Credit Suisse PB unveils top themes for investors

The private banking division favours risk assets and is overweight equities, commodities and real estate and underweight fixed income.
Credit Suisse PB unveils top themes for investors

Credit Suisse Private Banking has unveiled its top investment themes for 2011 against a backdrop of growing discrepancies between fiscal and monetary policies around the globe.

The firm sees at least one more year to the post-crisis recovery that began in 2009, and as a consequence leans towards risk assets, notes Lars Kalbreier, global head of equities and alternatives research.

It is overweight equities, commodities and real estate, and underweight fixed income. Within fixed income, it likes government bonds the least, particularly in developed markets, and inclines towards emerging market bonds and corporate bonds.

Under the bank's base-case scenario of a policy-induced soft landing in China, Asian equity markets are forecast to deliver aggregate upside potential of 19% amid a positive economic earnings cycle and favourable liquidity conditions.

In terms of overall positioning for 2011, it urges investors to focus on the beneficiaries of emerging market growth, American regeneration, historically high corporate cash levels, rising inflation, higher interest rates and a weaker US dollar.

It is overweight equities in Hong Kong, China and India due to upside potential to their 12-month index targets, solid earnings growth and exposure to emerging wealth. The 12-month Hang Seng Index target is 30,500, while the 12-month Sensex target is 23,800.

Within Asean, it sees an attractive investment outlook for Indonesia (16% upside potential) and Singapore (13%), but notes that Thailand is trading at the top of its historical valuation range.

Credit Suisse also recommends investing in companies that pay high dividend yields, noting historically high cash levels among non-financial firms.

"Since most companies have started to accept that the world will continue to grow, they will either start to pay it back to shareholders through dividends or stock buy-backs, reinvest in the business through capital expenditure or carry out acquisitions," says Kalbreier. "That is why we started to see a big pick-up in M&A in 2010, and that is likely to continue in 2011."

Fan Cheuk Wan, head of research Asia-Pacific for Credit Suisse Private Banking, tips non-Japan Asia companies to deliver 30% earnings growth this year, contributing to a corporate cash pile that was already strong after two years' growth.

"A healthy corporate balance sheet underpins robust free cash flow and this supports upside potential in the dividend payout ratio," she explains.

With Australia the highest-yielding stock market in Asia-Pacific, favoured stocks include Telstra (10% dividend yield), ANZ Bank (6%) and NAB (7.3%). A number of Chinese banking stocks in Hong Kong also stand out, including China Construction Bank (4.8%) and Bank of China (4.5%), as well as UOB Bank in Singapore (4.3%).

Elsewhere, high-yielding stocks are mainly positioned in more defensive and stronger cash-flow segments, so the private bank also likes real estate investment trusts (Reits). In Singapore its top pick is Frasers Centrepoint Trust (5.4%) and in Hong Kong it is Link Reit (4.5%). 

In terms of the macroeconomic backdrop, Kalbreier suggests 2011 will be marked by policy-making polar opposites, particularly between the US and Europe.

He expects a continuation of loose monetary policy and fiscal measures to stimulate the US economy, while almost half of eurozone countries will embark on austerity measures, increasing taxes and VAT and inevitably hitting consumer confidence and spending.

Credit Suisse forecasts 3% GDP growth for the US, against 1.8% for the eurozone this year. Contrastingly, it anticipates GDP growth of 7-8% for emerging markets, backed by a strong consumption story.

Non-Japan Asia GDP growth is forecast to moderate from an expected 8.8% for 2010 to 7.6% in 2011.

Fan expects QE2-induced capital inflow into emerging markets and the widening interest-rate differential between Asian currencies and the US dollar to intensify this liquidity flow, underpinning the inflation and asset bubble risk in Asia for the next 12 months.

"But in our base-case scenario, we strongly believe that Asia is likely to see a policy-driven soft landing this year," she says. "We anticipate positive rate hikes in most Asian countries, but we don't expect over-tightening because Asian policymakers will stick to a largely pro-growth bias."

The private bank is expecting a minimum of three 25bp interest-rate hikes in China, but Fan points to a PMI level of 53.3 in December as a tentative sign of gradual cooling in the economy, with the PMI input price index having dropped by 6.6 percentage points.

The market reacted calmly to Beijing's rate hikes in late October and on Christmas day, she notes, seeing monetary normalisation as a deferred action. "China has been behind the curve in terms of taking prompt action to contain inflation expectations, so this is actually a positive move," says Fan.

Credit Suisse anticipates CPI inflation in China to rise to 4.8% this year, from a projection of 3.1% for 2010, and Indonesia to edge up to 6%, from 5.3%. It expects CPI inflation to hit 9% in India for 2010, but believes India will be the first Asian country to see inflation peak, edging down to 7.5% for 2011.

The key reason is the positive effect of a good monsoon, which bodes well for agricultural output and will also support the private consumption outlook.

Overall, the bank is forecasting non-Japan Asia CPI inflation of 5.2% this year, from 4.4% in 2010. But Fan points out that this is nowhere near the last inflation cycle peak of 8% in 2008.

"I don't think the Asia region is entering a fully fledged overheating phase because we are not seeing a repeat of the super commodity rally in 2008, when global oil prices spiked at the $145 per barrel level," says Fan. 

Rather, Credit Suisse sees the oil price trading in a range between $85-$95 a barrel.

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