With the US Federal Reserve raising interest rates for the first time in nearly a decade last Wednesday and expectations that it will continue to do so over the course of 2016, Credit Suisse Private Bank is advising its clients to turn cautious on fixed income and buy equities instead.
“The days of expecting capital appreciation in fixed income are probably behind us,” Woods said.
The bank has an underweight call on fixed income. In the credit space, Woods said he expects total returns to be a modest 2-3% next year.
However, the private bank is recommending that its clients buy equities, particularly in Europe.
"The days of expecting capital appreciation in fixed income are probably behind us"
“Equities are our preferred asset class,” Woods said. “Europe is by far our major call for the course of 2016 and by Europe, I mean core Europe and Switzerland.”
Better-than-expected earnings for European companies will drive strong price appreciation. Within core Europe, healthcare, consumer and IT stocks are preferred, and within Swiss equities, mid-cap stocks that are attractively valued.
Emerging markets get a neutral, though equities in Asia ex-Japan could outperform other emerging markets in 2016 due to low valuations.
“Until a couple of months ago, valuations in Asia were at levels we’d only seen a handful of times over the last 20 years,” he added.
Big upside in H-shares?
He said that valuations in the region have started to normalise, but only selected markets offer value.
For example, low valuations in Taiwan make it one of the cheapest equity markets in the region. However, Southeast Asian equities are facing earnings headwinds from low commodity prices and weak exports, and therefore are likely to underperform.
Hong Kong has strong potential upside. With the Hang Seng Index trading at 10.4 times 12-month forward price-to-earnings, the bank sees this as a buying opportunity. In particular, Woods likes Hong Kong’s H-share market (Hong Kong-listed mainland companies).
“We expect the H-share market to post something in the region of 20% upside over the course of next year.”
The positive view on the H-share market is underpinned by expectations that China’s fiscal stimulus measures will help boost the economy, the services sector will continue to grow and a moderately weaker renminbi will support competitiveness.
Woods said his expectations for China’s GDP growth is at 7% in 2016, above the consensus 6.5%.
