Equities, “new hardcurrencies” andreal estate in 2013
Moderate growth, moderate inflationand low yield environment to persist in2013.
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.
Head of Global Financial Markets Researchnannette.email@example.com, +41 44 333 17 06
Despite the soft patch in equity markets at the time of writingand the many uncertainties that have prevailed, 2012 is end-ing as a strong year for credits and equities. Real assets, suchas real estate and gold, have also delivered strong perform-ances. As expected, cash and core government bonds are atthe lower end of the performance scale. Financial markets ad-hered rather closely to the central banks’ guidance away fromun-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 arelikely to continue to perform well. Our Top 2013 InvestmentIdeas focus on six specific investment themes: Beyond cash;Recovery stocks; Dividends and beyond; New gas and oilsources; 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 goodchance of obtaining a reasonable return in 2013, while man-aging risk. Investment in our six top ideas can, of course, becombined with a discretionary managed portfolio and/or directinvestment in stocks and bonds from our recommended TopPick lists, to give an overall balanced strategy.
Fixed income: Credit, not duration
In 2012, investors were able to generate strong – in somecases even double-digit – returns on bonds with credit risk.We do not expect similar performances in 2013. Not that weanticipate a rapid turn in the credit cycle and sharply rising de-fault rates. Corporate credit fundamentals start from a strongposition. But credit spreads have narrowed substantially during2012 and the asset class simply offers less upside from herein most segments. Still, bonds, particularly through direct hold-ings, offer a source of higher cash flow than un-remunerativecash. Investors can therefore look at short maturity bankbonds 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 prospectsin fixed income will contribute to a shift into equities in 2013. Judging by higher implicit discount rates, earnings or dividendyields, the asset class is still attractively valued compared tobonds. Opportunities for new investments look more numerousto us in equities than in other asset classes. Dividend stocks,for example, remain an attractive theme for more risk-averseequity investors, particularly in Asia, where the pressure to tapfiscal revenue sources is less than in the West, and companiesstill have large cash holdings. High free cash flow-generatingstocks, 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. Thisis our Top 2013 Investment Idea No. 2: “Recovery stocks.” Inthe USA, we count stocks that benefit directly from the USconsumer revival among those set to recover. But we alsothink that merger and acquisition activity could pick up to thebenefit of M&A targets. Companies have had difficulty raisingtheir 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 themelies in the new gas and oil sources (our Top 2013 InvestmentIdea No. 4) that are being tapped across the continents, in theUSA, Africa and Asia. This should benefit upstream energystocks 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 equitiesshould perform similarly well. Hedge funds should also be ableto benefit from ample liquidity. On commodities, low interestrates are generally supportive but moderate growth prospectslimit the upside potential. We have a neutral view for the asset
Investment Strategy 27/11/2012
Credit Suisse - Research Monthly Asia