Credit Suisse has set out what it calls its top investment ideas for 2014 against a general stance that favours stocks in general, including a belief that European equities could perform relatively well in the next 12 months.

Credit Suisse has set out what it calls its top investment ideas for 2014 against a general stance that favours stocks in general, including a belief that European equities could perform relatively well in the next 12 months.

The Zurich-listed bank said five of its top ideas can be incorporated into the core portfolios of clients while two of them are more suited as “satellite ideas”.

The five “core” top ideas are “Europe’s recovery”; “Seeking equity alpha”; “Emerging markets”; “Fixed income in a world of rising yields" and “Forex as the Fed tapers”.

The “satellite ideas are “Cash-rich companies” and China reform re-accelerates”.

Europe’s recovery

The bank said the economy in Europe is slowly picking up pace and it expects earnings growth to accelerate in 2014. Another plus is that equities are relatively cheap compared with the US market; Credit Suisse in particular favours the Germany market. For higher-risk investors, European small and mid-cap stocks, cyclicals and selected banks at low valuations are attractive. For lower-risk investors, the bank recommends dividend-yielding stocks as they offer potentially lower risk with higher yields than fixed income markets.

Seeking equity alpha

Credit Suisse said that after a strong run for most stock markets (apart from some emerging market indices) in 2013, it expects further improvements in 2013.

Equities are the preferred asset class for 2014. 

“Investors should choose sectors, styles, countries and individual stocks based on prevailing market dynamics; our current favourites include cyclicals and momentum stocks from the IT, financials and capital goods sectors,” the bank said in a note.

Emerging markets reloaded

The bank said it expects that most emerging markets will benefit from a cyclical upswing, supported by export opportunities to the developed markets in 2014. “Emerging market trend growth rates remain above those of developed markets (albeit lower than before) and could further re-accelerate with structural reforms,” it said.

Credit Suisse argued, however, that deficits in some emerging market countries are still causing volatility and therefore investors should gain exposure to export-led, growth-sensitive countries, such as Taiwan, and also look for those where the potential for successful structural reforms is not yet fully discounted.

Fixed income in a world of rising yields

It will be a challenge, the bank said, to obtain reasonable returns on fixed income when duration is unattractive due to the risk of rising yields amid US Federal Reserve “tapering” and rising economic growth. “Investors should focus on short-duration assets in areas where value still exists, like corporate senior loans (usually held via a fund), bank subordinated debt, bank CoCos, corporate hybrids and distressed debt,” the bank said. (CoCos are contingent convertible bonds, where the convertibility of the security is dependent on a particular event or trigger.)

“While credit spreads on high yield and floating rate debt are near historic lows, limited amounts of such debt from strong issuers can be included in an overall portfolio. We believe investors should avoid currently overvalued assets such as bank senior debt,” Credit Suisse continued.

Forex as the Fed tapers

The bank said that as the Fed reduces its quantitative easing programme, the dollar will appreciate against other currencies, such as the Japanese yen, and trade at a stronger end of ranges against others, such as the euro. It says investors should position themselves accordingly to take advantage of such a move.

Cash-rich companies

Companies’ holdings of cash are near the highest levels for several years, Credit Suisse said, and that rising confidence among company bosses and shareholder pressure should encourage more mergers and acquisitions in 2014.

“Moderate risk-appetite investors should favour companies with strong free cash-flow and the ability to buy back shares. Investors with higher risk-appetite should focus on companies that are the potential targets of industry consolidation or which will benefit from asset disposals through restructurings,” the bank said.

China reform re-accelerates

The bank noted that the recent package of reforms announced by the Chinese ruling Communist Party gave a clear direction for structural reforms, pointing the way towards rising growth.

Credit Suisse said investors should gain exposure to global, regional and domestic firms that can benefit from China’s structural reforms with a focus on private companies, services sectors and winners from economic re-balancing toward consumption.