Credit Suisse has crunched a mid-year update on its top investment ideas for 2014.
A lot can happen in six months with post GFC-high markets, low inflation, a stronger economy in the US with corporate earnings beating expectations and global economic growth on the rise.
In fine-tuning the investment ideas, Credit Suisse has removed one idea from the mix, the “Forex as the Fed tapers”, and merged its “Emerging markets reloaded” and “China reform re-accelerates” into one idea, “Emerging market reformers, cyclicals & dividends”.
And its added two new ideas: “Techs in focus” and “Sustainability”.
Five of the top ideas are pure equity plays.
“Our Top Ideas represent a straight-forward way of implementing our highest conviction strategies, and aim to deliver outperformance within each asset set class,” Credit Suisse says in its Research Alert to clients.
“How they are implemented depends on the individual client’s needs, but broadly speaking, our Top Ideas should be a key element of a client’s actively managed assets. They can be implemented in various ways, including direct holdings and funds.”
All seven of the original Top investment ideas for 2014 have positive absolute returns since inception, ranging from 0.3% to 12.2%.
Here are the seven (edited by Business Insider):
Idea 1: European value
Europe remains a favoured region. While the recovery is slow, expectations are still depressed. Current earnings per share forecasts are still 30% below the 2008 peak. The slow pace of recovery should result in a weaker Euro. Credit Suisse maintains the existing consumer and industrial recovery stock lists, but makes adjustments to the constituents. For the European consumer list, Credit Suisse focuses mainly on relatively cheaper companies and/or those with strong growth expectations. For the industrials list, the focus shifts to companies which should benefit from an improvement in economic activity as well as a weaker Euro. The renewed list only contains companies with EUR as a reporting currency. Finally, Credit Suisse has removed the financials list and replaced it with a selection of EU telecoms. Due to changing regulation in the EU, mergers and acquisitions (M&A) activity as well as increased investment into network quality by the telecom operators provides selected opportunities.
Idea 2: Seeking equity alpha
The general backdrop for equities remains favourable as the global economic recovery remains on track and acceleration of economic growth allows companies to grow their earnings. After a long period of multiple expansion, equity markets are now in a phase where earnings per share tend to grow, while multiples could stagnate or even decline. Volatility should also rise, a further supporting factor for emphasis on bottom-up stock selection. Credit Suisse adjusts its stock selection in line with current equity sector strategy and present BUY-recommended companies from the healthcare, information technology and materials sectors, removing financials from the list.
Idea 3: Techs in focus
As mobile technologies increasingly make it possible to access the internet nearly everywhere, the knowledge economy is evolving from an Internet of Things (IoT) into an Internet of Everything (IoE). Machine-to-machine (M2M) and machine-to-person (M2P) communication will have an impact on every aspect of our lives and the economy. Productivity gains by bringing people, processes, data and things together will be significant. The main beneficiaries of this trend are IT companies which can build and develop new business niches and/or potentially take market share from traditional non-IT industries. Wearables, home automation, automobiles and healthcare are all newly developing business segments.
Three groups of IT companies can benefit most from these changes:
- internet platform companies, such as Google, Facebook, Apple and Amazon (Big Data users)
- Selective semiconductor, cloud computing and software companies which enable connection to the internet as well as provide data collection and analysis (the Big Data enablers)
- IT and capital goods firms which use the Internet of Things for industrial and/or process automation.
Idea 4: Emerging market reformers, cyclicals and dividends
Reform is crucial for emerging market economies and Credit Suisse believes countries which are putting effort into growth-friendly policy measures will provide investors with superior returns. Some of the countries that have already taken steps in this direction, such as China, Indonesia, India and Mexico, have been rewarded by the capital markets. While the effects of the reforms are likely to unfold over the coming years, Credit Suisse believes it is crucial to take positions at an early stage.
The emerging market cyclicals selection focuses on companies which stand to gain from an upswing in developed markets. With export to GDP ratios of above 50%, Hong Kong SAR, Singapore, Taiwan, Malaysia, Thailand and South Korea should benefit most. Finally, the record low interest rates across various emerging markets, and thus the low gap between bond yields and dividend yields, should benefit high yielding emerging market stocks. Credit Suisse’s emerging market dividend selection is based on the same criteria as the defensive dividend strategy. However, the emerging market dividend strategy requires a higher degree of risk tolerance.
Idea 5: Cash-rich companies
Credit Suisse continues to believe that large corporate cash piles, low cost of debt and an improving outlook for the global economy will continue to drive shareholder returns through share buybacks, dividends and M&A. M&A volumes in particular have seen a strong start to 2014, and the momentum has continued with US tax inversion deals adding a new driver. Rather than repatriating cash held overseas, some companies are engaging in cross-border M&A as a way to re-invest. Credit Suisse dividend strategies, M&A 15 and share buyback picks have all demonstrated strong performance.
Idea 6: Sustainability
Businesses are increasingly undertaking efforts to deal with the adverse effects of climate change, pollution, and wastage. They acknowledge that man-made costs are putting a serious constraint on profitability, and that dealing with environmental, social, and governance-related issues might pay off in the future. Globally, more stringent regulation on environmental practices and product safety standards serve as a powerful incentive for businesses to invest in sustainability.
Credit Suisse focuses on three areas for potential growth:
- Energy efficient buildings, based on the sheer fact that buildings account for 40% of global energy consumption
- Adaptability to a changing business environment, where we focus on the corporate response to climate change (food security, insurance, infrastructure resilience)
- resource efficiency, with an emphasis on new materials and waste treatment.
Idea 7: Fixed income: The search for yield
Depressed yields currently represent the main challenge for fixed income investors. Even though Credit Suisse thinks global benchmark yields will gradually rise from current levels, interest rates will still remain at historically low levels. Credit Suisse believes the search for yield will continue and has renamed the idea to “Fixed income: The search for yield” from “Fixed income in a world of rising yields,” but left the underlying investment approach unchanged. Higher yield normally goes hand-in-hand with higher risk. Hence, this investment theme is directed at investors with a somewhat higher risk tolerance. However, Credit Suisse tries to limit the risk with more subordinated bonds by maintaining a conservative issuer selection, such as focus on issuers on an improving or at least stable fundamental credit trajectory. Credit Suisse continues to see attractive opportunities in subordinated corporate hybrid securities and in bank subordinated paper. In light of rates outlook, Credit Suisse also keesp the average maturity of recommendations to around five to seven years.
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