june-cs

7/15/2019 june-cs

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June 2013Research Monthly

Investment Strategy

Low inflation allows easymoney to underpin stocksuptrend page 3

Iberdrola hybrid bond in EUR(IBESM 5.75%, call 02/18;ISIN: XS0808632763)Yield pick-up of around 3% vs.the senior bond for a “half-periph-eral” utility (Spain: 50% of rev-

enues; UK, USA, Latin America:50%).

Buy

Diversified equity and fixed in-come funds that offer frontiermarket exposureFrontier markets will likely enjoyhigh growth and reduced risk pre-mia in the coming years.

Buy

Apple A recent Top 30 portfolio addition,valuation now attractive followinga recent de-rating.

Buy

Directional hedge fund strate-giesMarket conditions for hedge fundsare supportive. Low intra-stockcorrelations are positive for direc-tional strategies.

Buy

Foreign exchange

Less demandfor safe havencurrencies page 17

Fixed income

Globalquantitativeeasingsupporting EMUperipherals page 12

This month’s featured topic

Cyclicals tocatch upwhenbusinesscycle firmspage 9

Important disclosures are found in the Disclosure appendix. Credit Suisse does and seeks to do business with companiescovered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could af-fect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.For a discussion of the risks of investing in the securities mentioned in this report, please refer to the following Internet link:

https://research.credit-suisse.com/riskdisclosure

Global ResearchPrivate Banking

Investment horizon: 6-12+ months

7/15/2019 june-cs


EditorialGiles KeatingHead of Research for Private Banking andWealth Management

[email protected],+41 44 332 22 33

There are moments in markets when an invisible boundary is

crossed, the psychology changes, the focus of investors

shifts, events that were previously important become irrelevant

while others move center stage. Negative psychological shifts

of this type are often a response to single events such as amajor bankruptcy. Positive shifts tend to be a reaction to a sub-

tle accumulation of less dramatic events, yet when they hap-

pen, their impact can be just as powerful. In recent weeks, we

seem to have passed such an invisible boundary. Key signals

include the breaking of a key S&P 500 resistance at previouspeaks around 1600; the weakening of safe-haven assets like

CHF and gold; and the resilience of stock markets to sell-offs,

with even the sharp one-day fall in the Nikkei of over 7% be-

ing (at time of writing) partially reversed almost immediately.Meanwhile the default on bank deposits in a Eurozone country

caused barely a ripple in confidence. The recent soft patch in

global economic indicators has been accompanied by an ongo-

ing uptrend in global equities. A barrage of FOMC speeches

showing an active, if unfinished, debate about Fed exit policyhas attracted analyst attention and caused a few weak days

for stocks and US Treasury bonds, but no sustained sell-off.

Putting this all together, it seems that sentiment is no longer dominated by the old demons of Eurozone break-up, renewed

recession, and the Fed inflating asset prices without helpingthe economy. Now, the dominant view seems centered around

an ongoing recovery with modest inflation. Of course uncertain-

ties abound, over the exact pace of recovery, the timing and

style of Fed exit, the level to which equity multiples can rise,

the risks of weaker credits. These are crucial issues that cancause brief setbacks but they sit within a psychological – and

actual – environment that is very different, in a positive way,

from where we were just a few months ago.

In this issue

Investment Strategy

Low inflation allows easy money to underpin stocks

uptrend page 3

Investment summary page 5

Economics

The gradual recovery continues page 7


Cyclicals to catch up when business cycle firms page 9

Investment theme

Yield at reasonable risk: Corporate hybrids page 10

Credit Suisse Megatrends

Megatrends: Frontier markets page 11

Fixed income

Global quantitative easing supporting EMU

peripherals page 12

Equities

Central bank policy the main driver of equity prices page 14

Alternative investments

Hedge funds and real estate to outperform

commodities page 16

Foreign exchange

Less demand for safe haven currencies page 17

Risk disclaimer page 19

Editorial deadline: 28 May 2013

2 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs


Investment Strategy

Low inflation allowseasy money to

underpin stocksuptrend

Low inflation allows Fed exit to be slow

and gradual.

Equities, credits, hedge funds and real

estate in much of the US and parts of Eu-

rope and Asia benefit most. Commodities

outlook now neutral.

EUR/USD in trading range; AUD and

GBP vulnerable, MXN among currencies

with best upside potential.

Nannette Hechler-Fayd'herbeHead of Global Financial Markets Researchnannette.hechler-fayd'[email protected], +41 44 333 17 06

Conventional cyclical market mechanics back to the

fore

Five months into the year, signals are that quantitative easingis finally showing real results. This is when conventional rela-tionships between interest rates, bond and equity valuations

come back to the fore in financial markets’ mechanics as well

as in investors’ minds. Two elements are decisive in determin-

ing the degree and imminence of interest rate risks to asset

prices. One is whether better economic data are coinciding with rising inflation expectations, therefore resulting in rapidly

rising interest rate expectations. Importantly, this is not the

case in most developed countries. In the USA, low inflation will

likely allow the Fed exit to be slow, with rates globally staying

low for a prolonged period. The second is the extent to which

asset valuations still have headroom with regard to fundamen-tal anchors. Cheap valuations will allow better absorption of in-

terest rate fluctuations even as the economy and earnings

prospects improve. We think that stock valuations remain

more attractive than those of bonds. We therefore maintain

our strategic focus on stocks, and would look to enter attrac-

tively valued markets more forcefully in temporary setback

phases.

Fixed income: Credits remain underpinned, duration

unattractive

The three government bond markets that have consistentlystood out with yields far apart from (below) their estimated fair

values over recent months were Japanese government bonds

(JGBs), German Bunds and the Swiss Eidgenossen. Conse-

quently, they exhibit the greatest vulnerability to a correction.The JGB yield rise is testimony to that, although we do not

think much more correction is likely from here over the next

6–12 months. Bunds, although very highly valued, still benefit

from the possibility that the ECB could lower rates further.

Swiss government bond yields, in contrast, could be the nextto correct up closer to their fair value. With systemic risks re-

ceding, the attractiveness of un-remunerative Swiss assets

has declined and outflows into better yielding alternatives can

be expected. Credits remain favored within the fixed income

class. We mostly recommend selected bank, corporate andemerging market bonds of short to medium tenor, also as part

of our Top 2013 Investment Idea No. 1, “Credits, not dura-

tion.”

Equities: Favorable environment for stocks; cyclicals

with catch-up potential

Within equities, we reiterate our current overweights in the

USA and Japan. Further marked bond yield increases in Japanfrom current levels seem unlikely and the threat to Japanese

stocks from there thus seems contained. Valuations are attrac-

tive and earnings prospects have improved markedly for

Japanese companies, given the weaker JPY. In the USA, valu-

ations are higher, but monetary policy and investor flowsshould remain very supportive. In Switzerland, higher bond

yields could prove detrimental, but if they were to coincide with

a slightly weaker CHF, then the downside could be quite limit-

ed. Even so, the rather defensive Swiss market could start un-

derperforming after a strong first five months. Indeed, from asector point of view, cyclicals have started to perform better

than defensives over the past month. But the extent of cycli-

cals’ underperformance year-to-date leaves room for further

catch-up, in our view. We accordingly maintain our “Recovery

stocks” Investment Idea No. 2. Dividend investing (InvestmentIdea No. 3) remains a valid way for more risk-averse bond-

proxy investors to gain exposure to stock markets.

Alternative Investments: Neutral outlook for commodi-

ties; hedge funds and real estate preferred

We have revised our strategic outlook for commodities overall,

and have turned neutral. Demand for raw materials is rising

moderately, but some sectors have seen substantial supply ad-ditions. Spare production capacity has emerged, suggesting

that upward price pressure for the asset class should remain

limited. On gold, we believe that important performance

drivers, such as the quest for protection against a general fi-nancial meltdown, are fading, while rising inflation expectationsfail to materialize as real yields fall no further. But we do not

think a proper bear market is likely to ensue as long as real

3 Investment Strategy 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs


yields are not clearly on the rise. Hedge funds and real estate

offer better opportunities, in our view, and they remain our pre-

ferred alternative investments. We reiterate our InvestmentIdea No. 5 on US real estate.

Currencies: GBP and AUD at risk of further weakening

EUR/USD is likely to remain in its broad trading range for aslong as interest differentials do not clearly shift in favor of the

USD. For EUR/CHF, 1.20 remains a credible floor with a bias

toward a weaker CHF. For USD/JPY, more sideward tradingfrom here does not seem unlikely to us either. In our view, the

two currencies most at risk of a depreciation are GBP and

AUD. We see appreciation potential in MXN and a selection of

Asian currencies, including the slowly appreciating CNY in our

Investment Idea No. 6.

Top 2013 Investment Ideas: May update

We keep all our investment ideas on Green for now. Perfor-

mances range from 0.9% to 18%. Detailed updates are provid-ed in the summary table and in our separate publication

Research Alert, “Top Investment Ideas for 2013 – May up-date.” (24/05/2013)

Strategic asset allocation (SAA)The neutral allocations serve as a guideline and represent theaverage weighting over an entire market cycle. Since the glob-al strategy is based on a medium-term investment horizon, itdeviates from the neutral position. We recommend an over-

weight in equities and alternative assets, particularly hedge

funds and real estate (selected markets). Conversely, we rec-ommend under weighting fixed income investments and liquidi-ty.

Source: Credit Suisse


7/15/2019 june-cs


Investment summaryShort interest rates 3M Libor / 10-year government bonds

10Y

bonds

3M Li-

bor

12M3MSpot12M3MSpotin %

1.1-1.30.7-0.90.650.0-0.20.0-0.20.02CHF

1.6-1.81.3-1.51.430.1-0.30.1-0.30.20EUR *

1.9-2.11.7-1.92.010.3-0.50.3-0.50.27USD

2.2-2.41.7-1.91.900.5-0.70.5-0.70.51GBP

1.0-1.20.9-1.10.830.1-0.30.1-0.30.16 JPY

Spot rates are closing prices as of 24/05/2013. Forecast date: 23/05/2013. * 3M Euribor

Source: Bloomberg, Credit Suisse

Bonds: Selected indices

12M TR out-

look

Total return

YTD (%)

Spread to

bench-

mark (bp)

YTM

(%)

Index

0.31082.7USD (CS LUCI)

2.01111.6EUR (CS LEI)

0.3450.7CHF (CS LSI)

3.31293.0GBP(CS LEI)

-1.22884.9EM HC (JPM EMBI

Global)

0.5n.a.5.4EM LC hedged in

USD (JPM GBI)

5.54535.3High Yield (CS HY In-

dex)

Prices as of 23/05/2013


Commodities

12M3MSpot

1,4501,3001,386.64Gold (USD)

2020.022.40Silver (USD)

1,6001,4751,452.50Platinum (USD)

10010094.15Oil (USD)

Spot prices: London close 24/05/2013


Equities: Selected indices

12M price tar-

get

YTD (%)MTD (%)PriceIndex

1,76317.6%3.3%1,649.60S&P 500

7,84319.7%3.3%8,168.78SMI

6,61112.3%3.5%6,654.34FTSE-100

2,6115.2%1.9%2,764.29Euro Stoxx 50

17,50040.6%5.4%14,612.45Nikkei 2251,039-2.7%-1.2%1,026.68MSCI EM

13,000-5.8%-1.8%10,722.30China H-

Shares

Prices as of 27/05/2013


Foreign exchange

12M3MSpot

1.31-1.351.31-1.351.29EUR/USD

0.96-1.000.93-0.970.96USD/CHF

1.28-1.321.25-1.291.24EUR/CHF

106-110104-108101USD/JPY

142-146139-143131EUR/JPY

0.90-0.940.87-0.910.85EUR/GBP

1.43-1.471.48-1.521.51GBP/USD

8.58-8.628.58-8.628.59EUR/SEK

0.92-0.960.92-0.960.96 AUD/USD

5.90-6.106.00-6.206.13USD/CNY

Spot rates: London close 24/05/2013


Real GDP growth and inflation

InflationGDP

growth

2014E2013E20122014E2013E2012in %

1.0-0.1-0.72.01.51.0CH

1.81.52.51.1-0.4-0.6EMU

2.11.62.12.52.02.2USA

2.52.82.81.50.80.2UK

1.8-0.40.01.21.42.0 Japan


Global Research asset category strategy

Strategic6–12+ M

Tactical1–6 M

Comments and comparison of weightingsBy region/strategy

Yields set to stay low for governments and credits, as policy

stays easy.Overweight: USA & Australia; Underweight: Europe &

Switzerland.

Fixed income

Multiple expansion set to allow equities to trend yet higher, de-

spite soft earnings, as risk appetite improves. Nikkei drop looks

to be profit-taking; we see any negative global impact as tempo-

rary.

Overweight: USA and Germany. Underweight: Switzer-

land, Latam and Australia.

Equities

Tactically and strategically neutral amid temporary growth slow-

down and deteriorating long-term cyclical factors.

Overweight: Energy, Neutral: Industrial Metals, Under-

weight: Precious Metals and Agriculture.

Commodities

Equities: Valuations richer, but some upside potential strategical-

ly. Direct real estate: Attractive rental carry.

Overweight: USA, Asia-Pacific and Germany.Real estate

We favor small/mid-sized LBOs, emerging markets and private

debt funds.

Focus on natural resources, SME LBOs, emerging mar-

kets and private debt funds.

Private equity

We overweight directional strategies, such as EMs and long-

short. We maintain our positive stance for global macro and fixedincome arb.

We maintain our positive stance on global macro and di-

rectional strategies as well as fixed income arb.

Hedge funds

We expect EUR/USD to rise to 1.33. BoJ easing set to weaken

JPY.EUR/USD , USD/CHF , GBP/USD ,

USD/JPY .

Foreign ex-

change

Source: Credit Suisse Investment Committee/Global Research


7/15/2019 june-cs


Top Investment Ideas for 2013

Rationale/update ActionStatusFixed Income

Cash is likely to continue to be unremunerative (near-zero yields) in most markets.

Corporate bonds of short maturities still offer a reasonable yield pick-up versus cash,

given essentially stable default rate expectations for 2013. Conservative investors

should focus on investment grade credits. We keep the overall constructive status

with more limited opportunities in USD.

Buy short dated AA- to BBB financials and A

to BB non-financials (excluding auto) in CHF,

EUR and GBP. Hold USD exposure.

1. Beyond cash: Credit

not duration

Equities

Among the three components of the recovery idea, the US recovery stocks have so

far performed more modestly than the other two. Based on the expected re-accelera-

tion of the global economy throughout H2 2013, we continue to view the US recov-

ery idea as very attractive. All three components remain on green.

Buy US consumer, M&A and US recovery

stocks.2. Recovery stocks

For investors who are interested in absolute returns and have expectations of relative-

ly high cash flow disbursements from dividends. Fundamental drivers for equity yield

remain intact, despite strong YTD performance.

Buy high-dividend-yielding stocks and stocks

generating high free cash flow as well as glob-

al convertibles, particularly high yield.

3. Dividends and beyond

We expect the crude oil price to be well-supported due to robust demand. This

should benefit the energy sector, which already started to perform well in mid-April.

Higher crude oil prices should disproportionately benefit oil and gas companies with

new exploration technologies, or which have an interest in a yet unexploited shale

gas, tight oil or deep water oil source, as they are becoming increasingly attractive

and profitable the higher the crude oil price is.

Invest in upstream energy stocks.4. New gas and oil

sources

Alternative Invest-

mentsDespite individual softer releases recently, US housing market indicators generally

continued their gradual recovery trend. We see further upside in the coming quarters,

given record-high homebuyer affordability. Attractive rental yields coupled with slightly

positive rental growth prospects form the basis of our constructive view on US com-

mercial real estate. German real estate also appears relatively inexpensive and can

benefit from capital inflows.

Invest in commercial and residential real es-

tate, REITs as well as homebuilding-related

stocks.

5. US real estate

Foreign Exchange

We continue to recommend diversification into selected EM currencies out of tradition-

al hard currencies, such as EUR and USD. Further, we view GBP as increasingly be-

coming a new funding currency, especially for long positions in preferred EM curren-

cies.

Buy selected Asian currencies and other se-

lected emerging market currencies funded in

EUR or USD. Buy MXN, BRL, TRY, PLN and

RUB vs. GBP.

6. The new hard curren-

cies

Key to status symbols: green = attractive investment opportunities – continue to invest in theme; yellow = keep holdings but do not add to existing positions; red = reduce /exit existing positions.



7/15/2019 june-cs


Economics

The gradualrecovery continues

European demand likely to rise from de-

pressed levels; US soft patch despite

strong consumers; emerging markets soft-

er than expected but still solid.

Monetary policy to remain easy as infla-

tion low; Fed emphasis on flexibility to en-

sure smooth exit.

Thomas [email protected], +41 44 333 50 62

We expect gradual global growth to continue and inflation to re-

main low. Central banks are thus likely to maintain their easypolicy and some could even ease more. In Europe, GDP still

contracted in Q1 but feeble signs of strengthening domestic

demand from very depressed levels are emerging. Eurozone

car sales are one example of this; while they are still down

sharply from pre-crisis levels, they are beginning to improve. Fi-nancial markets are demanding lower risk premia from govern-

ments in the European periphery and this remains a key driver

of monetary conditions becoming more accommodative. The

differences within Europe nevertheless remain large. In

France, investment confidence in particular has sufferedstrongly over the past year, whereas Germany remains on the

stronger side of the spectrum. In the European periphery, or-

der intake and exports have been stronger recently but un-

employment remains very high. Overall, our outlook remains

one of ongoing gradual improvement in the Eurozone.

US consumer resilience versus production soft patch

Regional and national manufacturing surveys in the US already

indicate some softening in activity. This has now been con-

firmed by weaker-than-expected industrial production, with a

broad-based decline in the April reading. On the more positive

side, the latest consumer numbers, e.g., retail sales, remain re-silient. Better labor market trends, rising house and stock

prices support consumer wealth and sentiment, which helps

offset fiscal headwinds. Overall, our outlook for the US econo-

my remains constructive. If final demand continues to stay re-

silient, we continue to expect the current production weaknessto remain temporary.

“Flexible” Fed policy should ensure smooth exit

Fed communication continues to highlight greater flexibility.

Following discussions about when the Fed might reduce asset

purchases, the Fed has indicated that it could also raise pur-chases further or raise them again after an initial reduction.

The Fed’s emphasis on “two-way risk” in asset purchases, i.e.,

less or more, probably aims to signal that it has the means to

manage a smooth exit without unwanted market disruptions,

such as a significant and sudden jump in yields.

Emerging markets: Weaker than expected; trend solid

Overall, indicators out of emerging markets have been uncon-

vincing in recent months. In terms of business survey evi-

dence, the majority of emerging market PMI readings are

above the growth threshold of 50, but not by much. Especially

data releases from the larger economies, such as China or Brazil, have been weaker than expected. In China, GDP

growth is now running around 7%–8%, in line with govern-

ment plans for a more sustainable but still solid rate, and there

seems little willingness to stimulate. Elsewhere, monetary poli-

cy can and is likely to turn more supportive and should help en-sure somewhat stronger growth in the second half of the year.

(24/05/2013)

7 Economics 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs


Selected ideas from previous months

May 2013 (30/04/2013)

Action to be takenRecommendation

Add exposureEQBUY CS Top 30 stock: Google. Google released a strong earnings report recently, boosted by mobile advertising, with YouTube set to be

a long-term contributor.

Add exposure AIBUY Global Real Estate Investment Trusts (REITs). We favor US and Asian REITs in particular.

Add exposureFXBUY A basket of equally weighted 12-month forwards in CNY, SGD and MXN versus USD and EUR, with a target of 105 and a stop lossof 97.5. Diversify out of traditional hard currencies.

April 2013 (26/03/2013)


Add exposureEQBUY Funds with exposure to water. Companies active in water treatment are favored by our Traffic Light system.

Add exposureEQBUY Vodafone. CS Top 30 company and also M&A 15 candidate.

Add exposure AIBUY Long/short equity. Gain global equity market exposure with limited downside.

Add exposureFXBUY A basket of equally weighted 12-month forwards in MXN, BRL, TRY, PLN and RUB versus GBP, with a target of 108 and a stop

loss of 96.5. Diversify out of traditional hard currencies.

March 2013 (26/02/2013)


Add exposureEQBUY ENI, BG Group, Royal Dutch Shell, Galp, Halliburton, Anadarko and Suncor. Energy stocks set to benefit from the rapid rise of new

oil and gas sources. Add exposureEQBUY CS Top 30 company: General Electric. A clear call on improving capital spending globally.

Add exposure AIBUY Simon Property Group: Gain diversified exposure to US retail real estate sector.

FI Fixed income, EQ Equities, AI Alternative investments, FX Foreign exchange, RE Real estate

For further information, including disclosures with respect to any other issuers, please refer to the Credit Suisse Global Research Disclosure site at: http://www.credit-suisse.com/research/disclaimer


8 Economics 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs



Cyclicals to catchup when business

cycle firms

Defensive sectors have strongly outper-

formed cyclicals this quarter owing to de-

mand for yield.

The metals and mining sector has been

the notable laggard.

Michael O'SullivanHead of Portfolio Strategy & Thematic Researchmichael.o'[email protected], +44 20 7883 8228

Link between emerging markets and cyclical underper-

formance

Headline equity indices have rallied strongly this year, thoughthe pattern of performance at the sector and regional level has

been atypical of what one might expect in the context of a mar-

ket dominated by strong risk appetite and steadying economic

growth. In particular, emerging markets have underperformed

developed markets, and cyclicals have lagged defensives. In-

deed, the relative performance of classic defensives (utilities,telecoms and staples) relative to cyclical (materials, consumer

discretionary, industrials) is now more stretched than in 2009,

and nearly as extended as during the aftermath of the dot.combubble in 2002. This trend has been partly driven by the ex-

treme performance of industries like healthcare, which while

not a typical defensive sector, has attracted yield-oriented in-

vestors, and by the very poor performance of the metals & min-

ing sector, which has fallen by 20% over the past quarter alone.

The weak performance of metals and mining also flags the

fact that from a macro point of view, this economic cycle is un-

usual in at least two respects. The first is the de-synchroniza-

tion of business cycles, with many emerging markets seeing

slower growth as the US picks up. The second is the dramatic

effect of quantitative easing by central banks on marketprices. This has had the effect of driving cash rich investors in-

to higher yielding sectors. Against this backdrop, at least two

questions present themselves – are defensives now expensive,

and what catalysts are required to spur a cyclical rally? (having

underperformed defensives by nearly 8% in the past 3months, cyclicals have outperformed by 3% in the past

month).

Some defensives looking expensive

First, on valuation, upside to consensus analysts targets looks

meager for defensive markets, such as Switzerland (0%), and

for industries, such as food, beverages and tobacco (1%).P/E ratios are looking full too, with the relative forward P/E

for defensives/cyclicals at one standard deviation above its

long-term average, though not as stretched as in 2009. Valua-

tions of dividend yielding stocks are also full, with the forward

P/E for the MSCI Dividends benchmark index relative to thebroad market now close to its highs (our Defensive and Dy-

namic Dividend baskets, which include a valuation overlay,

have forward P/Es close to average levels). In short, investors

are paying a premium for defensives.

Stay long selected cyclicals

Second, the performance of cyclicals is not as bad if we iso-

late the metals and mining sector. For instance, the consumer

durables and autos industries were the third and fourth best

performers out of 31 industries in the past quarter. In general,

the missing ingredient for cyclicals has been broader, stronger macro growth. If we examine periods in the past 20 years

when cyclicals have led the MSCI World recovery/rally, one

finds that it has invariably been backed by improving macro

(US PMI as the proxy). And, in most of the cases, there was

multiple expansion – though this time the multiple expansionhas been in defensives. As such, the current “lull” in macro mo-

mentum indicators has not helped cyclicals, though the ratio of

negative macro surprises in the developed world looks like it is

now bottoming. In this context, we reiterate our overweight rec-

ommendations on the industrials, consumer discretionary andIT sectors, and underweights in utilities, telecoms and con-

sumer staples.

Not to forget financials

As a final point, it is also worth mentioning financials, which is

not a traditional cyclical sector, though it does tend to perform well in the Recovery stage of the business cycle according to

our Cycle Clock analysis. It is currently the sector with the best

earnings momentum, and while we are overweight the insur-

ance industry, any pullback in the broad market may present

an opportunity to add broader financials exposure.(24/05/2013)

9 This month’s featured topic 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs


Investment theme

Yield at reasonablerisk: Corporate

hybrids

Corporate hybrids on average offer a

yield pick-up of 2.4% vs. senior bonds (in

EUR), and their yield-to-call level (3.7%)

is broadly on a par with dividend yields in

Europe.

We recently initiated new BUY recom-

mendations on corporate hybrids fromsomewhat lower-rated credits, which we

deem attractive.

Peter Pö[email protected], +41 44 333 57 68

Iberdrola hybrid bond in EUR (IBESM 5.75%,call 02/18; ISIN: XS0808632763)Yield pick-up of around 3% vs. the senior bond for a

“half-peripheral” utility (Spain: 50% of revenues; UK,USA, Latin America: 50%).

Buy

KPN (KPN 7%, call 03/23; ISIN:USN4297BBC74), Electricite de France (EDF5.25%, call 01/23; ISIN: USF2893TAF33) inUSD.

Loss of S&P’s equity credit after the first call date pro-vides a strong incentive to call, in our view.

Buy

Yield pick-up vs. senior bonds in exchange for higher

risk

Corporate hybrid bonds are obligations issued by non-financialcorporates, which contain both debt and equity features. Like

debt, the securities have predetermined coupons and can be

redeemed for fixed amounts. Like equity, they are deeply sub-

ordinated, have optional coupon payments in certain circum-

stances without triggering a default, and do not have a fixedmaturity (or the maturity date is well in the future, i.e. 60

years). Hybrids are, however, normally callable after 5–10

years, although there is no certainty that they will actually be

called.

On average, corporate hybrids in EUR currently offer ayield-to-call of 3.7% p.a., which corresponds to a yield pick-

up of 2.4% versus senior bonds of the same issuers. While

this spread has narrowed in recent months, it still ranges about

0.5% above its historical average. The hybrids’ yield can also

compete with the dividend yield of the STOXX Europe 50 In-dex (3.8%).

Buoyant primary market activity

New issues of corporate hybrid bonds have surged strongly

this year, with volumes reaching close to EUR 15 bn YTD. We

attribute this to the historically low interest rate environment, in

which companies can bolster credit metrics at a relatively lowcost with a generally tax-deductible instrument (for issuers),

and investors’ search for yield and generally positive risk senti-

ment. The total return chart shows the outperformance of cor-

porate vs. financial hybrids and vs. senior bonds, though it alsoreveals the high-beta nature of the hybrid asset class in times

of market turmoil.

New recommendations

Despite the recent rally, we continue to see value in selected,

fundamentally solid names, and have initiated new BUY recom-

mendations on the asset class (see actionable ideas). In turn, we have downgraded hybrids issued by Bayer, Linde, Henkel

and Siemens to HOLD (from BUY) as they have reached ambi-

tious valuation levels.

For more information on the asset class, please ask your

Credit Suisse representative for the full report, “Corporate hy-brid debt on the rise,” published on 7 May 2013.

(23/05/2013)

Corporate hybrids have outperformed financials and se-nior bonds (since iBoxx index inception).


10 Investment theme 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs


Credit Suisse Megatrends

Megatrends:Frontier markets

For risk-tolerant investors, frontier mar-

kets are an attractive source of diversifica-

tion.

Low liquidity, impaired market access

and political risks remain a challenge.

Antonios [email protected], +44 20 7883 6647

Markus [email protected], +41 44 334 88 57

Diversified equity and fixed income funds that of-fer frontier market exposureFrontier markets will likely enjoy high growth and re-duced risk premia in the coming years.

Buy

Megatrends are major economic, social and political forces,

which are relevant across decades. The Emerging World mega-trend represents the shifts that are taking place in developing

economies and that are changing the global economic bal-ance. Recently, some of the large emerging economies have

started to lose their appeal as investments due to rising correla-

tions, while growth rates have come down. Investors need to

look beyond the traditional emerging market economies to fron-

tier markets. Under our new Megatrends Framework, frontier markets constitute one of the Megatrend Investments within

the Emerging World megatrend.

What are frontier markets?Frontier markets are economies with small and illiquid capital

markets, but high growth potential. The market capitalization

of the group is just 0.5% of the MSCI AC World, compared toemerging markets, which account for 11.7%. They are a dis-

parate group, with great variations in GDP per capita and popu-

lation sizes. While poor, they enjoy high growth, demographic

tailwinds, improving governance, diversification and attractive

valuations. Gulf economies account for a high share of equitycapitalization, but the group includes countries, such as Kenya,

Nigeria and Bangladesh.

Benefits of frontier market investingOn aggregate, frontier markets account for 13.4% of the glob-

al population, but just 4.9% of global GDP. IMF forecasts indi-cate that in real terms they will grow by 4.2% p.a. over the

next 5 years, i.e., double the rate of developed markets. Fron-

tier markets’ populations are still young, while the rate of popu-

lation growth there is expected to be twice that of emerging

markets in the coming decades.Governance in the frontier markets is improving, with sever-

al countries having democratically elected governments. Africa

exemplifies some of these changes, as fiscal and monetary

policies are becoming more stable and exchange rates increas-

ingly market-determined. Governments are retreating fromtheir involvement in industry, while the debt write-downs com-

pleted in the middle of the last decade have provided relief.

The diversification potential of frontier market investments

is stronger than with emerging market investments, which now

tend to increasingly move in tandem with global equities; thecorrelation coefficient of frontier markets is much lower than

that of emerging markets (0.54 and 0.88, respectively). Addi-

tionally, frontier markets also offer a good pick-up in yield (4%

against 2.7% for emerging markets) and trade at a discount

on a price-to-book basis. Opportunities exist in both the equityand fixed income space. Investors can access local currency

bonds via dedicated frontier market debt funds. Africa has

some relatively liquid and growing local currency markets, withNigeria the largest in terms of size (USD 33 bn) and accessibil-

ity. For more information, please see our report, “Frontier mar-kets to benefit from growth and reduced risk premia,” pub-

lished on 13 May 2013. (23/05/2013)

11 Credit Suisse Megatrends 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs


Fixed income

Global quantitativeeasing supporting

EMU peripherals

Sustained monetary accommodation to

support both sovereign and corporate

bonds from the Eurozone periphery.

We maintain our strategic positive view

on high yield bonds, given our expecta-

tions of stable default rates and sustained

strong demand.

Maurice [email protected], +41 44 333 21 41

Flattish 12M total return expectations for government

bonds

Most major 10-year government bond benchmarks have re-

mained range bound since the start of the year. US Treasuries

and UK Gilts trade around our fair value estimates, while the

valuations of German, Swiss and Japanese paper appear

stretched. In our view, the global monetary expansion – in abid to achieve higher growth and inflation – should ultimately

lead to sustainably favorable credit conditions. We thus reiter-

ate our preference for corporate and emerging markets bonds

over global government bonds. Further, we highlight our Top

2013 investment idea No. 1, “Beyond cash: Credit, not dura-

tion,” which we expect to perform in line with our moderate sin-gle-digit return expectations.

We maintain our positive view on EMU peripherals

At its last meeting, the ECB cut the main refinancing rate andleft the door open to implement further measures to achieve

its targets. We share the market’s confidence that the ECB

will do whatever is necessary to support the economic recov-ery. We continue to recommend selected peripheral govern-

ment bonds, given the reasonable pick-up in yields. As we ex-

pect growth to return to the Eurozone in the second half of the

year, we also accumulate corporate bonds from peripheral-

heavy sectors such as utilities, telecoms and subordinated fi-nancials.

EMU peripheral government credit spreads (CDS 5Y)

Source: Bloomberg, Credit Suisse / IDC

No bubble in high yield – we remain constructive

Given the continued relaxation of bank lending standards, ex-

pectations of a sustained economic upturn, as well as sound

corporate balance sheets, we forecast essentially stable de-fault rates globally 12 months from now. Further, we expect

strong demand technicals to remain intact, as real short-term

rates are likely to remain negative in most major currencies

and investors continue their hunt for yield. Although absolute

yields are at record lows, corporate high yield remains our pre-ferred fixed income asset class, as credit spreads still more

than compensate for expected default risk on a strategic hori-

zon. (24/05/2013)

12 Fixed income 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs


Selected bond recommendations

Dur-

ation

Benchm.

spread

YTM/

YTC

(%)

Ask

price

(2)

Vol.

(m)

Min.de-

nom./ inc.

(in 1000)

MaturityCoup.Rating (1)IssuerCurr.ISIN

CHF

2.01391.09102.952005 / 516/07/20152.500BBB /

Baa3

RCI BANQUE SA CHFCH0181738904

3.61461.40102.402505 / 528/02/20172.065NR / A3SBERBANK (SB CAP SA)CHFCH02044772744.02402.21104.851855 / 525/10/20173.375NR / NRUNICRED BANK IRELAND PLCCHFCH0197482711

USD

4.41181.97100.123,0002 / 111/01/20182.000 A- / Baa2BANK OF AMERICA CORP (3)USDUS06051GET22

4.13013.70100.731,500200 / 116/01/20183.875BBB+ /

Baa2

INTESA SANPAOLO SPA (3)USDUS46115HAJ68

4.31492.23100.621,250200 / 116/01/20182.375BB+ /

Baa3

FORD MOTOR CREDIT CO LLC (3)USDUS34540UAA79

4.41071.87100.811,250200 / 111/02/20182.050BBB /

Baa3

IMPERIAL TOBACCO FINANCE (3)USDUSG4721VBK91

4.61322.1599.87500200 / 117/04/20182.125 A / A2CREDIT AGRICOLE LONDON (3)USDUS22532MAH51

4.51952.80101.771,250150 / 127/04/20183.192BBB /

Baa2

TELEFONICA EMISIONES SAU (3)USDUS87938WAQ69

EUR

2.72342.36102.371,500100 / 10021/03/20163.250BBB- /

Baa3

BBVA SENIOR FINANCE SA EURXS0901738392

4.02592.91104.501,711100 / 109/11/20174.000BBB+ /

Baa2

INTESA SANPAOLO SPA EURXS0852993285

4.22302.67103.011,000100 / 111/01/20183.375BBB+ /

Baa2

UNICREDIT SPA EURXS0863482336

4.32002.35102.306001 / 122/01/20182.875BBB /

Baa3

RCI BANQUE SA EURXS0905797113

Others

4.41724.5999.611752 / 104/06/20184.500NR / A2eING BANK NV AUDXS0937583580

4.61784.6299.4342510 / 1023/08/20184.500 A- / Baa2BANK OF AMERICA CORP (3) AUD AU3CB0208775

4.52173.00101.133001 / 125/04/20183.250BBB /

Baa3

RCI BANQUE SA GBPXS0921284666

5.9842.03102.043001 / 120/11/20192.375 A+ / A2BNP PARIBASGBPXS0856595961

2.91052.2799.9475010 / 1027/05/20162.250NR / NRVOLKSWAGEN FIN SERV NVNOK XS0935312305

4.61252.7399.5150010 / 1029/05/20182.625NR / NRRABOBANK NEDERLANDNOK XS0933295114EM/Below IG*

2.84534.65104.00370150 / 131/12/20175.625BB- / Ba3SUNRISE COMMUNICATIONS I (3)CHFXS0804472057

2.22732.65102.7575050 / 105/10/20153.875BB+ / NRMOL HUNGARIAN OIL & GASEURXS0231264275

4.32763.1399.601,000100 / 121/02/20183.035BBB / NRVNESHECONOMBANK(VEB)EURXS0893205186

4.72733.16103.991,6001 / 127/08/20184.000BB / Ba1THYSSENKRUPP AGEURDE000A1R08U3

4.42512.99133.0250050 / 5015/12/20189.500NR / Ba2HEIDELBERGCEMENT FIN LUX

(3)

EURXS0686703736

6.41752.54102.185001 / 115/07/20202.875BB+ / Ba1FRESENIUS FINANCE BV (3)EURXS0873432511

6.92533.5099.131,000100 / 120/05/20213.374BBB /

Baa1

RUSSIAN RAILWAYS (RZD)EURXS0919581982

6.34185.15103.62350100 / 115/04/20235.625B+ /

(P)Ba3

UNITYMEDIA HESSEN / NRW (3)EURXS0918739318

5.25236.57101.50400100 / 114/03/20736.875BB / Ba1KONINKLIJKE KPN NV (4, 6)GBPXS0903872603

8.82974.18106.881,250100 / 100perpetual6.000BBB+ / A3ELECTRICITE DE FRANCE (3, 4,5)GBPFR0011401728

2.71887.85100.0520,0005,000 /

100

25/07/20167.875BBB- /

Baa3

GAZPROMBK (GPB FINANCE) (3)RUBXS0877983642

3.93694.32101.50500200 / 126/10/20174.700BB / Ba1FRANSHION INVESTMENT LTD

(3)

USDXS0847609434

4.83774.79102.00600200 / 113/02/20195.200BB / Ba3VIMPELCOM HLDGS (3)USDXS0889401054

7.23305.18102.381,000200 / 106/12/20225.500NR / Ba1YAPI VE KREDI BANKASI (3)USDXS0861979440

4.25006.17102.10750200 / 102/05/20236.375NR / Baa3UNICREDIT SPA (3, 7)USDXS0925177130

8.02414.4199.7435002 / 120/05/20234.375BBB / A3PETROBRAS GLOBAL FINANCE

(3)

USDUS71647NAF69

4.14736.43104.501,500200 / 1perpetual6.625BBB / NRSOCIETE GENERALE (3, 7, 8)USDXS0813929782

*Emerging Markets/Below Investment Grade; 1) e = expected rating, subject to final documentation / NR = not rated; 2) Indicated prices as of 24 May 2013; 3) Semi-annual coupon; 4) Corporate subordinated hybrid debt, yield

to call, duration to call; 5) first call 29/01/2026; 6) call 14/03/2020; 7) Subordinated bank debt; 8) First call 11/06/2018, yield to call, duration to call. For the detailed analysis accompanying the recommendations listed,

please refer to the latest Global Research Credit Updates and Investment Ideas.


13 Fixed income 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs


Equities

Central bank policythe main driver of

equity prices

Japan stands out as the only region with

positive earnings momentum.

Cyclical sectors beginning to make up

performance gap with defensives.

Michael O'SullivanHead of Portfolio Strategy & Thematic Research

michael.o'[email protected], +44 20 7883 8228

Apple

A recent Top 30 portfolio addition, valuation now at-tractive following a recent de-rating.

Buy

Interplay of quantitative easing and asset prices

In December 1996, Federal Reserve Chairman Alan

Greenspan’s comment on “irrational exuberance” produced a

short-lived correction in equities. This phrase later took on

greater significance in the aftermath of the dot.com bubble,

when central banking orthodoxy held that asset price bubbles

were hard to identify and harder still to lance. Equities todayare well off the high multiples reached in 2000, but the effect

of central banks on asset prices (bonds as well as equities),

and the interplay of this with fundamentals, is again becoming

a debating point in the context of aggressive quantitative eas-

ing from the Federal Reserve and the Bank of Japan.Risk appetite is now high, close to what we would describe

as “euphoria” territory, though when we dig into the detail of

our risk appetite index, most of the rise in this index has been

driven by the sharp rise in Japanese equities. Indeed, at the

sector level (as we detail in this month’s featured topic on cycli-cals and defensives), risk appetite is more muted, and in the

expectation of a firmer business cycle, we advocate a move

from the more expensive defensive industries toward selected

cyclical industries, such as capital goods and consumer

durables.

We still favor US equities

At the regional level, we continue to differentiate between mar-

kets where central banks are highly supportive (the US and

Japan stand out here) and those where central banks are per-

haps more restricted in terms of the options available to them(the Eurozone, for instance). It is also worth noting that both

earnings growth and momentum are more promising for Japan

and the US than for other regions. As such, we continue to fa-

vor these regions, underweighting the commodity-sensitive

markets of Australia and Canada. We are also underweightSwitzerland, where performance has been uncharacteristically

strong this year for a typically defensive market, though we

note that valuations for Switzerland are high and the marketmight be vulnerable if funds were to flow out of the Swiss mar-

ket.Strategically, provided that central banks in the developed

world do not relent in the inventive and supportive monetary

policy that the Fed and Bank of Japan have demonstrated, eq-

uities are likely to be underpinned, especially in those countries

where relatively stronger earnings combine with accommoda-tive policy. (24/05/2013)

14 Equities 28/05/2013 Credit Suisse - Research Monthly

7/15/2019 june-cs


Global equity sector strategy and top picks

Asia ex Japan (N) /

Japan (O) / Australia (U)

Latin America

(U)/ Emerging

Europe &

Africa (N)

USA (O)Switzerland (U)Europe (N) /

UK (N)

Industry (strategic weight)Sector (strategic

weight)

Cnooc Ltd, Woodside+Novatek*, Ultra-

par*, Pacific Ru-

biales*

Anadarko

Petroleum,

Schlumberger

--Energy (N)Energy (N)

-Mexichem*-Lonza-Chemicals (N)Materials (N)

----Construction Materials (N)

-----Metals & Mining (N)

-----Pulp & Paper (N)

Gamuda*, Komatsu+-General Electric,

Masco

ABB, Schindler,

Georg Fischer

Schneider Elec-

tric

Capital Goods (O)Industrials (O)

-----Commercial Services & Supplies (N)

---Deutsche Post+Transportation, incl. Logistics (N)

Toyota Motor, Bridgestone,

Honda Motor

---BMW+ Automobiles & Components (O)Consumer discre-

tionary (N)

Sony+----Consumer Durables & Apparel, Tex-

tiles, Apparel & Luxury (N)

--McDonald's--Hotels, Restaurants & Leisure (N)

--Time Warner --Media (N)

--Home Depot--Retailing (U)

Seven & I----Food & Staples Retailing (N)Consumer staples

(U)

- AmBev*Coca-Cola-DiageoBeverages (U)

-Brasil Foods*-Nestlé, Lindt &

Sprüngli PC

Unilever Food Products (U)

-----Tobacco (U)

--Procter & Gam-

ble

-Reckitt Benckiser Household & Personal Products (N)

--Baxter Internation-

al

TecanFresenius SEHealthcare Equipment & Services (N)Healthcare (N)

--Gilead--Biotechnology (N)

Astellas Pharma- AbbVieRoche (Genusss-

cheine), Novartis,

Actelion

Hikma Pharma-

ceuticals

Pharmaceuticals (N)

China Construction Bank,

Sumitomo Mitsui Financial

Group, Kasikornbank*,

Bank Mandiri*, HDFC

Bank, Mitsubishi UFJ,

Mizuho Financial Group

Sberbank*, Itau

Unibanco*

--BNP ParibasBanks (N)Financials (N)

-- JPMorgan, In-

vesco

--Diversified Financials (N)

---Zurich Insurance

Group, Swiss Re

Allianz, AXA Insurance (O)

Asian Property Develop-

ment, Henderson Land De-

velopment

----Real Estate (N)

Tencent*Mail.ru*Mastercard--Software & Services (O)IT (O)

Samsung*, Toshiba, AU Op-

tronics+

----Technology Hardware & Equipment

(O)

--Intel- ARM Holdings+Semiconductors & Semiconductor

Equipment (O)

-MTN Group*--VodafoneDiversified Telecoms (U)Telecom services

(U)

----Wireless Telecoms(U)

-----Utilities (U)Utilities (U)

This is our sector strategy and top picks as of 27 May 2013 recommended by Credit Suisse, Private Banking division. Our sector/industry strategy shows our sector/industry preferences with recommendations relative to region-

al benchmarks: Global: (MSCI World in USD), Europe (MSCI Europe in EUR), Switzerland (Swiss Market Index in CHF), USA (S&P 500 in USD), Asia/Pacific (MSCI AC Asia/Pacific in USD). An overweight (underweight) is a

recommendation to invest more (less) than in a neutral position indicated by the market-cap weights of the respective benchmarks. The sector/industry weights as well as the neutral positions in figures are available upon re-

quest; please contact your relationship manager. The Top Picks is a selection of our favorite stocks within our coverage. The selection was made to reflect the sector/industry and regional preferences. Regular full updates are

provided via our Research Monthly publications as well as in our Equity Research reports. Additionally, we publish our adds and drops in our Research Daily publication. Legend: (O) = Overweight, (N) = Neutral, (U) = Under-

weight. (*) = Emerging Markets top picks. Changes are marked as follows: (+) = additions to the top picks, (#) = changes to sector/industry/country weightings. For further information, including disclosures with respect to any

other issuers, please refer to the Credit Suisse Global Research Disclosure site at: http://www.credit-suisse.com/research/disclaimer. Please note that trading facilities in certain securities may be limited.


15 Equities 28/05/2013 Credit Suisse - Research Monthly

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Alternative investments

Hedge funds andreal estate to

outperformcommodities

Hedge funds: Directional strategies re-

main supported by favorable volatility and

liquidity conditions.

US real estate: Further upside for listed

investments despite richer valuations due

to robust fundamental outlook.

Tobias MerathHead Commodities & Alternative Investments [email protected], +41 44 333 13 62

Directional hedge fund strategiesMarket conditions for hedge funds are supportive.Low intra-stock correlations are positive for directionalstrategies.

Buy

Clear difference between alternative investment cate-

goriesDevelopments in alternative investments have recently di-verged, and we think this will continue. The current environ-

ment of rather soft growth, falling inflation but high liquidity is

weighing on commodities, but benefits real estate and certain

hedge fund strategies. Selectivity remains key, and we have a

clear preference for US real estate investments as well as di-rectional hedge fund strategies. We are cautious on commodi-

ties.

Commodities: A more cautious approach is warrantedCommodities continue to be under selling pressure. The soft

patch in global growth and the deterioration in technical indica-

tors suggest that a more cautious investment approach is war-ranted – at least until growth picks up more sustainably. We

have downgraded our strategic outlook for commodities as a

whole to neutral. Within commodities, performance can be

quite divergent. Oil prices should have some upside amid slow-

ing supply growth. In precious metals, gold is likely to remainunder moderate pressure near term, given declining inflation

expectations. Longer term, valuation should provide some sup-

port and limit the downside risks. Food prices are likely to de-

cline amid overvaluation and surging supply.

Hedge funds: Directional strategies continue to perform

very well

The DJ CS Hedge Fund Index was up 1.4% in April. With ayear-to-date performance of 5.0%, hedge funds managed to

deliver close to 60% of their average annual historical perfor-

mance in the first four months of trading. Directional strate-

gies, in particular, have continued their winning streak, with eq-

uity long/short and emerging market funds up more than6.0%. As liquidity and volatility conditions remain supportive

and herding tendencies among managers are limited, we think

hedge funds have further upside potential. Within hedge

funds, directional strategies such as long/short equity should

continue to outperform, given low inter-stock market correla-tions.

Real estate: Further upside for US property investments

The performance of most direct and indirect US real estate in-

vestments has been strong in recent months. While the valua-

tions of many listed US real estate investments are no longer cheap, we continue to see value strategically due to a promis-

ing fundamental outlook. We expect the US housing market re-

covery to broaden in the coming quarters, given record-high

homebuyer affordability. Attractive rental yields coupled with

slightly positive rental growth prospects form the basis of our constructive view on commercial real estate.

(23/05/2013)

16 Alternative investments 28/05/2013 Credit Suisse - Research Monthly

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Foreign exchange

Less demand forsafe haven

currencies

Capital outflows to weaken JPY versus

USD and CHF versus EUR.

Emerging currencies: Yield advantage is

being eroded. Selection is key. We prefer

CNY.

Marcus HettingerHead of Global Forex [email protected], +41 44 333 13 63

Our currency views are broadly unchanged compared to last

month. Several central banks across the world have eased

monetary policy further and yield compression has continued,

even in emerging markets. We thus continue to expectEUR/USD to trade within its broad range of 1.25 to 1.35. We

expect the pair to trade toward the upper part of that range giv-

en the positive technical trend rating. Further JPY weakness is

very likely, in our view, as there are first signs of capital out-

flows out of Japan, but undervaluation of the JPY is now be-coming more pronounced above 100. Within Europe, less de-

mand for safe havens will also weigh on the CHF vs. EUR, es-

pecially as the CHF remains richly valued and yields are very

low. SNB President Thomas Jordan has also left all options

open as regards the EUR/CHF the floor. In our view, the UK needs a weaker currency to rebalance the economy as the cur-

rent account deficit remains very high. We thus retain our

strategic bearish view on GBP vs. USD and EUR. The current

soft patch in global growth, little upside for commodity prices

and overvaluation are likely to continue to weigh on the AUDand we thus remain negative on the AUD overall.

Within emerging markets, currency selection will be key.

The yield advantage has fallen further as central banks eased

and currencies are no longer cheap. We continue to prefer theCNY. We still expect USD/CNY to fall to 6.00 over 12

months, driven by the current account surplus, capital inflows

and possibly a widening of the trading band. Diversification out

of traditional hard currencies, such as USD, EUR and GBP

(Top Investment Idea No. 6: “The new hard currencies”) re-mains a topic as long as monetary stimulus in the major econo-

mies is not reduced. In Latin America, we prefer the MXN as it

offers yield, is fairly valued and is in a technical uptrend.

(24/05/2013)

USD model currency portfolioOur USD-based currency portfolio shows an assumed 60%benchmark home bias and 40% exposure to a broader uni-verse of foreign currencies, against which we allocate strategi-cally and tactically, according to our views and portfolio analyt-

ics.


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Important information on derivatives

Option premiums and prices mentioned are indicative only. Option premiums and prices can be subject to very rapid changes:

The prices and premiums mentioned are as of the time indicated in the text and might have changed substantially in the mean-

time.

Pricing

Derivatives are complex instruments and are intended for sale only to investors who are capable of understanding and assuming

all the risks involved. Investors must be aware that adding option positions to an existing portfolio may change the characteristics

and behavior of that portfolio substantially. A portfolio’s sensitivity to certain market moves can be heavily impacted by the lever-

age effect of options.

Risks

Investors who buy call options risk the loss of the entire premium paid if the underlying security trades below the strike price at ex-

piration.

Buying calls

Investors who buy put options risk loss of the entire premium paid if the underlying security finishes above the strike price at expi-

ration.

Buying puts

Investors who sell calls commit themselves to sell the underlying for the strike price, even if the market price of the underlying is

substantially higher. Investors who sell covered calls (own the underlying security and sell a call) risk limiting their upside to the

strike price plus the upfront premium received and may have their security called away if the security price exceeds the strike

price of the short call. Additionally, the investor has full downside participation that is only partially offset by the premium received

upfront. If investors are forced to sell the underlying they might be subject to taxing. Investors shorting naked calls (i.e. selling

calls but without holding the underlying security) risk unlimited losses of security price less strike price.

Selling calls

Put sellers commit to buying the underlying security at the strike price in the event the security falls below the strike price. The

maximum loss is the full strike price less the premium received for selling the put.

Selling puts

Investors who buy call spreads (buy a call and sell a call with a higher strike) risk the loss of the entire premium paid if the under-

lying trades below the lower strike price at expiration. The maximum gain from buying call spreads is the difference between the

strike prices, less the upfront premium paid.

Buying call spreads

Selling naked call spreads (sell a call and buy a farther out-of-the-money call with no underlying security position): Investors risk a

maximum loss of the difference between the long call strike and the short call strike, less the upfront premium taken in, if the

underlying security finishes above the long call strike at expiration. The maximum gain is the upfront premium taken in, if the se-

curity finishes below the short call strike at expiration.

Selling naked call spreads

Investors who buy put spreads (buy a put and sell a put with a lower strike price) also have a maximum loss of the upfront premi-

um paid. The maximum gain from buying put spreads is the difference between the strike prices, less the upfront premium paid.

Buying put spreads

Buying strangles (buy put and buy call): The maximum loss is the entire premium paid for both options, if the underlying trades be-

tween the put strike and the call strike at expiration.

Buying strangles

Investors who are long a security and short a strangle or straddle risk capping their upside in the security to the strike price of the

call that is sold plus the upfront premium received. Additionally, if the security trades below the strike price of the short put, in-

vestors risk losing the difference between the strike price and the security price (less the value of the premium received) on the

short put and will also experience losses in the security position if they owns shares. The maximum potential loss is the full value

of the strike price (less the value of the premium received) plus losses on the long security position. Investors who are short

naked strangles or straddles have unlimited potential loss since, if the security trades above the call strike price, investors risk los-

ing the difference between the strike price and the security price (less the value of the premium received) on the short call. In ad-

dition, they are obligated to buy the security at the put strike price (less upfront premium received) if the security finishes below

the put strike price at expiration.

Selling strangles or straddles


18 Foreign exchange 28/05/2013 Credit Suisse - Research Monthly

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Risk disclaimer

Investors should consider this report as only a single factor in

making their investment decision. For a discussion of the risks

of investing in the securities mentioned in this report, please re-

fer to the following Internet link:

https://research.credit-suisse.com/riskdisclosure

CS may not have taken any steps to ensure that the securities

or financial instruments referred to in this report are suitable

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Disclosure Appendix

Analyst certification

The analysts identified in this report hereby certify that views about thecompanies and their securities discussed in this report accurately reflecttheir personal views about all of the subject companies and securities. The

analysts also certify that no part of their compensation was, is, or will be di-rectly or indirectly related to the specific recommendation(s) or view(s) inthis report.

Knowledge Process Outsourcing (KPO) Analysts mentioned in this reportare employed by Credit Suisse Business Analytics (India) Private Limited.

Important disclosures

Credit Suisse policy is to publish research reports, as it deems appropri-ate, based on developments with the subject company, the sector or themarket that may have a material impact on the research views or opinionsstated herein. Credit Suisse policy is only to publish investment researchthat is impartial, independent, clear, fair and not misleading.The Credit Suisse Code of Conduct to which all employees are obliged to

adhere, is accessible via the website at:https://www.credit-suisse.com/governance/doc/code_of_conduct_en.pdf

For more detail, please refer to the information on independence of finan-cial research, which can be found at:https://www.credit-suisse.com/legal/pb_research/independence_en.pdf

The analyst(s) responsible for preparing this research report received com-pensation that is based upon various factors including Credit Suisse's totalrevenues, a portion of which is generated by Credit Suisse InvestmentBanking business.

Equity rating history as of (28/05/2013)

DateRatingCompany

13/05/2013BUY ANADARKO PETROLEUM

(APC US)

11/02/2013BUY

22/11/2012BUY

03/08/2012BUY

08/05/2012BUY

24/04/2013BUY APPLE INC (AAPL US)

24/01/2013HOLD

07/12/2012BUY

26/10/2012BUY

27/08/2012BUY

25/07/2012BUY

25/04/2012BUY26/04/2013BUYBAYER (BAYN GR)

28/02/2013BUY

01/11/2012BUY

23/08/2012BUY

04/05/2012BUY

25/04/2013BUYENI (ENI IM)

20/02/2013BUY

30/10/2012BUY

06/08/2012BUY

13/07/2012BUY

02/05/2012HOLD

15/05/2013BUYGALP ENERGIA SGPS

S.A. (GALP PL)

13/02/2013BUY

30/10/2012BUY

31/07/2012BUY

04/05/2012BUY

DateRatingCompany

22/04/2013BUYGENERAL ELECTRIC CO

(GE US)

09/04/2013BUY

21/01/2013BUY

24/12/2012BUY

22/10/2012BUY

23/07/2012BUY23/04/2012BUY

19/04/2013BUYGOOGLE (GOOG US)

24/01/2013BUY

23/10/2012BUY

20/07/2012BUY

03/05/2012BUY

23/04/2013BUYHALLIBURTON (HAL US)

28/01/2013BUY

18/10/2012BUY

24/07/2012BUY

20/04/2012BUY

08/05/2013HOLDHENKEL PREFERRED

(HEN3 GY)

12/03/2013HOLD

16/11/2012BUY

06/09/2012BUY

01/08/2012BUY

14/05/2012BUY

25/04/2013HOLDIBERDROLA (IBE SM)

15/02/2013HOLD

25/10/2012BUY

14/08/2012BUY

11/07/2012HOLD

04/11/2011HOLD

25/04/2013RESTRICTEDKPN NV (KPN NA)

06/02/2013HOLD

07/01/2013HOLD

26/10/2012HOLD

24/07/2012HOLD

21/06/2012HOLD

09/05/2012BUY

10/05/2013HOLDLINDE AKTIENGE-

SELLSCHAFT (LIN GY)

21/03/2013HOLD

02/11/2012BUY

02/08/2012BUY

06/07/2012BUY

17/05/2012BUY

03/05/2013BUYROYAL DUTCH SHELL-A

(RDSA NA)

01/02/2013BUY

02/11/2012BUY

27/07/2012BUY

27/04/2012BUY

07/05/2013BUYSIEMENS (SIE GY)

29/01/2013BUY

20/11/2012BUY

31/07/2012BUY

02/05/2012BUY

02/05/2013BUYSIMON PROPERTY

GROUP INC (SPG US)

13/02/2013BUY

02/11/2012BUY

30/07/2012HOLD

11/06/2012HOLD21/02/2011TERMINATED

02/05/2013BUYSUNCOR ENERGY (SU

CN)

11/02/2013BUY


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DateRatingCompany

22/11/2012BUY

13/08/2012BUY

09/05/2012BUY

13/02/2013BUYVODAFONE (VOD LN)

14/11/2012BUY

30/07/2012BUY

22/05/2012BUY

The subject issuer (ANADARKO PETROLEUM, APPLE INC, BAYER,ENI, GENERAL ELECTRIC CO, GOOGLE, HALLIBURTON, HENKELPREFERRED, IBERDROLA, KPN NV, LINDE AKTIENGESELLSCHAFT,ROYAL DUTCH SHELL-A, SIEMENS, SIMON PROPERTY GROUPINC) currently is, or was during the 12-month period preceding the date ofdistribution of this report, a client of Credit Suisse. Credit Suisse providedinvestment banking services to the subject company (ANADARKOPETROLEUM, BAYER, ENI, GENERAL ELECTRIC CO, GOOGLE, HAL-LIBURTON, HENKEL PREFERRED, IBERDROLA, KPN NV, LINDE AK-TIENGESELLSCHAFT, SIMON PROPERTY GROUP INC) within the past12 months. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject issuer

(ANADARKO PETROLEUM, APPLE INC, BAYER, ENI, GENERALELECTRIC CO, HALLIBURTON, IBERDROLA, ROYAL DUTCH SHELL- A, SIEMENS, SIMON PROPERTY GROUP INC) within the past 12months. Credit Suisse has managed or co-managed a public offering ofsecurities for the subject issuer (ANADARKO PETROLEUM, ENI, GENER- AL ELECTRIC CO, GOOGLE, HALLIBURTON, IBERDROLA, KPN NV,SIEMENS, SIMON PROPERTY GROUP INC) within the past three years.Credit Suisse has managed or co-managed a public offering of securitiesfor the subject issuer (ENI, GENERAL ELECTRIC CO, IBERDROLA,KPN NV) within the past 12 months. Credit Suisse has received invest-ment banking related compensation from the subject issuer (ANADARKOPETROLEUM, ENI, GENERAL ELECTRIC CO, GOOGLE, HALLIBUR-TON, IBERDROLA, KPN NV, SIMON PROPERTY GROUP INC) withinthe past 12 months. Credit Suisse has received compensation for prod-ucts and services other than investment banking services from the subject

issuer (ANADARKO PETROLEUM, APPLE INC, BAYER, ENI, GENER- AL ELECTRIC CO, HALLIBURTON, IBERDROLA, ROYAL DUTCHSHELL-A, SIEMENS) within the past 12 months. Credit Suisse expectsto receive or intends to seek investment banking related compensationfrom the subject issuer (ANADARKO PETROLEUM, APPLE INC, BAY-ER, ENI, GENERAL ELECTRIC CO, GOOGLE, HALLIBURTON,HENKEL PREFERRED, IBERDROLA, KPN NV, LINDE AKTIENGE-SELLSCHAFT, SIMON PROPERTY GROUP INC, SUNCOR ENERGY) within the next three months. As at the date of this report, Credit Suisseacts as a market maker or liquidity provider in the securities of the subjectissuer (ANADARKO PETROLEUM, APPLE INC, GENERAL ELECTRICCO, GOOGLE, HALLIBURTON, SIMON PROPERTY GROUP INC). Cred-it Suisse holds a trading position in the subject issuer (ANADARKOPETROLEUM, APPLE INC, BAYER, ENI, GALP ENERGIA SGPS S.A.,GENERAL ELECTRIC CO, GOOGLE, HALLIBURTON, HENKEL PRE-

FERRED, IBERDROLA, KPN NV, LINDE AKTIENGESELLSCHAFT,ROYAL DUTCH SHELL-A, SIEMENS, SIMON PROPERTY GROUP INC,SUNCOR ENERGY, VODAFONE ). As at the end of the precedingmonth, Credit Suisse beneficially owned 1% or more of a class of com-mon equity securities of (BAYER, KPN NV, SIEMENS, VODAFONE ).

Additional disclosures for the following jurisdictions

United Kingdom: For fixed income disclosure information for clients ofCredit Suisse (UK) Limited and Credit Suisse Securities (Europe) Limited,please call +41 44 333 33 99.For further information, including disclosures with respect to any other is-suers, please refer to the Credit Suisse Global Research Disclosure siteat:https://www.credit-suisse.com/disclosure

Guide to analysis

Equity rating allocation as of (28/05/2013)

Investment banking

interests onlyOverall

40.92 %40.76 %BUY

50.9 %51.59 %HOLD

5.59 %5.41 %SELL

2.59 %2.23 %RESTRICTED

Relative stock performance

At the stock level, the selection takes into account the relative attractive-ness of individual shares versus the sector, market position, growthprospects, balance-sheet structure and valuation. The sector and countryrecommendations are "overweight," "neutral", and "underweight" and areassigned according to relative performance against the respective regionaland global benchmark indices.

Absolute stock performance

The stock recommendations are BUY, HOLD and SELL and are depen-dent on the expected absolute performance of the individual stocks, gener-ally on a 6-12 months horizon based on the following criteria:

10% or greater increase in absolute

share price

BUY

variation between -10% and +10% in

absolute share price

HOLD

10% or more decrease in absolute

share price

SELL

In certain circumstances, internal and ex-

ternal regulations exclude certain types

of communications, including e.g. an in-

vestment recommendation during thecourse of Credit Suisse engagement in

an investment banking transaction.

RESTRICTED

Research coverage has been concluded.TERMINATED

Absolute bond performance

The bond recommendations are based fundamentally on forecasts for totalreturns versus the respective benchmark on a 3-6 month horizon and aredefined as follows:

Expectation that the bond issue will out-

perform its specified benchmark

BUY

Expectation that the bond issue will per-

form in line with the specified bench-mark

HOLD

Expectation that the bond issue will

underperform its specified benchmark

SELL

In certain circumstances, internal and ex-

ternal regulations exclude certain types

of communications, including e.g. an in-

vestment recommendation during the

course of Credit Suisse engagement in

an investment banking transaction.

RESTRICTED

Credit Suisse HOLT

With respect to the analysis in this report based on the HOLT(tm) method-ology, Credit Suisse certifies that (1) the views expressed in this report ac-curately reflect the HOLT methodology and (2) no part of the Firm's com-pensation was, is, or will be directly related to the specific views disclosedin this report. The Credit Suisse HOLT methodology does not assign rat-ings to a security. It is an analytical tool that involves use of a set of propri-etary quantitative algorithms and warranted value calculations, collectivelycalled the Credit Suisse HOLT valuation model, that are consistently ap-


7/15/2019 june-cs


plied to all the companies included in its database. Third-party data (includ-ing consensus earnings estimates) are systematically translated into a num-ber of default variables and incorporated into the algorithms available inthe Credit Suisse HOLT valuation model. The source financial statement,pricing, and earnings data provided by outside data vendors are subject toquality control and may also be adjusted to more closely measure theunderlying economics of firm performance. These adjustments provide con-sistency when analyzing a single company across time, or analyzing multi-

ple companies across industries or national borders. The default scenariothat is produced by the Credit Suisse HOLT valuation model establishesthe baseline valuation for a security, and a user then may adjust the de-fault variables to produce alternative scenarios, any of which could occur.The Credit Suisse HOLT methodology does not assign a price target to asecurity. The default scenario that is produced by the Credit Suisse HOLTvaluation model establishes a warranted price for a security, and as thethird-party data are updated, the warranted price may also change. The de-fault variables may also be adjusted to produce alternative warrantedprices, any of which could occur. Additional information about the CreditSuisse HOLT methodology is available on request.CFROI(r), CFROE, HOLT, HOLTfolio, HOLTSelect, HS60, HS40, Value-Search, AggreGator, Signal Flag and "Powered by HOLT" are trademarksor registered trademarks of Credit Suisse or its affiliates in the UnitedStates and other countries. HOLT is a corporate performance and valua-

tion advisory service of Credit Suisse.

For technical research

Where recommendation tables are mentioned in the report, "Close" is thelatest closing price quoted on the exchange. "MT" denotes the rating for the medium-term trend (3-6 months outlook). "ST" denotes the short-termtrend (3-6 weeks outlook). The ratings are "+" for a positive outlook (pricelikely to rise), "0" for neutral (no big price changes expected) and "-" for anegative outlook (price likely to fall). Outperform in the column "Rel perf"denotes the expected performance of the stocks relative to the bench-mark. The "Comment" column includes the latest advice from the analyst.In the column "Recom" the date is listed when the stock was recommend-ed for purchase (opening purchase). "P&L" gives the profit or loss that hasaccrued since the purchase recommendation was given.

For a short introduction to technical analysis, please refer to Technical Analysis Explained at:https://www.credit-suisse.com/legal/pb_research/technical_tutorial_en.pdf

Global disclaimer / important information

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The information, tools and material presented in this report are provided toyou for information purposes only and are not to be used or considered asan offer or the solicitation of an offer to sell or to buy or subscribe for secu-rities or other financial instruments. CS does not offer advice on the taxconsequences of investment and you are advised to contact an indepen-dent tax adviser. Please note in particular that the bases and levels of taxa-tion may change.

CS believes the information and opinions in the Disclosure Appendix ofthis report are accurate and complete. Information and opinions presentedin the other sections of the report were obtained or derived from sourcesCS believes are reliable, but CS makes no representations as to their accu-racy or completeness. Additional information is available upon request. CSaccepts no liability for loss arising from the use of the material presentedin this report, except that this exclusion of liability does not apply to the ex-tent that liability arises under specific statutes or regulations applicable toCS. This report is not to be relied upon in substitution for the exercise of in-dependent judgment. CS may have issued, and may in the future issue, a

trading idea regarding this security. Trading ideas are short term tradingopportunities based on market events and catalysts, while company recom-mendations reflect investment recommendations based on expected totalreturn over a 6 to 12-month period as defined in the disclosure section.Because trading ideas and company recommendations reflect different as-sumptions and analytical methods, trading ideas may differ from the com-pany recommendations. In addition, CS may have issued, and may in thefuture issue, other reports that are inconsistent with, and reach differentconclusions from, the information presented in this report. Those reportsreflect the different assumptions, views and analytical methods of the ana-lysts who prepared them and CS is under no obligation to ensure thatsuch other reports are brought to the attention of any recipient of this re-port. CS is involved in many businesses that relate to companies men-tioned in this report. These businesses include specialized trading, risk arbi-trage, market making, and other proprietary trading.

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Publication Research MonthlySelected chapters Investment StrategyEconomics

This month’s featured topicInvestment themeCredit Suisse MegatrendsFixed incomeEquities Alternative investmentsForeign exchange

Publisher

Giles KeatingHead of Research for Private Banking and Wealth Management+41 44 332 22 [email protected]

Oliver Adler Head Economic Research+41 44 333 09 [email protected]

Nannette Hechler-Fayd'herbeHead of Global Financial Markets Research+41 44 333 17 06nannette.hechler-fayd'[email protected]

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Kevin Lyne-SmithHead of Global Equity Research+41 44 334 56 41

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Authors

Giles KeatingHead of Research for Private Banking and Wealth Management+41 44 332 22 [email protected]

Nannette Hechler-Fayd'herbeHead of Global Financial Markets Research+41 44 333 17 06nannette.hechler-fayd'[email protected]

Thomas Herrmann+41 44 333 50 [email protected]

Michael O'SullivanHead of Portfolio Strategy & Thematic Research+44 20 7883 8228michael.o'[email protected]

Peter Pönitzsch+41 44 333 57 [email protected]

Antonios Koutsoukis+44 20 7883 6647

[email protected]

Markus Stierli+41 44 334 88 [email protected]

Maurice Jiszda+41 44 333 21 [email protected]

Tobias MerathHead Commodities & Alternative Investments Research+41 44 333 13 [email protected]

Marcus Hettinger Head of Global Forex Research+41 44 333 13 [email protected]


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