Credit Suisse: Here Are the Key Investment Themes For 2015

Image: Johannes Simon/Getty.

Robert Parker, a senior adviser at Credit Suisse, based in the UK, gave a briefing today in Sydney on the opportunities for investment in 2015.

Having been with the Swiss investment bank since 1982, he’s seen some peaks and troughs in the market.

Today he gave some insight into some of the questions being asked by investors, including whether China is head for a hard landing, whether the recovery in the US will last, and whether Europe will drag down the rest of the world.

And the key question: Where are the investment opportunities?

Parker likes equity markets which he says will remain firm in 2015.

“We think global equity markets have higher to go,” he says.

“We like the Japanese markets and we like Japanese exporters. Their corporate margins and profitability are going through the roof with the weak Yen.

“We like Chinese consumers. Wage increases are growing by 15%.

“We like markets which are undervalued and will benefit from recovery in Europe, such as Poland and Central Europe.”

And Credit Suisse is still big on high dividend companies.

“We’re tweaking that because although we’re still keen on high dividend companies the problem is that a lot of these high dividends are now the most expensive sectors (such as Utilities).

“What’s interesting now is the sectors with super surplus cash levels … those companies which are going to be forced to pay more dividends or have more share buybacks. One area is IT.”

Think Apple, which has $135 billion sitting on its books.

And for equities Australia looks cheap on the world stage when measured on price/earnings ratios, and Japan is very cheap, compared to most of the rest, according to this chart:

“Now is the time to take profits,” he says.

“As a loyal employee of Credit Suisse, the message is very simple: sell Swiss equities. Switzerland is super expensive. And it’s not surprising. Switzerland has a lot of defensive companies (such as Nestles).”

However, much of the rest of the Eurozone is reasonably cheap.

“I think we’re going to get a surprise and it’s going to be European corporate earnings,” Parker says.

“We like core Europe. If you look, for example, at German capital good companies and, if I am right and the Euro goes to 1.15 against the USD, then the profit margins on exports are just going to be expanded dramatically.”

Parker also likes the look of China which he says is gliding downward and not falling sharply.

“I like China and China to date this year is up about 18%,” he says. “China was a miserable place to invest in 2013 but we’ve seen a turnaround there.”

He says investors are currently very defensively positioned, holding stocks which work in bad and good times.

The ratio of defensive stocks to cyclical stocks is extreme.

And Credit Suisse is selling defensive stocks and buying cyclicals.

IT is one of those cyclicals looking attractive, as this chart shows:

Some key themes for 2015:

  • The appreciation of the US dollar against all the major currencies. So far this year, the Yen and the Euro have depreciated by 9% against the US Dollar. The Australia dollar has come down hard and is hovering around 85 US cents.
  • All US economic indicators remain strong and trend growth over the next 12 months should be 3% or more. Headline unemployment should reach 5.5% by end the first quarter 2015. The stronger US dollar and lower commodity prices will cap inflation, which should now be limited to 1.5% in 2015.
  • The trend in Chinese annual growth to 7% in and to 6.5% in 2015 is intact. Shadow banking no longer represents a serious threat to the economy and although real estate prices will decline, the problems in the real estate market will not lead to a hard landing. Central bank liquidity injections will continue to underwrite the economy.
  • The decline in most commodity prices, notably oil with Brent down 28% so far this year, and gold flat, copper down 9% and corn down 11%. In Australia, iron ore is the focus. Parker says the global commodity market is currently behaving as if prices have hit a floor. He emphasises that he doesn’t follow iron ore specifically.
  • The outperformance of corporate bonds relative to the major government bond markets. The investment grade corporate index has generated 13.4% so far this year compared to the world government bond index just 1.3%.
  • Extreme equity market divergence with the S&P up around 10% this, outperforming the Nikkei, up 6% , with the Euro stoxx flat. Mediocre performance by Australia, up 1% at best. However, the resources sector is down more than 10% in Australia.
  • Strong performance numbers from Asia with India up more than 30%, and most South East Asian markets up close to 20%
  • Equities. Although technical patterns in global equity markets look similar to those at the previous market peak in 2006-2007, market and economic circumstances are now very different, with lower levels of investor and financial market leverage. Positives for equity markets are Japan, low energy prices, the persistence of strong US data, the soft landing in China and policy initiatives to improve European growth.
  • Corporate earnings growth should improve, notably in Europe, given the weaker Euro. High levels of corporate liquidity should support share buy-backs, increased dividends and higher levels of Mergers and Acquisition activity. There is an extreme undervaluation of cyclical stocks versus defensive sectors.
  • Areas of undervaluation are North Asia and notably Korea and Japan, Central Europe such as Poland, the German capital goods sector and European export sectors.

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