Credit Suisse
It’s difficult to beat the crowd if you’re part of it.
To this end, Credit Suisse’s global equity strategy team, led by Andrew Garthwaite, surveyed 265 investors to get a handle on what the consensus views are for eight key market topics.
Then the team proceeded to poke holes in this conventional wisdom and map out ways to take a more contrarian investing approach. Here's what caught our eye.
Consensus: The U.S. dollar bull will continue in full force
More than two-thirds of investors surveyed expect the greenback to be the best performing currency in the next year, with nearly 25 percent seeing it breaking above parity vs. the euro.
Credit Suisse, however, points out a number of reasons why the U.S. dollar bull could take a breather, particularly relative to the euro and the yen.
“The first rate hike on the last five tightening cycles was associated with a dollar weakening by around 10 percent over the following three months,” writes Garthwaite.
According to the strategists, the spread between the 10-year U.S. Treasury and German bund is consistent with a moderately stronger euro, while “it is both economically and politically imprudent to have a much weaker yen.”
Credit Suisse adds that the U.S. dollar is expensive on a purchasing-power parity basis relative to the euro and yen, though, as a cautionary note, currencies can deviate from this perception of fair value for prolonged stretches.
The team sees European banks and miners as the best positioned to benefit from a rising euro, and favors domestically oriented firms in Europe and Japan in the event of U.S. dollar weakness.
Consensus: Emerging markets will underperform
A paltry 4 percent of survey respondents believe global emerging-market equities will do better than other regions over the next year.
But this asset class appears oversold relative to global equities, notes Credit Suisse, and cumulative flows into these equity funds are at a six-year low:
Within the space, Credit Suisse favors commodity importers such as India, Taiwan, and Korea.
Consensus: Oil prices will rebound to $70 by the end of 2016
Credit Suisse’s house view is that oil will rise to this level by the end of 2015, but its global equity strategy team isn’t as optimistic.
The fall in the three-year forward price of oil, uncertainty regarding how much the cost curve will drop, lingering supply-demand imbalance, signs of slowing Chinese demand, and Saudi Arabia’s ability to “afford a price war a good deal longer,” are all reasons to believe oil will stay lower for longer, writes Garthwaite.
Select airlines and retailers would be the direct beneficiaries of continued low oil prices, according to Credit Suisse, while cheaper crude would also keep inflation expectations contained, supporting fixed income.
Consensus: Bond yields will inch higher in the next year
The consensus case is that “bond yields will rise by a small amount, but the deflationary effects of China’s slowdown, disruptive technology and deregulation mean that the rise will only be modest,” writes Garthwaite.
Credit Suisse anticipates a much sharper rise in yields, predicated on five Fed rate hikes over the next 18 months, as well as market expectations of the future course of monetary policy going upward to better align with the Federal Open Market Committee’s dot plot, and a rise in U.S. core inflation, among other reasons.
From an investment perspective, higher bond yields would also augur well for cyclical stocks.
Consensus: A Greek exit is off the table for a while
The chances of Greece leaving the European Union seemingly nosedived after the indebted nation was able to—after much bickering—reach an agreement with its creditors to secure more funds in exchange for additional reform measures.
The strategists, though, would caution those who think the Greek saga is in the rearview mirror.
“Our central case is for a 30 percent probability of a Grexit over the next year (and higher in the longer run),” according to Garthwaite.
The chief concern is that Greece simply won’t be willing or able to hold up its end of the bargain.
“There is very high implementation risk given: (i) the track record of Greece in terms of delivering on its reforms has been poor; (ii) the government not having ownership of the reform program; and (iii) already evident reform fatigue in the population,” writes Garthwaite.
In the event of a Greek exit, Credit Suisse sees European equities falling about 10 percent in short order, which would provide an attractive buying opportunity.
Consensus: Equities rise but stay out of bubble territory
Survey respondents don’t think the Standard & Poor’s 500-stock index is set to surge—the average price target for the end of 2017 implies just a 9 percent gain from current levels.
Credit Suisse, however, thinks there’s a 60 percent to 70 percent chance that equities end up forming a bubble.
According to the strategists, at least three factors could fuel irrationally exuberant price action. They include further declines in the price of equity, excess liquidity continuing to slosh around the financial system, and a wider range of investors pouring into the market. According to Credit Suisse, the “only buyers have been the corporate sector and private equity,” while households and institutional investors have stayed on the sidelines.
posted by ccc.bc @ 7:23 PM
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