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PB Americas
The Investment Landscape – September 2010
Private Banking AmericasInvestment Strategy & Advisory Group
The Investment Landscape
September 2010
The Investment Landscape – September 2010
This document is not complete without attached “Important Legal Information.”
Important Legal InformationThis 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 Chief Investment Officer 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 Chief Investment Officer, 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 Chief Investment Officer 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 www.credit-suisse.com/pbclientview. CSSU does not provide legal or tax advice. Consult your personal accounting, legal, and tax advisor with respect to any legal or tax implications.
The Private Banking USA business in CSSU is a regulated broker dealer and investment advisor. It is not a chartered bank, trust company or depository institution. It is not authorized to accept deposits or provide corporate trust services and it is not licensed or regulated by any state or federal banking authority. Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
©2010 Credit Suisse Securities (USA) LLC. All rights reserved.
The Investment Landscape – September 2010
This document is not complete without attached “Important Legal Information.”
Table of Contents
Executive Summary
Guideline Allocations
Market/Strategy Summary
Key Focus:
– China
– Interest Rates
Global Markets Recap
Market and Economic Outlook
The Investment Landscape – September 2010
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Executive Summary
The Investment Landscape – September 2010
This document is not complete without attached “Important Legal Information.”
Executive Summary
PB Americas
The Investment Landscape – September 2010
Guideline Allocations & Tactical Overweights
The Investment Landscape – September 2010
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Guideline Allocations
Source: Credit Suisse Investment Strategy & Advisory
Asset Class 1 2 3 4 5 Focus
US Large Cap 10% 15% 20% 23% 24%Quality Growth, High Div, Technology, Consumer Staples
US Sm/Mid Cap 3% 3% 4% 4% 4%
Non-US Developed 5% 6% 9% 12% 14%Germany, Scandinavia, Canada, Asia Pacific ex-Japan
Emerging Markets 6% 9% 14% 18% Asia (China, Korea), Brazil, Peru
Fixed Income 52% 36% 22% 10%Expect credit-related to outperform gov't; credit selection important
Short-term/FX 25% 17% 5%USD neutral, constructive on EM and commodity-related currencies
Private Equity 4% 10% 14% 18%Sm/Mid LBOs, Infrastructure, Secondary, EM, Clean Tech
Hedge Funds 8% 13% 13% 10%Event Driven, Global Macro, Convertible Arb
Commodities 5% 5% 8% 10% 12% Oil & Base Metals
Projected Volatility 0-4 4-7 7-11 11-15 15+
Volatility Budget
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The Investment Landscape – September 2010
Market / Strategy Summary
The Investment Landscape – September 2010
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– Global growth momentum slowing, expansion expected to continue Economic indicators such as PMI index in expansionary territory, but below recovery highs US jobs picture remains weak, but private payrolls increased for past eight months Monetary policy to remain accommodative (maybe more so) due to benign inflation
– Equities: investors cautious despite healthy earnings growth – valuations attractive Valuations, low rates/inflation, and high cash levels positive for equities Favor large cap, quality growth and high dividend, themes: emerging consumer, infrastructure Overweight: US, Asia ex-Japan, Germany, Canada, Nordic countries, Brazil
– Interest Rates: mixed data and uncertainty support low rates Expect rates to stay low for longer, fed on hold until 2012, 10Yr Treasury near 3.0% end-10 Credit: low for longer rate environment = demand for yield, spreads may tighten further
– Currencies: less yield support for USD; commodity-related & EM should outperform Rate spreads supportive of EUR/USD, but bouts of risk aversion should continue to boost dollar Low yields supportive of creditor currencies such as yen and Swiss franc
– Commodities: expect further gains for base metals due to strong demand growth Oil prices appear undervalued below $75, healthy global demand supportive Gold gets support from low rates, but expect to underperform as safe haven demand dries up
Market/Strategy Summary – Sept 2010
Source: Credit Suisse Investment Strategy & Advisory
The Investment Landscape – September 2010
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Purchasing Managers Index (Above 50 = Expansion) Indicators point to decelerating, positive growth after rebound
Source: Bloomberg, Credit Suisse IDC
30
35
40
45
50
55
60
65
Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10
China PMI Eurozone PMI UK PMI US PMI 50
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Real GDP Growth Forecasts 2010 & 2011 Emerging markets lead global growth
Source: Credit Suisse Estimates
2.8%
4.6%
5.7%
4.1%
8.7%
2.7%
1.7% 1.5%
Global Non-JapanAsia
LatinAmerica
EEMEA Japan US Euro-16 UK
2010E
2011E
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US Nonfarm Private Payrolls (Monthly ,000s)Private nonfarm payrolls (ex-gov’t) up for past 8 months
Source: Thomson Reuters Datastream
-1000
-800
-600
-400
-200
0
200
400
Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10
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August price change in local currency Most major equity indices fell in August amid bearish sentiment
Source: Thomson Reuters Datastream
0.0%
-0.6%
-0.9%
-1.9%
-2.0%
-2.3%
-3.5%
-4.0%
1.7%
0.6%
-7.5%
-4.7%
S&P TSX Comp (Toronto)
BSE Sensex (India)
Shanghai SE Comp (China)
FTSE 100 (UK)
Kospi (S Korea)
Bolsa (Mexico)
MICEX (Russia)
Hang Seng (Hong Kong)
Bovespa (Brazil)
DJ Euro Stoxx (Euro Area)
S&P 500 (USA)
Nikkei 225 (Japan)
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MSCI World Forward P/E Valuations attractive at current market levels
Source: Thomson Reuters Datastream
5
10
15
20
25
Aug-90 Aug-94 Aug-98 Aug-02 Aug-06 Aug-10
Avg: 16.9
8/31/10:
11.3
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YTD Change in 10Yr Gov’t Bond Yield (in bps)Yields have fallen globally along with inflation expectations
Source: Thomson Reuters Datastream
-136
-123-119
-85-79
USA Euro area UK Canada Switzerland
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US Dollar vs Euro, Yen and Pound YTD (Indexed to 0 at 12/31/09)USD stronger vs European currencies, weaker vs yen
Source: Thomson Reuters Datastream
-15%
-10%
-5%
0%
5%
10%
15%
20%
Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10
vs Euro
vs Yen
vs Pound
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DJUBS Commodity Sub Indices YTD (Indexed to 0 at 12/31/10)YTD: Precious +14%, Ag +6%, Industrial -1%, Energy -20%
-30%
-20%
-10%
0%
10%
20%
Dec-09 Feb-10 Apr-10 Jun-10 Aug-10
Precious Metals Energy Agriculture Industrial Metals
Source: Thomson Reuters Datastream
PB Americas
The Investment Landscape – September 2010
Dashboard 2010Key Focus: China
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China Chinese growth expected to remain strong, lead global activity Export growth returns, augmenting domestic strength Money supply growth is normalizing, easing inflation pressures Equity valuations attractive given strong earnings growth outlook
Credit Fewer banks tightening lending standards
Consumer US consumer confidence remains tentative, is improving
Commodities DJ UBS index +28% from low, 45% below peak
Cash Assets have moved from money market to bond funds - investors
remain cautious Cash on corporate balance sheets at record levels, may be deployed
Dashboard 2010 - Key Focus: China
Source: Credit Suisse Investment Strategy & Advisory
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Real GDP Growth: China & Global (Y-o-Y % Change) Chinese growth expected to remain strong, lead global activity
Source: Credit Suisse
2010 Dashboard: China
11.9
10.39.4
8.07.5
8.18.9
10.1
4.9 5.1 4.84.1 4.0 4 4.3 4.7
0
2
4
6
8
10
12
14
Q1-10 Q2-10E Q3-10E Q4-10E Q1-11E Q2-11E Q3-11E Q4-11E
China Global
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Chinese Exports & Retail Sales, Y-o-Y % ChgExport growth returns, augmenting domestic strength
Source: Bloomberg via Credit Suisse IDC
2010 Dashboard: China
0
5
10
15
20
25
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
-30
-20
-10
0
10
20
30
40
50
60
China Retail Sales Chinese Exports (Rt Axis)
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China Money Supply Growth (M2, Y-o-Y % Change)Money supply growth normalizing, easing inflation pressures
Source: Bloomberg via Credit Suisse IDC
2010 Dashboard: China
0%
5%
10%
15%
20%
25%
30%
Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10
Avg: 18%
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MSCI China Forward P/E Equity valuations attractive given strong earnings growth outlook
Source: Thomson Reuters Datastream via Credit Suisse IDC
2010 Dashboard: China
0
5
10
15
20
25
Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10
Avg: 13.68/31/10: 12.1
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Loan Survey: Net % respondents reporting tightening lending standardsSmaller % of banks are tightening lending standards
Source: Thomson Reuters Datastream
2010 Dashboard: Credit
-40
-20
0
20
40
60
80
100
Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10
Fewer banks tightening
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US Consumer ConfidenceUS consumer confidence remains tentative, is improving
Source: Bloomberg
2010 Dashboard: Consumer
20
30
40
50
60
70
80
90
100
110
120
Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10
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DJ UBS Commodity Index DJ UBS index +28% from low, 45% below peak
Source: Bloomberg
2010 Dashboard: Commodities
50
100
150
200
250
Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10
+28%
Mar-09
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Assets in Money Market vs Bond & Income Funds ($ Trillions)Investors have moved cash in to bond funds, remain cautious
Source: Thomson Reuters Datastream
2010 Dashboard: Cash
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10
US Money Market Funds
US Bond & Income Funds
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S&P 500 Co. Cash & Equivalents ($ billions) Cash on corporate balance at record levels, may be deployed
Source: Standard & Poor’s
2010 Dashboard: Cash
*Through Q1, latest data available
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1990 1994 1998 2002 2006 2010*
PB Americas
The Investment Landscape – September 2010
Key Focus: Interest Rates
The Investment Landscape – September 2010
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Expect interest rates to stay low for longer due to weak sentiment, modest growth outlook and low inflation
– Price rally in Treasury bonds rational in current economic environment– Rates have likely bottomed but expect government bond prices to remain well
supported and rise in yield to be gradual
Low rates create opportunity for governments, corporations and consumers to access funds at low rates & reduced interest expense
– US Government: despite jump in 2009 budget deficit, interest expense fell - budget deficit increased $960 bln while interest expense fell $68 bln
– Corporations: low corporate bond yields allow corporations to raise funds at very low rates, leading to increasing interest coverage ratios (more earnings per dollar of interest)
– Consumers: for those able to borrow or re-finance at very low mortgage rates, lower mortgage payments free up more disposable income
Key Focus: Interest Rates
Source: Credit Suisse Investment Strategy & Advisory
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US 2Yr Treasury YieldShort Treasury yields at all-time lows
Source: Thomson Reuters Datastream
2010 Dashboard: Interest Rates
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Aug-80 Aug-85 Aug-90 Aug-95 Aug-00 Aug-05 Aug-10
8/31/10: 0.5%
30Y Avg: 6.1%
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10Yr Treasury Yield less 10 Yr Treasury Inflation-linked Yield
(TIPS implied) low US inflation expectations = low bond yields
Source: Thomson Reuters Datastream
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10
10Y Inflation Expectations 5Y Inflation Expectations
10Y: 1.63%
5Y: 1.27%
2010 Dashboard: Interest Rates
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Barclays US Agg Long Treasury Index (Total Return)Price rally in Treasurys rational given economic environment
Source: Thomson Reuters Datastream
2010 Dashboard: Interest Rates
1750
2000
2250
2500
2750
Aug-08 Feb-09 Aug-09 Feb-10 Aug-10
+ 20% since 4/5/10
+29%
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US Treasury Yearly Budget Deficit vs Interest Expense (USD, Billions) Low rates = lower interest expense despite larger deficits
Source: Bloomberg
2010 Dashboard: Interest Rates
200
250
300
350
400
450
500
2002 2003 2004 2005 2006 2007 2008 2009
0
200
400
600
800
1000
1200
1400
1600
Yearly Budget Deficit (Rt Axis)
Yearly Interest Expense
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US Corporate Non-Financial Interest Coverage & Bond Yields
Low rates = higher interest coverage ratios (earnings / interest)
2010 Dashboard: Interest Rates
Source: Bloomberg, Thomson Reuters Datastream
4
6
8
10
12
14
Jun-80 Jun-85 Jun-90 Jun-95 Jun-00 Jun-05 Jun-10
4%
6%
8%
10%
12%
14%
16%
18%
EBITDA Interest Coverage Ratio Baa Corp Bond Yield (Rt Axis)
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Freddie Mac US 30YR Mortgage Rate Low rates = lower mortgage payments for many consumers
2010 Dashboard: Interest Rates
Source: Bloomberg
2
4
6
8
10
12
14
16
18
20
Aug-80 Aug-85 Aug-90 Aug-95 Aug-00 Aug-05 Aug-10
8/31/10: 4.3%
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The Investment Landscape – September 2010
Global Markets Recap
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Global Markets Recap
Equities Mixed economic data and renewed double-dip fears pushed global equity
markets lower in August. Only Canada (+1.7%), India (0.6%) and China (0.1%) posted gains on the month. Japan led declines due to stronger yen (bad for exporters). Emerging markets, led by S. Korea and India, continued to perform better than developed; the MSCI EM index + 0.4% YTD vs S&P 500 (-4.6%) and EAFE (-5.3%). China (-20% YTD) is laggard after strong 2009 (+80%).
In August, weak sentiment led to outperformance of more defensive sectors such as telecomm, utilities and staples. All global sectors are down YTD. In the US, only consumer discretionary (+1.0%) and industrials (+0.2%) are positive.
Large cap stocks held up much better than small in August (Russell 1000 + 3%
vs Russell 2000); small cap remains better YTD thanks to strong start to 2010. Value continues to outperform growth in both large and small cap space.
Currency The dollar was stronger in August and YTD against all major currencies except
the yen and Swiss franc, creditor currencies that benefit from low rates.
Source: Credit Suisse Investment Strategy & Advisory
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Global Markets Recap
Interest Rates & Fixed Income Government bond yields continued to trend lower in August due to strong
investor demand for safe assets, low inflation and increasingly mixed growth outlook. The 10Yr US Treasury yield moved below 2.5% and the yield curve (10Y – 2Y) took a flatter shape. Euro area 10Yr fell to 2.1%, UK to 2.9%, Japan to 0.95%.
Fixed income indices continue strong performance; falling rates have made longer dated Treasurys the top performing segment (+21% YTD). Credit indices have also performed well but wider credit spreads lead to underpformance versus governments. Nominal bonds outperform inflation-linked as inflation expectations fall. US tax-exempt bond yields vs Treasurys are at, or below, historic averages.
Commodities Lower rates and increased uncertainty lifted precious metal prices in August
(gold +6%, silver +7%). The LME metals index posted a small gain despite equity selloff (copper +1.6% in August & +1.0% YTD). Oil remained weak, falling 9%.
Volatility Slow summer trading helped keep the VIX Volatility Index subdued, averaging
25 during August (vs average of 24 in Jan-July).
Source: Credit Suisse Investment Strategy & Advisory
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GLOBAL MARKETSTotal Return Through 08/31/10
Source: Thomson Reuters DataStream
Level Aug-10 YTD
EQUITIES (TR)S&P 500 1,049 -4.5% -4.6%
MSCI EAFE (Local) 726 -2.7% -5.3%
MSCI EM (Local) 42,492 -1.4% 0.4%
US DOLLARVS. EURO 1.27 2.5% 12.9%
VS. YEN 83.97 -3.1% -9.8%
COMMODITIESOIL ($ / barrel) 71.92 -8.9% -9.4%
GOLD ($ / ounce) 1,247.00 6.1% 13.8%
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GLOBAL EQUITY MARKETS YTD Price change in local currency (YTD through 8/31/10)
Source: Thomson Reuters Datastream
-8.6%
-6.1%
-5.9%
-5.0%
-3.5%
-1.4%
-0.1%
1.4%
2.9%
3.6%
-19.5%
-16.3%
Shanghai SE Comp (China)
Nikkei 225 (Japan)
DJ Euro Stoxx (Euro Area)
Hang Seng (Hong Kong)
S&P 500 (USA)
Bovespa (Brazil)
FTSE 100 (UK)
Bolsa (Mexico)
MICEX (Russia)
S&P TSX Comp (Toronto)
BSE Sensex (India)
Kospi (S Korea)
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GLOBAL SECTORS (S&P 1200 Global)Price change in USD (YTD Through 08/31/10)
Source: Thomson Reuters Datastream
Sector Aug-10 YTD
Consumer Staples -1.1% -1.1%Consumer Discretionary -3.8% -1.7%Industrials -6.0% -1.9%Telecomm Services 0.1% -3.2%Basic Materials -2.3% -8.4%Utilities -0.5% -9.5%Health Care 0.1% -9.8%Financials -7.0% -10.1%Information Technology -7.3% -10.8%Energy -4.7% -14.6%
S&P Global 1200 -4.2% -7.7%
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US EQUITY RETURNS (Size & Style)Total Return Through 08/31/10
Source: Thomson Reuters Datastream, Bloomberg
Aug-10 YTD
Russell 1000 (Lg Cap) -4.5% -4.4%
Russell 1000 Value -4.3% -3.0%
Russell 1000 Growth -4.7% -5.7%
Russell 2000 (Sm Cap) -7.4% -3.0%
Russell 2000 Value -7.5% -2.5%
Russell 2000 Growth -7.3% -3.4%
DJIA -3.9% -2.1%
NASDAQ -6.2% -8.7%
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US SECTORS (S&P 500)Price Change Through 08/31/10
Source: Thomson Reuters Datastream
S&P Sector Aug-10 YTD
Consumer Discretionary -4.1% 1.0%Industrials -7.3% 0.2%Consumer Staples -1.6% -0.3%Utilities 0.9% -1.7%Telecomm Services 2.3% -1.8%Basic Materials -2.8% -5.9%Financials -7.9% -5.9%Health Care -1.8% -10.3%Energy -4.7% -10.7%Information Technology -7.2% -11.5%
S&P 500 -4.7% -5.9%
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CURRENCY% Change As of 08/31/10
Source: Thomson Reuters Datastream
Level Aug-10 YTDMAJORS
USD vs. Euro 1.27 2.5% 12.9%
USD vs. Japanese Yen 83.97 -3.1% -9.8%
USD vs. British Pound 1.54 1.9% 5.1%
USD vs. Swiss Franc 1.01 -3.1% -1.9%
AMERICASUSD vs. Canadian Dollar 1.07 3.5% 1.7%
USD vs. Mexican Peso 13.16 4.1% 0.8%
USD vs. Brazilian Real 1.75 -0.3% 0.6%
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GLOBAL INTEREST RATES10Y Gov’t Bond Yield (12/31/09 & 08/31/10)
Source: Thomson Reuters Datastream
3.8
3.4
4.1
1.3
3.6
1.9
2.5
2.1
2.9
1.0
2.8
1.1
USA Euro area UK Japan Canada Switzerland
Dec-09 Aug-10
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US FIXED INCOME & RATESAs of 08/31/10
Source: Thomson Reuters Datastream
Level Aug-10 YTD
Barclays US Aggregate (TR) 105 1.33% 8.19%
US TREASURY
5 Yr Treasury Yield 1.33% -26 bps -135 bps
10 Yr Treasury Yield 2.47% -44 bps -136 bps
Yield Curve (10Y - 2Y) 200 bps -36 bps -70 bps
LENDING RATES
Fed Funds 0.25% Unch Unch
3 Mo LIBOR 0.30% -16 bps 5 bps
1 Yr LIBOR 0.84% -19 bps -14 bps
Prime 3.25% Unch Unch
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CREDITSpread to 10-Yr Treasury As of 08/31/10 (Basis Points)
Source: Thomson Reuters Datastream
Current Chg (Bps) Chg (Bps)Spread Aug-10 YTD
Barclays US Muni Bond 45 12 66
Barclays US Inv Grade Corp 186 11 140Barclays US High Yield 599 56 76
Barclays Global Aggregate Credit 78 18 50
Barclays Global High Yield 599 45 43
JPM Emerging Market Bond 326 13 31
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US FIXED INCOME YTDTotal Return YTD through 8/3110
Source: Bloomberg, Thomson Reuters Datastream
0.3%
5.2%
5.5%
6.4%
6.9%
7.0%
7.1%
8.3%
8.4%
14.7%
16.8%
21.0%
US Cash
US Agencies
US MBS
US Inflation Linked (TIPS)
US Treasury Med
US Munis
US ABS
US High Yield
US Inv. Grade Med
US Inv. Grade Long
US CMBS
US Treasury Long
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NON-US FIXED INCOME YTDTotal Return YTD through 8/31/10 (In Local Currency)
Source: Bloomberg, Thomson Reuters Datastream
2.6%
5.0%
5.4%
5.5%
6.9%
7.6%
12.4%
14.1%
Japan Government
Euro Govt InflationLinked
Europe Govt Med
UK Government
Euro Inv. Grade
Europe Govt Long
EM
Pan European HighYield
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COMMODITIES% Change As of 08/31/10 (Spot Price)
Source: Thomson Reuters Datastream
Level Aug-10 YTD
WTI Crude Oil ($/bbl) 71.92 -8.9% -9.4%
Natural Gas (Henry Hub, $/MMBtu)
3.79 -21.2% -34.7%
Gold ($/oz) 1,247 6.1% 13.8%
Silver ($/oz) 18.87 6.9% 11.1%
Platinum ($/oz) 1,710 -1.4% 4.9%
Copper ($/lb) 3.36 1.6% 1.0%
LME Metals Index 3,353 0.1% -1.4%
Corn ($/Bushel) 3.94 7.8% 4.7%
Wheat (Soft Red, $/Bushel)
6.18 4.0% 50.4%
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HEDGE FUNDS & PRIVATE EQUITY
Source: Dow Jones Credit Suisse Hedge Fund Index, Cambridge Associates, Thomson Reuters Datastream
Jul-10* YTD
BEST PERFORMING HF STRATEGIES DJ CS Emerging Markets 3.5% 2.7%
DJ CS Long/Short Equity 2.5% -0.8%
DJ CS Convertible Arb 2.2% 4.9%
WORST PERFORMING HF STRATEGIES DJ CS Dedicated Short Bias -3.5% -6.2%
DJ CS Managed Futures -1.5% -1.2%
DJ CS Global Macro 0.7% 4.9%
Dow Jones/CS HF Index 1.6% 2.2%
S&P 500 Total Return 7.0% -0.1%*J uly 2010: most recent data available
Private Equity Q1-10*
Cambridge Associates US PE Index 4.4%
Cambridge Associates US VC Index 0.7%
S&P 500 Total Return 5.4%
Q1 2010: most recent data available
The Investment Landscape – September 2010
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CBOE Volatility Index (VIX)
Source: Thomson Reuters Datastream
0
10
20
30
40
50
Aug-09 Nov-09 Feb-10 May-10 Aug-10
PB Americas
The Investment Landscape – September 2010
Looking Ahead – 2010Market & Economic Outlook
The Investment Landscape – September 2010
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Market & Economic Outlook Summary Global expansion expected to continue, although at slower pace following
strong rebound from crisis lows; double dip remains unlikely. 2010 global GDP growth forecasted at 4.6% followed by 4.3% in 2011. Growth in emerging markets (particularly Asia) expected to remain strong, boosting global activity in part through increasing imports. Amid low inflation, central banks able to sustain (increase) policies to support growth.
Maintain positive long-term equity outlook; valuations attractive given healthy earnings growth expectations (MSCI World forward P/E = 11.3 vs 20Yr avg of 16.7). Weak sentiment, not positive fundamentals, remains near-term market driver as continued high unemployment and slow recovery trouble investors.
Overweight US, Asia ex-Japan, Germany, Canada, and Nordic countries. Underweight emerging Europe. Neutral stance on euro area.
US: focus on larger companies, quality growth and high dividend (with dividend growth potential). Overweight technology (upgrade cycle, business investment) and consumer staples (valuation & cash flows, focus on strong brand names).
Source: Credit Suisse Investment Strategy & Advisory
The Investment Landscape – September 2010
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Market & Economic Outlook Summary Mixed economic data, continued uncertainty and accommodative central bank
policies should keep rates low for longer. Expect US 10Yr Treasury yield near 3% end-10. Fed may implement more ‘quantitative easing’, rate hike unlikely until 2012. Globally, no policy rate changes expected in 2010; commodity-related (Brazil, Aust, Canada) likely pause tightening earlier than expected due to benign inflation outlook.
Low for longer rate environment plus solid corporate fundamentals should keep demand high for credit-related fixed income, expect tighter spreads in to year end. Overweight US investment grade and high yield, and emerging markets. Continue to highlight importance of careful credit selection.
US dollar has less yield support as Fed expected to remain on hold until 2012. Low yields benefit creditor currencies (JPY, CHF). Commodity-related and emerging market currencies should outperform, although valuations rich for some (AUD).
Base metals have most supportive fundamentals - strong demand outpacing supply. Global demand should also lift oil prices, although high inventories may weigh near-term. Low rates support gold, but expected to underperform other commodities. Wheat supply outage largely priced in; positive long-term outlook for agriculture.
Source: Credit Suisse Investment Strategy & Advisory
The Investment Landscape – September 2010
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GLOBAL ECONOMIC OUTLOOKReal GDP Growth
Source: Credit Suisse estimates
2010E 2011E Comments
Global 4.6% 4.3%Recovery projected to continue at somewhat slower pace. (Q3E 4.5% & Q4E 4.2%). Global PMI comfortably above 50 (Aug. 53.8) No double dip expected.
USA 2.7% 2.5%H2 growth momentum moderating. Recent dips in housing and retail sales mainly due to rescheduling of spending incentivized by stimulus measures.
Euro Area 1.7% 2.5%Q2 growth likely to have been strongest (3.9% q-o-q annualized). H2 growth projected to slow somewhat, yet growth to remain steady. Q3E 1.9%, Q4E 1.7%
UK 1.5% 2.5%Q2 GDP revised up driven by construction. Consumption buoyant in Q2. Improving labor market (falling unemployment claimant count since Feb '10) Q3E 1.1%
J apan 2.6% 0.8%Q2 GDP growth (0.4%) lower than expected driven by lower consumption and inventory restocking. Production expected to continue to slow. Q3E 1.3%
Non-J apan Asia
8.7% 7.6%India grew 8.8% in Q2, fastest in nearly 3 years on strong manufacturing and farm output. Chinese growth expected to be 9.7% for '10. High wages benefit consumption but also push up inflation.
EEMEA* 4.1% 4.5%Russian growth doubled in Q2 (1.5%) compared to Q1 due to improved domestic demand. Continuation of moderate recovery. 10E Russia 4.7%. Turkey 5.5%.
Latin America
5.7% 4.1%Brazil: signs of output growth slowdown evident; GDP growth to stabilize at close to potential growth rate. Argentina: growth forecast revised up for '10. 2010E Brazil 8.0%, Mexico 4.4%, Argentina 7.5%
* EEMEA = Emerging Europe, Middle East, Africa
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GLOBAL EQUITIES OUTLOOK
Source: Credit Suisse estimates
Weight (Local) Comments
USA OverPsychology, not fundamentals, continues to be main driver of market moves. Positive on large caps & high dividend yield - should help buffer some of the volatility.
Asia ex-J apan
OverConstructive on Korea given attractive valuation. China shows some slowing (prevents overheating) but data stronger than expected (good for domestic & global growth).
Latin America
NeutralIn Brazil recommend maintaining exposure to domestic sectors (airlines, retail) given outlook for positive, but modest, global growth. Stay defensive (telecoms) in Mexico.
UK NeutralRelatively high exposure to commodities/materials sector a positive, less constructive on domestic outlook. Region is high dividend yielding, valuation is not expensive.
J apan NeutralRegion treading water as global economy finds footing; see no obvious catalyst for J apan to outperform. Valuations most expensive of major global regions (2010 & '11).
Euro Area NeutralRecent bank woes not "new" news. Macro outlook improved overall, but still disparity between weak (Spain) & strong (Germany). Stronger euro headwind for exports.
EEMEA* UnderOil prices have been able to sustain $70+ level, positive for Russia, domestic outlook still strained. Cautious on South Africa given weak earnings outlook.
* Emerging Europe, Middle East, Africa
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Global Equities Snapshot (As of 08/31/10)
Source: I/B/E/S, Thomson Reuters Datastream, Bloomberg
Index
12 Mo. Relative % Change vs. MSCI AC World
Estimated 2010 Y-o-Y Engs Growth*
P/E (Current Price /
2010 Engs)* Sample ETFs
S&P 500 (USA) 1.4% 35.9% 12.7 SPY, IVV
MSCI Canada 5.4% 10.8% 15.7 EWC
MSCI Europe ex-UK -1.9% 34.1% 11.0 EZU, IEV, FEZ
MSCI UK 4.5% 39.3% 10.5 EWU
MSCI Japan -17.7% 77.9% 14.2 EWJ, ITF
MSCI Australia -3.3% 20.0% 12.0 EWA
MSCI China 5.8% 24.5% 13.3 GXC, FXI
MSCI Brazil 16.8% 27.3% 11.1 EWZ
MSCI India 14.3% 22.7% 17.7 PIN
MSCI Russia 19.3% 29.4% 6.4 RSX
MSCI All Country World 1.4% 35.9% 12.5 ACWI, VT
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EQUITY INDEX FORECASTS
Source: Credit Suisse estimates
Aug-10 End-10E
S&P 500 1,049 1,300 - 1,350
DJ EURO STOXX 251 290 - 300
FTSE 100 (UK) 5,225 6,000 - 6,200
NIKKEI 225 (Japan) 8,824 10,300 - 10,700
BOVESPA (Brazil) 65,145 77,000 - 80,000
BOLSA (Mexico) 31,680 35,000 - 37,000
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S&P 500 SECTOR OUTLOOK
Source: Credit Suisse estimates
Sector Weight Comment
Information Technology
OverConsumer behavior changing, mobile devices and multimedia technologies increasingly in trend; corporates upgrading hardware & software infrastructure.
Consumer Staples
OverCompanies owning internationally well known brand names have pricing power, emerging consumers offer immense pool for growth. Trading at a premium.
Financials NeutralBanks need to adapt business to new regulatory environment (eg closing proprietary trading), reducing income and earnings, though M&A activity helps.
Health Care NeutralValuation attractive, sector trades at relative discount, with increased visibility from healthcare reform gap should close. Govt's budget situation negative.
Industrials NeutralGood 2011 growth estimates despite slowing defense budget, as infrastructure investments continue favoring machinery, constr. & engine. companies.
Energy NeutralUpstream reinvestment efficiency low, profitability for downstream business remains muted though global demand growing. Valuation fair, solid growth.
Materials NeutralBase and precious metals mining companies continue to invest as demand grows; especially copper which faces low inventories and supply constraints.
Consumer Discretionary
NeutralWeak employment growth keeps discretionary income low, credit is tight and higher need for savings. Earnings growth muted though valuation fair.
Telecomm Svcs
UnderNetwork infrastructure and speed remains bottleneck for mobile devices; requires significant investments. New technologies threat to traditional services.
Utilities UnderLow earnings growth expectations and stretched valuation; high dividend yields offer alternative to low bond yields and shelter during market volatility.
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S&P 500 Sector Snapshot (As of 08/31/10)
Source: I/B/E/S, Thomson Reuters Datastream
Sector
12 Mo. Relative % Change vs.
S&P 500
Estimated 2010 Y-o-Y EPS Growth
P/E (Current Price /
2010 Engs)Sample Sector
ETFs
Consumer Discretionary 12.5% 44.1% 14.9 XLY, VCR
Consumer Staples 4.5% 7.2% 14.5 XLP, VDC
Energy -4.6% 51.7% 11.7 XLE, IYE
Financials -10.5% 202.1% 13.5 XLF, IYF, IYG
Health Care -4.5% 7.5% 11.2 XLV, IYH
Industrials 9.1% 21.8% 15.4 XLI, IYJ
Materials 2.6% 69.7% 15.8 XLB, IYM
Technology -0.7% 44.6% 13.0 XLK, IGM, IYW
Telecomm Services 4.1% 2.4% 16.0 IYZ, VOX
Utilities 2.6% 2.6% 12.5 XLU, IDU
S&P 500 2.8% 35.9% 12.5 SPY, IVV
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HEDGE FUND & PRIVATE EQUITY OUTLOOKThrough July, 2010 (most recent data available)
Source: Credit Suisse estimates
Hedge Fund Strategy Weight Comments
Event Driven OverPositive performance in J uly as both credit and equity markets rebounded. Both merger arb and distressed debt strategies should outperform due to healthy M&A activity and restructuring opportunities, respectively.
Convertible Arb OverIn J uly, lower grade names outperformed investment grade names and convertible bonds valuations improved on healthy trading volume. Fund of fund managers now more constructive on the strategy.
Global Macro OverJ uly markets driven by government actions and macro data. Short term tactical trading continues to drive returns as managers await further clarity in global economic outlook.
Fixed Income Arbitrage OverPositive returns in J uly. Search for yields drove spreads narrower. Opportunity set should remain expansive as managers can take advantage of anomalies created by quantitative easing.
Equity Long/Short UnderStrategy reversed losses from prior two months. Performance led by long side of portfolio due to global equity markets rally. High beta sectors and stocks outperformed lower beta counterparts due to return of risk appetite.
Private Equity NeutralFocus on small LBO funds, infrastructure funds, secondary market funds, emerging market, distressed real estate and clean tech venture capital.
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POLICY RATE OUTLOOKGovernment Policy Rates (%)
Source: Credit Suisse estimates
Aug-10 2010E Comments
USA 0-0.25 0.25Likelihood of Fed Funds rate hike is low as growth momentum slows in H2 '10. Further quantitative easing expected. No rate hike anticipated before 2012.
Euro Area 1.00 1.00ECB last meeting in line with expectations. Growth and inflation projections revised up. No rate change expected through year end.
UK 0.50 0.50No policy change (quantitative easing and policy rate) at least until Nov. '10 when BOE releases new inflation report.
J apan 0.10 0.10 BoJ remains in favor of status quo, likely to maintain zero rate policy longer term.
Canada 0.75 1.00Expectations for slower growth and lower inflation suggest pause after 25 bps rate hike in Sept.'10. Next BoC move pushed out to H2 '11.
Mexico 4.50 4.50Rate unchanged at last meeting. No rate change expected in 2010 and possibly 1H '11. Next rate move will be rate hike, not cut.
Brazil 10.75 10.75More benign inflationary outlook led to no rate hike at Sept meeting. Expect no rate changes through '10. Selic rate expected to be cut to 10% by end '11.
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INTEREST RATE OUTLOOK10-Yr Government Bond Yield
Source: Bloomberg, Credit Suisse estimates
Aug-10 2010E Comments
USA 2.47% 2.90% - 3.10%Faster than expect mortgage backed security prepayments triggered Fed to extend QE. Rates likely to stay lower for longer (no rate hike before '12).
Euro Area 2.13% 2.50% - 2.75%With further policy normalization by ECB, rates projected to trend higher.
UK 2.93% 3.25% - 3.50%In absence of BoE Gilt purchases and no rate hike, yield rise likely less pronounced.
J apan 0.97% 0.90% - 1.10%Yields could remain close to 1.0% in near term. Yields low, but stable.
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FIXED INCOME OUTLOOK
Source: Credit Suisse estimates
Weight Comments
US Investment Grade Corp.
OverCurrent spreads near middle of historical range. Expect tighter spreads year end, supported by low rate environment. Fundamentals remain positive. Pull-backs in spreads provide opportunities to add higher yielding credits.
US High Yield OverHY spreads 56 bps wider in Aug due to risk aversion. Default rates should decline as economic recovery continues. Corporate balance sheets healthy. Spreads should tighten further; suggest careful credit selection.
Emerging Markets OverExpect further tightening year end. Many EM countries in better fiscal condition than developed ones. Overweight Venezuela, Russia and Chile.
Treasury Inflation Protected (TIPS)
NeutralInflation currently low, but some inflation likely to emerge in longer run - in which case TIPS will outperform nominal bonds. TIPS should be part of FI portfolio for diversification and protection of long term purchasing power.
US Municipal NeutralRatios of muni yields vs Treasurys near or below historical averages. Extend duration to medium. Focus on high quality credits. Diversification and credit selection key. Tax-exempt bonds should be in high demand if tax rates rise.
Mortgage-Related NeutralFed's support for MBS market should cap basis widening. Spread volatility likely to continue, providing tactical trading opportunities.
US Treasuries NeutralFlight to safety pushed yields to historic low levels although could stay low for sometime. Stay on shorter end of the curve.
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FIXED INCOME OUTLOOKPreferred Maturities (In Years)
Source: Credit Suisse estimates
0 1 2 3 4 5 6
A/BBB
GBP AAA/AA
A/BBB
EUR AAA/AA
A/BBB
USD AAA/AA
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CURRENCY OUTLOOK
Source: Credit Suisse estimates
US Dollar Aug-10 2010E Comments
vs. Euro* 1.27 1.30 -1.35Euro weaker vs dollar in Aug due to risk aversion. Fed expected to remain on hold longer than ECB, pushing spreads in favor of euro. However, bouts of risk
aversion could boost dollar from time to time. Euro neutral.
vs. Japanese Yen
84.2 84 - 88Narrow rate spreads support yen. However yen unlikely to remain much below
83 due to valuation. Yen neutral.
vs. British Pound*
1.53 1.60 -1.65BoE likely to raise rates before Fed due to inflation risk. However, pound vulnerable to de-leveraging. Pound marginally bullish.
vs. Canadian Dollar
1.07 0.98 - 1.02C-dollar is the least overvalued among commodity currencies. However, it remains vulnerable to bouts of risk aversion. C-dollar marginally bullish.
vs. Mexican Peso
13.20 12.00 - 12.30Nearly balanced current account and capital inflows supportive of peso. Peso
outlook marginally bullish.
vs. Brazilian Real
1.76 1.65 - 1.75Robust growth and commodity outlook should translate into stronger real.
Strong carry appeal.
*indicates inverse exchange rate quotation
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CURRENCY FORECASTS
Source: Credit Suisse estimates
Aug -10 2010EINTEREST RATE DRIVEN CURRENCIES
Euro / US Dollar 1.27 1.30 -1.35=US Dollar / Japanese Yen 84.2 84 - 88
British Pound / US Dollar 1.53 1.60 -1.65
US Dollar / Swiss Franc 1.04 1.00 -1.04
US Dollar / Mexican Peso 13.20 12.00 - 12.30
COMMODITY CURRENCIESUS Dollar / Canadian Dollar 1.07 0.98 - 1.02
US Dollar / Brazilian Real 1.76 1.65 - 1.75
Australian Dollar / US Dollar 0.89 0.90 - 0.94
NZ Dollar / US Dollar 0.70 0.70 - 0.74
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COMMODITIES OUTLOOK
Source: Credit Suisse
Weight Comments
Base Metals
Over
Most base metals have traded sideways recently as economic data has disappointed. Demand continues to show healthy growth while inventories are falling. Copper remains preferred metal - consumption growth is outpacing supply expansion.
Energy Over
Profit taking pushed oil below $75, natural gas near $4 - both appear undervalued at these levels. Oil: global demand growth remains robust and spare production capacity is falling gradually. Natural gas: expect higher prices, with continued volatile.
Agriculture Neutral
Wheat supply outage largely priced in (+50% since J uly). Corn and soy prices may benefit as they can be used as substitutes, boosting demand. Healthy longer term outlook driven by structural shifts in EM & growing demand from food, fuel and feed.
Precious Metals
Under
Gold gets support from low rates, limiting downside, but likely to underperform as safe haven demand dries up. Platinum and palladium should perform well due to positive supply/demand fundamentals. Q4 typically weak for precious metals.
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COMMODITIES FORECASTS
Source: Thomson Reuters Datastream, Credit Suisse estimates
Aug-10 2010E
ENERGY
WTI Crude Oil (USD/ barrel) 71.9 85 - 95
US Natural Gas (USD/mmbtu) 3.79 5.00 - 5.50
PRECIOUS METALS (Spot, USD/ounce)Gold 1,247 1100 - 1200
Silver 18.9 18 - 19
Platinum 1,710 1800 - 1900
BASE METALS (Spot, USD/Pound)Aluminum 0.89 1.00 - 1.05Copper 3.36 3.80 - 4.00Zinc 0.80 0.85 - 0.90
Agriculture (USD/bushel)Wheat 6.18 6.0 - 7.0Corn 3.94 4.0 - 5.0
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