  page 8 The first of these seems difficult to justify (for example, look at Investment summary  page 9 our recent Global Investor on new applications of digital techno- logy to healthcare). The second and third have clearly dam-aged growth in recent years, but those years have also seen a Economics 2013: Growth moderate, rates low  page 10 transition toward solving those problems. Broken balance sheets are now largely repaired for most US banks and house-holds, though progress is much slower for governments on Fixed income Less value in fixed income  page 12 both sides of the Atlantic. There has been (largely unsung) pro-gress in macro adjustment and structural reform in Europe, with massive current account deficits reduced or eliminated, nominal wages falling to restore competitiveness and the start Equities Positioning for the (Re)recovery  page 14 Alternative investments of radical labor market reform. Grand plans for European integ- Opportunities in hedge funds and real estate  page 16 ration look elusive, but limited elements of it are being created, and successful macro adjustment may expose the remaining parts as unnecessary. On top of all this, one other crucial transition of recent Foreign exchange Diversify out of hard currencies into selected EM currencies  page 17 years has gone largely unnoticed: Oil prices more than tripled at the same time as the financial crisis (as described in the ac-companying essay). This has surely been a major drag on Risk disclaimer  page 19 growth, but now at last the world is learning to live with these Editorial deadline: 27 November 2012 high prices, discovering new sources of energy and adapting production to use less of it. As all these various transitions ad-vance, they become less of a drag and increasingly open the possibility that growth may surprise to the upside. This is the year-end issue of the Research Monthly (December 2012/January 2013). The February issue will be published at the end of January 2013. 3 Investment Strategy 27/11/2012 Credit Suisse - Research Monthly Investment Strategy Equities, “new hard currencies” and real estate in 2013  Moderate growth, moderate inflation and low yield environment to persist in 2013.  Bond returns in 2013 positive, but lower than in 2012; more investment opportunit-ies in equities.  “New hard currencies” and US real es-tate offer protection against eroding pur-chasing power. Nannette Hechler-Fayd`herbe Head of Global Financial Markets Research nannette.hechler-fayd`herbe@credit-suisse.com, +41 44 333 17 06 Despite the soft patch in equity markets at the time of writing and the many uncertainties that have prevailed, 2012 is end-ing as a strong year for credits and equities. Real assets, such as real estate and gold, have also delivered strong perform-ances. As expected, cash and core government bonds are at the lower end of the performance scale. Financial markets ad-hered rather closely to the central banks’ guidance away from un-remunerative risk-less into riskier assets. For 2013, we continue to anticipate a low interest rate en-vironment, sustained by moderate growth and inflation glob-ally. In this context, assets that benefit from low yields are likely to continue to perform well. Our Top 2013 Investment Ideas focus on six specific investment themes: Beyond cash; Recovery stocks; Dividends and beyond; New gas and oil sources; US real estate; and The new hard currencies. We be-lieve that an investor who focuses on these six ideas, in com-binations adapted to their own risk profile, should have a good chance of obtaining a reasonable return in 2013, while man-aging risk. Investment in our six top ideas can, of course, be combined with a discretionary managed portfolio and/or direct investment in stocks and bonds from our recommended Top Pick lists, to give an overall balanced strategy. Fixed income: Credit, not duration In 2012, investors were able to generate strong – in some cases even double-digit – returns on bonds with credit risk. We do not expect similar performances in 2013. Not that we anticipate a rapid turn in the credit cycle and sharply rising de-fault rates. Corporate credit fundamentals start from a strong position. But credit spreads have narrowed substantially during 2012 and the asset class simply offers less upside from here in most segments. Still, bonds, particularly through direct hold-ings, offer a source of higher cash flow than un-remunerative cash. Investors can therefore look at short maturity bank bonds with ratings between AA and A and corporate bonds with ratings between A and BB as an alternative to un-remu-nerative cash or term deposits. This is our “Beyond cash: Cred-it, not duration” Top 2013 Investment Idea No. 1. Equities: Attractive compared to other asset classes In 2012, investment flows into equities have remained low des-pite the good performance. We suspect lower return prospects in fixed income will contribute to a shift into equities in 2013. Judging by higher implicit discount rates, earnings or dividend yields, the asset class is still attractively valued compared to bonds. Opportunities for new investments look more numerous to us in equities than in other asset classes. Dividend stocks, for example, remain an attractive theme for more risk-averse equity investors, particularly in Asia, where the pressure to tap fiscal revenue sources is less than in the West, and companies still have large cash holdings. High free cash flow-generating stocks, and in Europe, convertible bonds, constitute the other two components of our “Dividends and beyond” Top 2013 In-vestment Idea No. 3. We are also optimistic that a range of stocks can recover strongly through 2013 as the business cycle strengthens. This is our Top 2013 Investment Idea No. 2: “Recovery stocks.” In the USA, we count stocks that benefit directly from the US consumer revival among those set to recover. But we also think that merger and acquisition activity could pick up to the benefit of M&A targets. Companies have had difficulty raising their top line, but margins are good and corporate cash is plen-tiful. Finally, cyclical stocks more generally are part of the re-covery theme as well. A more specialist but interesting theme lies in the new gas and oil sources (our Top 2013 Investment Idea No. 4) that are being tapped across the continents, in the USA, Africa and Asia. This should benefit upstream energy stocks with access to these sources in particular. US real estate: Our preferred alternative investment Among alternative investments, private equity investments fol-lowing similar themes as those we presented for equities should perform similarly well. Hedge funds should also be able to benefit from ample liquidity. On commodities, low interest rates are generally supportive but moderate growth prospects limit the upside potential. We have a neutral view for the asset 4 Investment Strategy 27/11/2012 Credit Suisse - Research Monthly class overall and focus on undersupplied commodities. For our Top 2013 Investment Idea No. 5, we keep US real estate as our preferred alternative investment, though. Currencies: Major crosses in trading ranges Our outlook for major exchange rates is neutral. Interest rate differentials are very tight and no big trends are likely to be triggered against that backdrop. In our view, appreciation po- Strategic asset allocation (SAA) The neutral allocations serve as a guideline and represent the average weighting over an entire market cycle. Since the glob-al strategy is based on a medium-term investment horizon, it deviates from the neutral position. We recommend an over-weight in equities and alternative assets, particularly hedge funds and gold. Conversely, we recommend underweighting fixed income investments and liquidity. tential lies in selected emerging market currencies that benefit from current account surpluses and offer attractive remunera-tion. This is our Top 2013 Investment Idea No. 6: “New hard currencies.” The latter help investors protect purchasing power. We see depreciation risk, in contrast, for the AUD. The currency is strongly overvalued and interest rates in Australia are expected to fall further. Add the potential long-term bene-fits the USD may get from a gradual move toward energy autonomy and several ingredients of a correction in the AUD/USD come together. Closing 2012 with our Top 10 Investment Ideas We are ending the year with a good result on our 2012 invest-ment ideas. The section dedicated to their review details re-commended actions with regard to existing holdings. We hope our clients have found the updates over the year helpful and Fixed Income Benchmark (BM) Income Benchmark (BM) SAA BM SAA Cash 5% 2% Fixed Income 80% 80% Equity 0% 0% Alternative 15% 18% SAA BM SAA Cash 5% 2% Fixed Income 55% 53% Equity 20% 22% Alternative 20% 23% wish all a successful 2013. (23/11/2012) Balanced Benchmark (BM) Capital Gain Benchmark (BM) SAA BM SAA Cash 5% 2% Fixed Income 35% 32% Equity 40% 43% Alternative 20% 23% SAA BM SAA Cash 5% 2% Fixed Income 15% 12% Equity 60% 64% Alternative 20% 22% Equities Benchmark (BM) SAA BM SAA Cash 5% 2% Fixed Income 0% 0% Equity 80% 83% Alternative 15% 15% Source: Credit Suisse 5 Performance review 2012 27/11/2012 Credit Suisse - Research Monthly Performance review 2012 Performance of Top Investment Ideas for 2012  Our Top Investment Ideas for 2012 have posted good returns thus far, and have provided diversification.  Strong fixed income and real estate per-formance. Stefan Braunschweig stefan.braunschweig@credit-suisse.com, +41 44 334 66 42 Nicole Krieger nicole.m.krieger@credit-suisse.com, +41 44 332 48 61 In the Research Monthly one year ago, we assumed that the low interest rate environment in developed markets would con-tinue in 2012. We also expected slightly negative total returns overall in fixed income and continued growth for equities. We anticipated high volatility and we were positive on real estate and gold. Based on these views, we presented our Top 10 In-vestment Ideas for 2012, some of them with a focus on per-formance, some with a focus more on risk management and portfolio diversification. We occasionally updated the ideas dur-ing the year (please see our monthly Research Alerts on the Top Investment Ideas). At the time of writing (21 November), we calculated abso-lute returns of between 8.5% (USD) and 17.5% (EUR) for Fixed income Idea No. 1, core corporates. Idea No. 2, invest in emerging market quasi-government credits, also recorded a good absolute performance. In this equity positive environ-ment, both idea No. 3, High dividend stocks, and idea No. 4, CS Top 30 portfolio, outperformed their respective bench-mark, MSCI World. This resulted in an absolute return of 14.4% for our basket of high dividend stocks and 15.7% for the CS Top 30 basket. Idea No. 5, a covered call writing strategy, was closed in the spring with an absolute profit of 9.4%, as volatility dropped significantly in the first quarter of the year. Idea No. 6, Diversifiers, and idea No. 7, Renminbi, were ideas to diversify away from EUR and USD. Besides the diversification effect, both ideas produced positive absolute re-turns. The first commodity idea, to follow a value strategy (No. 8), outperformed its benchmark and was closed with an abso-lute performance of 6.4%. In September, this idea was switched into a carry strategy, which has underperformed the benchmark by 1.7% so far (–3.2% absolute). The best per-forming idea was No. 9, real estate income generators, which had outperformed the benchmark by 11.3% until August (26.1% absolute) when we locked in the good performance. In September, we recommended investing in US real estate, which also outperformed the benchmark. We also proposed a list of well-diversified hedges against the more extreme possible outcomes globally. Some of the ideas (e.g. buy EUR puts/USD calls) showed a negative per-formance, other ideas (e.g. buy Italian and Spanish govern-ment bonds) performed well. (23/11/2012) ... - --nqh--