Presentation on theme: "Investment Strategy Monthly Slides January 2012"— Presentation transcript:
1 Investment Strategy Monthly Slides January 2012 Investment Strategy & Advisory Team:Barbara M. Reinhard, CFAChief Investment Strategist,Managing DirectorPhilipp E. Lisibach, CFADirectorJimmy M. JamesSamuel M. BaumannAssistant Vice-PresidentScott P. RosenblattRyan P. SullivanInvestment StrategyMonthly SlidesJanuary 2012Private Banking AmericasAs of January 10, 2012
2 Table of Contents Appendix (Click below to go to section) Investment Strategy OverviewFour Charts You Can’t MissAsset Allocation & Economic OutlookValuationsFundamentalsSentimentAppendixGlobal Asset Class ReturnsKey Forecasts
3 Investment Strategy Overview High growth equity sectors in a low economic growth environment.Increase stable over cyclical growth in equity portfolios.Position U.S. sector allocations towards stable growth sectors such as:Health Care, Telecom, Utilities, Consumer StaplesHigh dividend paying stocks and strategies during periods of low interest rates.Stay overweight emerging market equities.Increase municipal bond exposure, favoring 5-10 year maturities given yield curve shape.High credit quality during periods of high liquidity.Seek higher yield through different vehicles such as:Senior Bank Loans, MLPs, REITs with good coupons and coverage ratiosCertain investment vehicles referenced above may be available only to qualified, suitable investors.As of 1/09/2012Source: Private Banking (PB) Americas Investment Strategy & Advisory
4 Four Charts You Can’t Miss U.S. Labor Market Continues To Improve GraduallyU.S. Households Have Meaningfully Reduced TheirFinancial Burden since 2008As of 12/31/2011Source: BloombergAs of 9/30/2011; Latest data availableSource: Federal ReserveLow Bond Yields Make High Dividend Stocks AttractiveU.S. Home Prices are Reaching a Bottom and Homes areNow at their Most Affordable Level in the Last 20 YearsAs of 1/06/2012Source: BloombergData as of 11/30/2011Source: National Association of RealtorsSource: PB Americas Investment Strategy & Advisory
6 Cycle Clock*Our Cycle Clock indicator is currently in the Contraction phase. The move from Recovery to Contraction in early October was both atypical and unusual of a business cycle, and has only previously occurred over two short periods in 1985 and As such, our recommended asset allocation (neutral tactical and positive strategic views on equities) is less typical of a normal Cycle Clock.Over-heatingSlowdownContractionRecoveryStocksCommBondsCashCreditsOutperformUnderperformGDP robustUnemployment lowTighter rate policyInflation risingGDP droppingEmployment slowingTight rate policyInflation slowingGDP contractingUnemployment highEasier rate policyInflation lowGDP picking upEmployment offEasy rate policyInflation tame*The Cycle Clock framework breaks the economic cycle into 4 phases (Overheating, Slowdown, Contraction & Recovery). For each of the 4 phases we examine which asset classes may perform better than other asset classes based upon historical performance data. However, past performance is not an indication nor a guarantee of future results.As of 1/09/2012Source: Private Banking Global Research
7 Outlook SummaryAlternative investments, such as private equity funds and hedge funds, are typically high-risk investment vehicles which are available only to qualified individuals or entities that are willing to assume above average risk and sustain limited liquidity with a portion of their net worth.
8 Guidance AllocationsThe proposed Benchmark and Strategic Asset Allocations for each of the risk budgets referenced above are created by the Private Banking Americas Investments Strategy & Advisorygroup. The Benchmark Asset Allocation (BAA), for a 3-7 year time horizon, is the neutral position reflecting the predefined risk budgets and meets investment objectives over a full market cycle.The Strategic Asset Allocation (SAA), for a month time horizon, expresses views resulting in temporary deviations from the BAA to generate expected excess returns or reduce risk.Alternative investments are typically high-risk investment vehicles which are available only to qualified individuals or entities that are willing to assume above average risk and sustain limitedliquidity with a portion of their net worth. Please refer to the attached “Important Legal Information” for important disclosure relating to alternative investments.Data as of 1/09/12Source: PB Americas Investment Strategy & Advisory
9 Economics: Global growth divergence: U. S Economics: Global growth divergence: U.S. appears to gain momentum, Europe in recession.In 2012 global growth is expected to reach 3.5%, mainly driven by the ongoing U.S. recovery and emerging Asian economies. Elections in seven of the G20 countries, accounting for 35% of global GDP, will make politics a critical factor this year. There may be additional volatility in financial markets fuelled by crucial debates surrounding entitlement cuts and tax policy.The global growth pattern is expected to diverge further in 2012 with Europe’s leading indicators deteriorating and pointing to a recession. Meanwhile, U.S. indicators (rising purchasing manager indices) point to a modest acceleration in the near-term.The political transitions in many of the Middle Eastern countries remain a source of uncertainty in energy markets in 2012.U.S. Labor Market Continues To Improve GraduallyAs of 12/31/2011Source: BloombergOil Price Rises Amid Tensions in The Middle EastAs of 1/06/2012Source: BloombergSource: PB Americas Investment Strategy & Advisory
10 Equities: Sovereign issues continue to weigh on sentiment. Global Equities Valuations Look UndemandingValuations look reasonable overall, however headline risk remains and equities are likely to trade with elevated volatility in the near term.The Eurozone looks attractive on a valuation basis, however lingering contagion risk keeps us cautious on the region.With inflation less burdensome and growth expected to slow, many emerging markets are likely to benefit from looser (or less tight) monetary policies (Brazil, China).As of 12/31/2011Source: Bloomberg, DataStream*EAFE: Europe, Australasia, and Far EastRegional OutlookDeveloped MarketsU.S Emerging Markets Asia Pacific ex-Japan Asia Canada Latin America UK Europe, Mid East, Africa Japan Europe ex-UK SAA1SAA1Equity Market Index 12 Month Target ScenariosDJ EuroStoxx 50FTSE 100Nikkei 225MSCI EMSpot2,3175,5728,455916Optimistic3,0016,36711,5001,441Main2,7405,8099,8001,257Pessimistic2,4905,2737,200970Data as of 12/31/2011Data as of 1/09/12Source: PB Americas Investment Strategy & Advisorykk / mm Indicates a strong investment conviction in over/underweight position.k / m Indicates a modest investment conviction in over/underweight position. Indicates a neutral investment conviction, or benchmark weighting position.Note: Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.1Strategic Asset Allocation, see slide 8 for more informationSource: PB Americas Investment Strategy & Advisory
11 U.S. Equities: Macro data have continued to surprise to the upside. Average Strategist S&P 500 Year-end 2012 TargetWe remain positive, with a defensive sector allocation on U.S. equities. Consensus is for modest gains in 2012.Recent economic data releases (ISM manufacturing, consumer confidence, jobless claims) have surprised positively. An better macro environment should lead to an improved earnings outlook.Prolonged euro weakness a headwind for U.S. companies with significant revenues derived from the Eurozone, as earnings are impacted when translated back into USD.1344As of 1/5/2012Source: BloombergU.S. Sector OutlookHealth Care Energy Consumer Staples Industrials Telecomm Services Consumer DiscretionaryUtilities Financials Information Technology Materials S&P 500 Index 12 Month Target ScenariosS&P 500Index LevelSpot1,258Optimistic1,462Main1,299Pessimistic1,145Data as of 12/31/2011Data as of 1/09/12Source: PB Americas Investment Strategy & Advisorykk / mm Indicates a strong investment conviction in over/underweight position.k / m Indicates a modest investment conviction in over/underweight position. Indicates a neutral investment conviction, or benchmark weighting position.Note: Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.Source: PB Americas Investment Strategy & Advisory
12 Fixed Income: Preference for high quality credits, munis, and emerging market debt. In 2012 interest rates are expected to remain near zero in the U.S. Given the risk of extreme outcomes in Europe we favor high quality investment grade corporates.The fixed income segment of our Strategic Asset Allocation remains unchanged compared to last month. We continue to prefer exposure to high quality investment grade bonds and we maintain a small overweight position to emerging markets local currency denominated bonds with limited exposure to Europe.Municipal bonds have given up some of their attractive valuation compared to U.S. Treasuries, yet remain favorably valued. Default rates are expected to stay relatively low and tax revenues are projected to improve going forward with the continuation of the U.S. economic recovery.Municipals Remain Attractive Compared to U.S. Treasuries6080100120140160Dec-91Dec-95Dec-99Dec-03Dec-07Dec-11Muni / Treasury SpreadAverage+1 Standard Deviation-1 Standard Deviation%97.3%As of 12/31/2011Source: Thomson Reuters MMD, BloombergFixed Income OutlookSAA1U.S. MunicipalU.S. Investment Grade Corp.Emerging MarketsU.S. Treasury Inflation ProtectedU.S. High YieldU.S. TreasuriesU.S. SecuritizedData as of 1/09/12Source: PB Americas Investment Strategy & Advisoryk PositivemNegativegNeutralNote: Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.1Strategic Asset Allocation, see slide 8 for more informationSource: PB Americas Investment Strategy & Advisory
13 Currencies: EUR expected to be under pressure, emerging Asian currencies likely to gain. Volatility is projected to persist in 2012 as financial market funding conditions, elections, and economic growth remain risk factors. Safe haven currencies such as the USD, CHF, and JPY could benefit temporarily in time of elevated market volatility.EUR: The European Central Bank’s interest rate reduction cycle is expected to continue putting further pressure on the EUR vs. USD, as the relative yield advantage of the EUR fades.Emerging Asian currencies with strong external balances are preferred. Continued U.S. economic recovery is projected to be a positive for the Mexican peso (MXN), in the event of lower overall market risk.EUR Reaches a 16-month Low vs. USDData as of 1/06/2012Source: BloombergCurrency OutlookUSD vs. CHF EUR vs. USD USD vs. CAD NZD vs. USD USD vs. MXN AUD vs. USD USD vs. BRL USD vs. JPY GBP vs. USD Data as of 1/09/12Source: PB Americas Investment Strategy & Advisoryk PositivemNegativegNeutralNote: Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.Source: PB Americas Investment Strategy & Advisory
14 Commodities: 2011 was challenging; however depressed prices may present value. Macro uncertainty led by the financial crisis and economic growth uncertainty made 2011 a challenging year for commodities. The Dow Jones UBS Commodity Index finished the year down 13%.Precious metals, particularly gold, were the bright spot in 2011, gaining 10% for the year. As a result of its recent pullback, we believe gold is within fair value range. Further, a continued low interest rate environment may act as a catalyst for higher prices.Industrial metals remain neutral as growth concerns exist in both developed and emerging markets. Chinese trade data due in January will provide an indication on current state of demand.Other Than Precious Metals, Commodities Struggled During2011Data as of 12/31/2011Source: Bloomberg, All Indices Rebased to 100 as of 12/31/2010Commodity OutlookPrecious Metals Industrial Metals Livestock Agriculture Energy Data as of 1/09/12Source: PB Americas Investment Strategy & Advisoryk PositivemNegativegNeutralNote; Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.Source: PB Americas Investment Strategy & Advisory
15 Alternatives: Global Macro hedge funds continue to be top performing strategy. Through November 2011, the global macro hedge fund strategy – our top pick for most of 2011 – was able to navigate market volatility and generate consistent returns for most months of the year. Global macro is up 6.0% through November 2011, versus the S&P 500 index, up 1.1%. Hedge funds at large, as measured by the CS Dow Jones Index, are down 2.3%.Real property continues to be a strategic position in the Credit Suisse Global Asset Allocation Framework with a positive outlook. Well-placed and managed investments across regions and geographies may provide investors with an enhanced yield (see table).Private equity outlook remains constructive for the longer term. Current activity in the space is focused around secondary funds and smaller Leveraged Buy-out (LBO) transactions that involve less leverage and have more access to financing in the current environment.Global Macro Navigated Volatility and ProvidedConsistent Returns Through November 2011Data as of 11/30/2011; Latest data availableSource: Private Banking Investment Strategy and Advisory Group, BloombergGlobal Commercial Real Estate Continues toOffer Enhanced YieldsData as of11/30/2011Source: Credit Suisse, Colliers, PMA, ** USD/Square FootSource: PB Americas Investment Strategy & AdvisoryAlternative investments, such as private equity funds and hedge funds, are typically high- risk investment vehicles which are available only to qualified individuals or entities that are willing to assume above average risk and sustain limited liquidity with a portion of their net worth.
17 U.S. Equities - The Valuation Math Favors Investors S&P 500 Index 12-Month Forward P/E Ratio11.7xAs of 12/31/2011Source: Bloomberg
18 EAFE* Equities – Sovereign Debt Issues Remain an Overhang to the Eurozone MSCI EAFE - 12-Month Forward P/E Ratio10.0xAs of 12/31/2011Source: DataStream*EAFE: Europe, Australasia, and Far East
19 Emerging Market Equities – At a Discount to Developed Market Equities MSCI Emerging Market - 12-Month Forward P/E Ratio9.1xAs of 12/31/2011Source: DataStream
20 Municipals – Remain Attractive Compared to U.S. Treasuries G.O. AAA Muni Yield as % of 10-Year US Treasury Yield6080100120140160Dec-91Dec-95Dec-99Dec-03Dec-07Dec-11Muni / Treasury SpreadAverage+1 Standard Deviation-1 Standard Deviation%97.3%As of 12/31/2011Source: Thomson Reuters MMD, Bloomberg
21 High Yield – Macro Environment Continues to Keep Spreads Under Pressure Barclays High Yield Index spread over U.S. Treasuries in basis points (bps)723As of 12/31/2011Source: DataStream
22 Emerging Market Debt – Growth Dynamics Make Spreads Attractive JP Morgan Emerging Market Bond Index spread over U.S. Treasuries in basis points (bps)426As of 12/31/2011Source: DataStream
30 Global Asset Class Returns *Annualized**EAFE: Europe, Australasia, and Far East***Latest data available as of 11/30/2011****U.S. Private Equity Index The Cambridge Associates only quarterly data available, latest data available 6/30/2011As of 12/31/2011Source: Bloomberg, DataStream, Cambridge Associates
31 Key Forecasts* Global Equity Indices Commodities Real GDP (%) 12/31/1112MU.S. (S&P 500)1,2581,299Eurozone (Euro Stoxx 50)2,3172,740UK (FTSE 100)5,5725,809Japan (Nikkei 225)8,4559,800MSCI Emerging Markets9161,257Brazil (Bovespa)56,75463,000Mexico (IPC)37,07835,000Commodities12/31/113M12MEnergyWTI Crude Oil (USD/barrel)98.83105100US Natural Gas (USD/mmbtu)2.993.004.25Precious Metals (Spot, USD/ounce)Gold17501900Silver27.843227Platinum16502000Base Metals (USD/pound)Aluminum0.920.800.85Copper3.453.403.80Agriculture ($/bushel)Wheat6.535.605.30Corn6.475.705.40Real GDP (%)20122013Inflation ’12Global3.703.503.10U.S.1.601.801.40Eurozone0.301.50Japan-0.301.700.00Non-Japan Asia7.306.904.90Latin America4.403.606.80Interest Rates***12/31/113M12M1.882.2 – 2.4%2.4 – 2.6%1.831.7 – 1.9%1.9 – 2.1%UK1.982.3 – 2.5%2.6 – 2.8%0.990.9 – 1.1%1.1 – 1.3%Currencies (USD vs.)12/31/113M12MEuro**1.301.28Japanese Yen76.9174.0071.00British Pound**1.551.57Swiss Franc0.940.960.98Canadian Dollar1.021.05Australian Dollar**0.930.90New Zealand Dollar**0.780.700.68Mexican Peso13.9413.9013.10Brazilian Real1.871.831.74Data as of 12/31/2011*3month, 12month, or Year-end forecasts as indicated;**Level with USD as counter currency, price change with USD as base currency,*** 10 year government bond Source: PB Global Research, CS Latin American Equity Strategy, Bloomberg, Thomson Reuters DataStream
32 Important Legal Information This information is not intended to be a recommendation or opinion regarding the equity securities of the referenced companies. This material may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with Credit Suisse Securities (USA) LLC (CSSU). This material has been prepared by the Investment Strategy & Advisory Group of the Private Banking USA business of CSSU and not by the CSSU research department. It is provided for informational purposes, is intended for your use only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. The material is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of the Investment Strategy & Advisory Group, which may be different from, or inconsistent with, the observations and views of CSSU research department analysts, CSSU traders or sales personnel, or the proprietary positions of CSSU. Observations and views expressed herein may be changed by the Investment Strategy & Advisory Group at any time without notice. Past performance is not an indication or guarantee of future performance, and no representation or warranty, expressed or implied is made regarding future performance. The material set forth above has been obtained from or based upon sources believed to be reliable but CSSU does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes in market factors. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view of a particular market. CSSU may, from time to time, participate or invest in transactions with issuers of securities that participate in the markets referred to herein, perform services for or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. The material does not constitute objective research under FSA rules. The most recent CSSU research on any company mentioned is available to online subscribers at CSSU does not provide legal or tax advice. Consult your personal accounting, legal,and tax advisor with respect to any legal or tax implications.Private equity funds, hedge funds and other alternative investments are complex instruments that are not suitable for every investor, may involve a degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Before entering into any transaction, an investor should determine if the product suits his or her particular circumstances and should independently assess (with his or her professional advisers) the specific risks and the legal, regulatory, credit, tax and accounting consequences. CSSU makes no representation as to the suitability of any alternative investment product for any particular investor nor as to the future performance of any such products. Any offering of interest in any private equity fund, hedge fund or other alternative investment product shall only be made pursuant to the offering material for each such product, which will be provided to each prospective investor before making his or her investment decision and which contains information about such product's investment objectives, the terms and conditions of an investment in such product and also contains tax information and risk disclosures that involve significant risks, such as loss of entire investment, illiquidity, restrictions or transferring of interests, volatility of performance, and currency risks. Before deciding to invest in a private equity fund, hedge fund, or other alternative investment, prospective investors should read the relevant offering material for such product and pay particular attention to the risk factors contained therein. Prospective investors should have the financial ability andwillingness to accept the risk characteristics of such investment.The issuer of a fixed income security may be, or become, unable to make coupon and / or principal payments. Fixed income investments typically decline as interest rates rise. Inflation erodes the real value of interest payments. Some fixed income investments are callable forcing early redemption.