Equity Strategy -- Trip notes from America:: Credit Suisse

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Global Equity Strategy ----------------------------------------------------------------------------------------
Trip notes from America


● Little visibility: An appropriate title of our trip notes might have
been ‘waiting for something to happen’. Clients had very little
visibility on the three key issues: the end game in Europe, the
degree of overheating in China, the withdrawal of QE 2.
● Asset allocation: There was a strong consensus call for a pullback
in the equity market on this uncertainty. Yet, nearly everyone
wanted to buy on dips suggesting a limited pull-back. Clients were
also confused about how much of a growth slowdown is occurring.
● Consensus longs: Oil (OFS within that), tobacco and software
stood out. Thematic consensus longs were the GEM/NJA
consumer, rising food prices and water. Consensus shorts: Food
producers/food retailing, energy utilities in Europe, UK REITs,
companies competing against China (the list varies) and the USD.
● Few questions on banks, insurers and Japan: We almost had
no questions on banks (investors seem to accept that long-term
RoTE will revert to their pre-1990 trend), insurers and Japan (this
is very unusual and usually a good sign).
Clients had little visibility on three key issues
An appropriate title of our trip notes might have been ‘waiting for
something to happen’. Clients had very little visibility on the three key
issues: the end game in Europe, the degree of overheating in China,
the withdrawal of QE 2.
Asset allocation
There was a strong consensus call for a pull-back in the equity market,
given uncertainty about the issues mentioned above. Yet, nearly
everyone wanted to buy on dips (suggesting the pull-back will
probably be limited). There were big concerns on margins, which are
at record high in the US, owing to accelerating GEM wage growth,
high commodity prices and strong capex growth.
Macro issues
Clients were confused about how much of a growth slowdown is
actually occurring. Most macro funds felt this is part of the normal
business cycle, while bottom-up funds were concerned that the
peaking in US lead indicators at a time when US GDP is just 1.7%
shows that growth will continue to be anaemic. Inflation was a
dominant issue: nearly everyone believed that inflation is on the rise –
and investors were, consequently, on the look-out for inflation hedges.
There was huge uncertainty over the degree of overheating in
emerging markets, and particularly in China. The lack of quality data
and uncertainty over China’s degree of overheating, we believe, will
make the market particularly vulnerable to changes in the news-flow
from China. Investors thought the end game in China was clear (a
property bust and IRRs falling below interest rates, owing to
overinvestment), while the timing of this end game was very unclear.
Half of US clients expected the euro to break up at some point. On the
whole, investors seem quite relaxed about the end of QE 2.
Consensus longs
Oil (OFS within that), tobacco and software stood out. Thematic
consensus longs were the GEM/NJA consumer, rising food prices and
water. Style consensus longs were high dividend yield (yield being a
hedge against both uncertainty and inflation) and big cap. Regionally,
the consensus was clearly to be long the US.
Consensus shorts
Food producers/food retailing, energy utilities in Europe, UK REITs,
companies competing against China (though the list varies) and the
dollar.
There were very mixed views on mining, telecoms (value vs value trap)
and drugs as well as emerging markets as an asset class (top-down
funds were short of India, bottom-up were long).
Virtually no questions
We almost had no questions on banks (investors seem to accept that
long-term RoTE will revert to their pre-1990 trend), insurers and Japan
(this is very unusual and usually a good sign).