Credit Suisse is going big on Europe and has a focus on high-dividend yielding stocks as well as those with exposures to the global economic recovery.
Currently Credit Suisse recommends being overweight in Europe, but not the UK, and Japan, neutral in Australia and Emerging Markets, and underweight in the USA.
Chief investment strategist David McDonald gave a briefing today on where he thinks the big opportunities are for the rest of the year.
“This is where we’re telling clients to put their money now,” McDonald says.
“We’re strong on European equities and that’s one of the markets we’re pushing at the moment.”
Stephen Cabot, the Credit Suisse Director of Investment Consulting, outlined the case for Europe and high yield companies.
Focus on Steady Income
High cash flow generating companies provide equity exposure with relatively low risk.
“We expect cash flow rich companies to continue to perform well,” Cabot says.
He says high cash flow generating and/or high dividend paying companies signal stability and good health and historically these stocks have outperformed the broad market (MSCI World index) since 1995.
“In our view the inclusion of companies generating high free cash flow is a good rout for investors to gain exposure to equity markets, as these stocks generally provide lower risk,” he says.
Over the past 100 years, almost 70% of real equity returns have come from the dividend component alone, with the remaining 30% coming from the capital growth.
Europe’s recovery slowly gathers pace on both consumer and industrial sectors and should be reflected in earnings growth.
European stocks are valued more attractively than US stocks and Credit Suisse currently overweight Europe as the economic recovery slowly continues.
European company sentiment continues to improve with optimism for 2014 and an imminent recovery is indicated by a gradual improvement of European Purchasing Managers Indices (PMIs).
Credit Suisse expects Europe’s recovery to gather pace in 2014 and anticipate an acceleration in earnings growth.
The favourite in Europe is Germany, a strong exporting country. Its industrial and consumer goods exports give it strong exposure to a recovery.
Some stocks to watch: Siemens, Bayer AG, Adidas AG.
The ASX S&P 200 should hit around 5800 by the end of 2014, in line with earnings growth.
Analysts have been revising upwards their earnings forecasts. In resources, companies are getting more modest and realistic forecasts.
Credit Suisse still likes the major banks which provide steady, secure income yields.
On Rio Tinto: “They are getting massive cash from their Pilbara operations and it is still a stock we like.”
Australian stocks with good exposure to Europe: CSL, Sonic, Ramsey Healtrh, Amcor, Branbles.
Credit Suisse thinks there could be an interest rate rise from the RBA by this time next year.
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