The beginning of 2016 was characterized by considerable turbulence on the financial markets: the reasons and dynamics of this trend are analyzed by the usual Monthly Report published by Credit Suisse, which first locates the bad drivers. The most important of them are the tightening initiated by Fed in December, the drop in prices of Petroleum (despite the periodic covering of short positions), the weakness of the data on Chinese growth and concerns about further devaluation of the yuan.
Doubts about the sustainability of the global expansion appear to be growing, even as Credit Suisse believes a global recession – and therefore a major financial crisis – is unlikely. Equity markets rebounded following Draghi's conciliatory statement on January 21, 2016, which came after key support breaks across major equity markets. However, for a sustainable recovery of shares, or the ECB's statements will necessarily soon be followed by actions, or the Fed will need to make clear that it is slowing its pace of rate hikes, or corporate earnings will have to improve – or, ideally, all three. There are currently no other clear catalysts for a recovery in equities.
On the front of the oil market, the report believes further downward pressure on prices is likely due to continued high supply. This will escalate the tension for some oil-producing countries and companies. Probably the China it will further ease its monetary policy, but this could increase pressure on its currency, with a potential negative impact on other markets.
INVESTMENT ADVICE
In this context, Credit Suisse already published 11 sector promotion lists for equities in December: one list for each sector required by the Global Industry Classification Standard (GICS). Each list contains about ten recommended titles and five of the least reliable, to offer investors the best global choices – according to the judgment of the analysts of the Swiss bank – and the stocks to avoid in each sector. The selection is aligned with the semi-annual publication "Equity Credit Sector Monitor".
“We are slightly increasing the equity component – explains the report – for investors with intermediate risk profiles (yield, balanced and growth) and conversely reducing the allocation to the real estate sector. Real estate investments suffer from a relatively high sensitivity to interest rates, a characteristic of concern at this time when interest rates are globally low and the US Federal Reserve has embarked on a tightening cycle which could pave the way for a global interest rate trend. Equities are also sensitive to interest rates, but tend to outperform as long as the rise in rates is determined by economic growth, and therefore by profits”.
More diversification, therefore, and less exposure to the real estate sector (possibly to be eliminated) and to commodities, shifting resources towards convertible or inflation-linked bonds. “Convertible bonds – says the analysis by Credit Suisse – offer an alternative source of diversification, while remaining a fixed-income instrument in terms of coupon and capital. Given low current yields, one of the key risks in fixed income would be an unexpected acceleration in inflation, requiring more aggressive Fed tightening and little or no easing elsewhere. An interesting hedge for this scenario is offered by inflation-linked bonds.
