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● We published our central forecasts for the new year in our twopart
2011 outlook. We project global growth of around 4.5%, are
overweight equities (with a mid-year target of 1,350 on the S&P
500) and underweight bonds, expect peripheral Europe to muddle
through and maintain our benchmark on cyclicals.
● Here we look at the risks to our central scenario. Among the
surprises that could occur in 2011 we look at the following: (1)
GDP growth in the US of 5% in 1H 2011E and a strengthening
dollar; (2) US house prices rise in 2011E; (3) US bond yields rise
to 5% in 2011E; (4) Chinese growth accelerates; (5) The S&P 500
reaches 1,600;(6) There is a default in peripheral Europe; (7) Gold
rises to US$2,000/oz; (8) Autos are the best-performing sector for
the second year in a row; (9) Defensives outperform in spite of a
rise in equities; (10) Banks outperform by more than 10% in
2011E; and (11) Food prices continue to rise sharply.
(1) GDP growth in the US of 5% in 1H 2011E and a strengthening
dollar. Our central case scenario remains a weakening of the
dollar in 2011 and our FX team targets €/$1.46 by year-end,
while we believe that the Euro will be trading in a range of
€/$1.20–1.40.
(2) US house prices go up. We believe that the consensus is very
bearish on US housing and very few investors expect house
prices to rise this year. Our US homebuilding team believes that
the average expectation is for a 5% decline in prices this year
(the team forecasts an 8% decline). Consensus Economics
forecasts US housing starts in 2011 at 680,000, above the
current level of 560K but still 20% below the historical trough
point prior to the current crisis.
(3) The US 10-year bond yield hits 5%. We believe that the US 10-
year bond yields have limited upside potential from here (our US
interest rate team targets 3.5% year-end) and we would upgrade
bonds should yields rise to the 3.75–4% range (see our recent
note, Rising bond yields: how much of a threat?, dated 7
January).
(4) China’s monetary policy remains loose and growth accelerates.
Inflation expectations in China have risen close to an all-time
high and lead indicators have rolled over slightly (yet PMIs are
still consistent with nearly 10% GDP growth).
(5) A sovereign default in Europe. We still believe there will be no
debt restructuring this year in peripheral Europe (although we
expect that Greece and Ireland will eventually need debt
restructuring)—and that, critically, Spain’s fiscal arithmetic is
(just) sustainable unless the 10-year bono yield rises above 6.5%.
(6) Equities end up at 1,600 on the S&P 500. Our central case
scenario is that equities will rise until mid-year (we target 1,350
on the S&P) and will move sideways in the second half of the
year for the reasons we highlighted on our recent report 2011
Outlook: Asset allocation and regions, dated 8 December 2010.
However, we assign a 25% probability to the S&P surging to
1,600 or above.
(7) Gold goes to US$2,000. We are overweight gold and have a target
of US$1,500/oz, but would not be surprised if the gold price were to
rise to US$2,000.
(8) Autos are the best performing sector, again. We are overweight
the auto sector, but are aware of investor concerns about how
well the sector performed in 2010. Auto was the third-best
performing global sector, the second-best European sector and
the best US sector.
(9) Defensives outperform in 2011. Despite a positive economic
growth and market surprise, we think defensives could
outperform because: (a) It is possible to have defensives-led bull
markets; (b) Cyclicals already look expensive. (c) There is a
record gap between bond yields and the price relative of cyclicals,
indicating that cyclicals have discounted a lot of the improvement
in economic performance. (d) The price relative of cyclicals
against defensives has just returned to previous peak and the
price relative against the market is now way above its
(exponential) trend line. (e) There is little scope for further margin
improvements of cyclicals, given that margins in both absolute
and relative terms are at previous peaks. This is particularly
worrisome given that input cost pressures start to be seen in
some cyclicals. (f) Cyclicals are over-owned if we look at either
investor positioning or consensus analyst recommendations.
(10) Banks outperform by more than 10% in 2011E. We find that
investors in general are very afraid of banks. However, we think
banks could outperform if: (a) European CDS spreads fall. (b)
Their RoTE end up rising to the levels forecast by our analysts.
(c) The macro environment continues to develop in a way that
supports banks. (d) Loan growth picks up, as suggested by
lending surveys. (e) The regulatory and legal concerns die down.
(11) Food prices rise another 20%. Credit Suisse’s commodities team, led
by Ed Morse, forecasts a rise of around 5% in the main agricultural
prices in 2011. This is up to 22% (sugar) above the relevant futures
prices.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
● We published our central forecasts for the new year in our twopart
2011 outlook. We project global growth of around 4.5%, are
overweight equities (with a mid-year target of 1,350 on the S&P
500) and underweight bonds, expect peripheral Europe to muddle
through and maintain our benchmark on cyclicals.
● Here we look at the risks to our central scenario. Among the
surprises that could occur in 2011 we look at the following: (1)
GDP growth in the US of 5% in 1H 2011E and a strengthening
dollar; (2) US house prices rise in 2011E; (3) US bond yields rise
to 5% in 2011E; (4) Chinese growth accelerates; (5) The S&P 500
reaches 1,600;(6) There is a default in peripheral Europe; (7) Gold
rises to US$2,000/oz; (8) Autos are the best-performing sector for
the second year in a row; (9) Defensives outperform in spite of a
rise in equities; (10) Banks outperform by more than 10% in
2011E; and (11) Food prices continue to rise sharply.
(1) GDP growth in the US of 5% in 1H 2011E and a strengthening
dollar. Our central case scenario remains a weakening of the
dollar in 2011 and our FX team targets €/$1.46 by year-end,
while we believe that the Euro will be trading in a range of
€/$1.20–1.40.
(2) US house prices go up. We believe that the consensus is very
bearish on US housing and very few investors expect house
prices to rise this year. Our US homebuilding team believes that
the average expectation is for a 5% decline in prices this year
(the team forecasts an 8% decline). Consensus Economics
forecasts US housing starts in 2011 at 680,000, above the
current level of 560K but still 20% below the historical trough
point prior to the current crisis.
(3) The US 10-year bond yield hits 5%. We believe that the US 10-
year bond yields have limited upside potential from here (our US
interest rate team targets 3.5% year-end) and we would upgrade
bonds should yields rise to the 3.75–4% range (see our recent
note, Rising bond yields: how much of a threat?, dated 7
January).
(4) China’s monetary policy remains loose and growth accelerates.
Inflation expectations in China have risen close to an all-time
high and lead indicators have rolled over slightly (yet PMIs are
still consistent with nearly 10% GDP growth).
(5) A sovereign default in Europe. We still believe there will be no
debt restructuring this year in peripheral Europe (although we
expect that Greece and Ireland will eventually need debt
restructuring)—and that, critically, Spain’s fiscal arithmetic is
(just) sustainable unless the 10-year bono yield rises above 6.5%.
(6) Equities end up at 1,600 on the S&P 500. Our central case
scenario is that equities will rise until mid-year (we target 1,350
on the S&P) and will move sideways in the second half of the
year for the reasons we highlighted on our recent report 2011
Outlook: Asset allocation and regions, dated 8 December 2010.
However, we assign a 25% probability to the S&P surging to
1,600 or above.
(7) Gold goes to US$2,000. We are overweight gold and have a target
of US$1,500/oz, but would not be surprised if the gold price were to
rise to US$2,000.
(8) Autos are the best performing sector, again. We are overweight
the auto sector, but are aware of investor concerns about how
well the sector performed in 2010. Auto was the third-best
performing global sector, the second-best European sector and
the best US sector.
(9) Defensives outperform in 2011. Despite a positive economic
growth and market surprise, we think defensives could
outperform because: (a) It is possible to have defensives-led bull
markets; (b) Cyclicals already look expensive. (c) There is a
record gap between bond yields and the price relative of cyclicals,
indicating that cyclicals have discounted a lot of the improvement
in economic performance. (d) The price relative of cyclicals
against defensives has just returned to previous peak and the
price relative against the market is now way above its
(exponential) trend line. (e) There is little scope for further margin
improvements of cyclicals, given that margins in both absolute
and relative terms are at previous peaks. This is particularly
worrisome given that input cost pressures start to be seen in
some cyclicals. (f) Cyclicals are over-owned if we look at either
investor positioning or consensus analyst recommendations.
(10) Banks outperform by more than 10% in 2011E. We find that
investors in general are very afraid of banks. However, we think
banks could outperform if: (a) European CDS spreads fall. (b)
Their RoTE end up rising to the levels forecast by our analysts.
(c) The macro environment continues to develop in a way that
supports banks. (d) Loan growth picks up, as suggested by
lending surveys. (e) The regulatory and legal concerns die down.
(11) Food prices rise another 20%. Credit Suisse’s commodities team, led
by Ed Morse, forecasts a rise of around 5% in the main agricultural
prices in 2011. This is up to 22% (sugar) above the relevant futures
prices.
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