Investment Strategy Monthly Slides October Outlook Investment Strategy & Advisory Team: Barbara M. Reinhard, CFA Chief Investment Strategist, Managing Director [email protected]Philipp E. Lisibach, CFA Director [email protected]Samuel M. Baumann Assistant Vice-President [email protected]Jimmy M. James Vice President [email protected]Scott P. Rosenblatt Assistant Vice-President [email protected]Ryan P. Sullivan [email protected]Private Banking Americas As of October 19, 2011
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Investment Strategy Monthly Slides October Outlook Investment Strategy & Advisory Team: Barbara M. Reinhard, CFA Chief Investment Strategist, Managing.
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Investment StrategyMonthly Slides
October Outlook
Investment Strategy & Advisory Team:
Barbara M. Reinhard, CFAChief Investment Strategist, Managing [email protected]
A PMI Reading Below 42 Would Signal TroubleISM manufacturing purchasing manager index, seasonally
adjusted
As of 8/30/2011 Source: Bloomberg, Credit Suisse
1.1%
-0.1%
1.1%
1.3%
0.5%
0.1%0.3%
0.1%
-0.7%
0.5%
1.3%
1.8%
J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec
S&P 500 Index Average Monthly ReturnsSince 1970
As of 8/31/2011 Source: Bloomberg
State & Local Government Tax Revenues Above 2007 Peak
As of 6/30/2011 Source: U.S. Census
290
295
300
305
310
315
320
325
330
335
J un-06 J un-07 J un-08 J un-09 J un-10 J un-11
USD bn, quarterly data annual moving average
USD 333 bn
Asset Allocation & Economic Outlook
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Over-heating Slowdown Contraction Recovery
Sto
cks
Com
m
Bon
ds
Cash
Bon
ds
Sto
cks
Com
m
Cash
Bon
ds
Com
m
Sto
cks
Cre
dit
s
Cash
Com
m
Bon
ds
Outperform
Underperform
Cycle Clock*
*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 perform best.
GDP robust
Unemployment low
Tighter rate policy
Inflation rising
GDP dropping
Employment slowing
Tight rate policy
Inflation slowing
GDP contracting
Unemployment high
Easier rate policy
Inflation low
GDP picking up
Employment off
Easy rate policy
Inflation tame
As of 9/13/2011 Source: PB Global Research
Our Cycle Clock indicator has moved into Contraction territory, reflecting the weaker economic activity brought about by the Eurozone crisis. This financial market crisis, rather than the business cycle, is the chief driver of asset prices.
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As of 10/13/2011 Source: PB Americas Investment Strategy
& Advisory
Positive Negative NeutralNote; Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.
Outlook Summary
EQUITY
U.S.
Non-US Developed
Emerging Markets
FIXED INCOME
US Tax-Exempt US Taxable
Non-USD
ALTERNATIVE INVESTMENTS
Commodities
Gold
Hedge Funds Global Macro Funds remain favored hedge fund strategy.
Private Equity Secondary Funds volume likely to remain high through 2011.
Real Estate Direct Real Estate investments still appear attractive in low interest rate environment.
Negative sentiment dominates over attractive valuations.
Bond yields fell given softer economic growth; don’t represent compelling value.
Officials are pushing hard to recapitalize European banking sector.
Global Macro hedge funds continue to be favored strategy.
Recent sell-off puts gold back in fair value range with upside potential.
EM benefits from falling US sovereign rates and positive fundamentals.
Munis attractive relative to Treasuries; improving fiscal revenues and inflows.
De-risking of portfolios has led to outflows, though growth outlook remains superior.
Large cap companies with stable growth, high dividends are our focus.
Volatile credit spreads calls for caution; focus on high credit quality issuers .
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Guidance Allocations
Data as of 9/30/11Source: PB Americas Investment Strategy & Advisory
The proposed Benchmark and Strategic Asset Allocations for each of the risk budgets referenced above are created by the Private Banking Americas Investments Strategy & Advisory
group. 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 6-12+ 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 limited
liquidity with a portion of their net worth. Please refer to the attached “Important Legal Information” for important disclosure relating to alternative investments.
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Developed Markets Emerging Markets
U.S. Asia
Asia Pacific ex-Japan Latin America
Canada Europe, Mid East, Africa
UK
Japan
Europe ex-UK
Regional Outlook
S&P 500 Index Net Company Revisions
2012E
Note; Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.
/ Indicates a strong investment conviction in over/underweight position.
/ Indicates a modest investment conviction in over/underweight position. Indicates a neutral investment conviction, or benchmark weighting
position.
Equities: Negative sentiment dominates over attractive valuations
Earnings season is underway, presumably shifting focus from temporary factors back to fundamentals. Analysts have cut estimates of late, and an updated outlook from company managements will add more clarity to market sentiment.
Valuation remains attractive, with healthy balance sheets and strong cash flow generation, and P/Es for the next-twelve months suggest ample upside potential. Yet investors sentiment and risk appetite continue to be low, outweighing fundamentals.
De-risking of portfolios has led to money outflows in emerging markets, though growth outlook remains far superior to developed markets, offering better upside potential.
Up Down Net As of 9/15/2011 Source: Factset/IBES, Credit Suisse
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U.S. Sector Outlook
Health Care Energy
Consumer Staples Industrials
Telecomm Services Consumer
Discretionary
Utilities Financials
Information Technology Materials
S&P 500 Dividend & US 10-Year
Treasury Yields
Note; Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.
/ Indicates a strong investment conviction in over/underweight position.
/ Indicates a modest investment conviction in over/underweight position. Indicates a neutral investment conviction, or benchmark weighting
position.
U.S. Equities: Large cap companies with stable growth, high dividends
are our focus Given the prospect of continued heightened
volatility, we maintain our defensive posturing. Our focus remains stable, defensive growth and we continue to underweight cyclical growth.
Large cap companies offer better value in a low-growth environment, and companies with high yet sustainable dividend yields offer an attractive alternative to low-yielding fixed income investments.
Valuations are reflecting an economic scenario more dire than what is likely to occur, as implied earnings suggest a recession-like drop in earnings growth.
S&P 500 Index Dividend Yield 10 Year U.S. Treasury Yield
%
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Fixed Income: European sovereign crisis still dominating; preference for high
quality credits Market volatility and accommodative central
banks should keep benchmark yields at low levels.
Corporate credit valuations look increasingly attractive, but focus remains on stronger issuers given European sovereign crisis overhang. We increased our exposure to corporate credits to overweight from neutral favoring high-quality non-financial issuers.
We reduced our overweight position in emerging markets to de-risk our fixed income asset allocation. In taxable allocations, we increase our exposure to municipal bonds to overweight from neutral due to the relative attractiveness municipal bonds yields compared to U.S. Treasuries.
Fixed Income Outlook
Positive Negative Neutral
Note; Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.
As of 10/13/2011 Source: Credit Suisse Investment Strategy & Advisory
U.S. Municipal
U.S. Investment Grade Corp.
Emerging Markets
U.S. Treasury Inflation Protected
U.S. High Yield
U.S. Treasuries
U.S. Securitized
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
J un-56 J un-67 J un-78 J un-89 J un-00 J un-11
Non-financial corporate sector: cash/total assets
Corporate Cash Levels At Generational Highs
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Currencies: Short term neutral view on USD; longer term we favor emerging markets
currencies vs. USD EUR: Narrowing interest rate spread and low
risk appetite positive for USD in near term. Longer term neutral as negative U.S. current account weighs on USD.
Commodity currencies (AUD, NZD, CAD) remain overvalued. AUD narrowing spreads vs. the USD, overvaluation and vulnerability to bouts of risk points to further weakness despite Credit Suisse’s positive outlook on base metals.
Emerging market currencies face near-term downside risk with continued lack of risk appetite. Longer term we remain positive on emerging markets.
Positive Negative Neutral
Note: Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.
remains positive Recent commodity weakness is likely the
result of broad market weakness and the uncertainty resulting from indecisive policy makers in Europe. We expect a continued uptrend in commodity prices following the resolution of the Euro debt crisis and a stable pattern of economic growth.
Gold experienced significant selling pressure during September, partially due to funding and liquidity needs by large institutional holders. Prices are now back within fair value ranges and are no longer expensive. Gold will likely recover and resume uptrend into 2012.
Industrial metals, particularly copper and aluminum, are fairly valued. Physical demand remains robust and copper imports to China have increased over the last three months. Tight physical market may allow prices to rebound quickly when stability returns, however due to overall macro concerns we remain neutral.
Positive Negative Neutral
Note; Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.
Data as of 10/13/11Source: PB Americas Investment Strategy & Advisory
1450
1500
1550
1600
1650
1700
1750
1800
1850
1900
Jul-11 Aug-11 Sep-11
$/Troy Ounce
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Alternatives: Global Macro hedge funds continue to be favored strategy
August 2011 resulted in the largest monthly decline in 2011 for the Dow Jones Credit Suisse Hedge Fund Index, however global macro managers were able to post a positive performance for the month. Current market dislocation likely to continue to favor tactical strategies such as global macro and managed futures.
Despite difficult market environment of 2011, hedge fund launches have outpaced liquidations as investors generally believe that tactical hedge funds may be better equipped to preserve capital and take advantage of tactical trading opportunities. The 3rd quarter of 2011 is expected to see the trend continue.
Private equity outlook remains constructive for the longer term. Current activity in the space is focused around secondary funds.
Published by PB Americas Investment Strategy and Advisory Group:
The Investment Committee
Report U.S.Last Published: Oct-6-
2011
Released bi-weekly, the Investment Committee Report offers consolidated and consistent opinions on the markets as well as strategic and tactical outlooks from Credit Suisse’s global thought leaders.
Viewpoints: Risk-on/Risk-off
Last Published: Oct-3-2011
Released at the beginning of each month, Viewpoints examines the implications of the latest economic trends and market moving events impacting the financial markets.
Key Focus: Municipals
Last Published: Sep-15-2011
Released monthly, the Key Focus publication provides an in depth review of an asset class or investment strategy that is of particular interest during a given timeframe.
Change of Investment View
Last Published: Sep-30- 2011
Released as needed due as a result of changes to the Global Asset Allocation Framework.
Appendix
Published by PB Americas Investment Strategy and Advisory Group:
Research Monthly(s)Last Published: Sep-2011
Five separate reports released monthly, covering Commodities, Foreign Exchange, Alternative Investments, Real Estate, Fixed Income Strategy
Released monthly, featuring timely commentary on current market conditions, our economic outlook, as well as our guidance allocations and latest investment strategies.
CompassLast Published: Jul-15-
2011
Released quarterly, Compass presents a convergence of portfolio strategy and global market insights, thematic investment theses and asset allocation analysis.
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