PB Americas
The Investment Landscape – August 2010
Private Banking AmericasInvestment Strategy & Advisory Group
The Investment Landscape
August 2010
The Investment Landscape – August 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.
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©2010 Credit Suisse Securities (USA) LLC. All rights reserved.
The Investment Landscape – August 2010
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Table of Contents
Executive Summary
Guideline Allocations
Market/Strategy Summary
Key Focus:
– Credit
– Earnings
Global Markets Recap
Market and Economic Outlook
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Executive Summary
The Investment Landscape – August 2010
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Executive Summary
PB Americas
The Investment Landscape – August 2010
Guideline Allocations & Tactical Overweights
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Guideline Allocations
Source: Credit Suisse Investment Strategy & Advisory
Asset Class 1 2 3 4 5 Focus
US Large Cap 8% 16% 20% 23% 23%Quality Growth, High Div, Technology, Consumer Staples
US Sm/Mid Cap 2% 4% 4% 4% 4%
Non-US Developed 5% 8% 9% 12% 15%Germany, Scandinavia, Canada, Asia Pacific ex-Japan
Emerging Markets 6% 8% 10% 14% Asia (China, Korea), Brazil, Peru
Fixed Income 40% 33% 21% 10% 2%Shorter Maturities, Credit Selection Important
Short-term, FX 45% 14% 8% 5%USD neutral, constructive on EM and commodity-related
Private Equity 6% 10% 14% 17%Sm/Mid LBOs, Infrastructure, Secondary, EM, Clean Tech
Hedge Funds 8% 13% 14% 15%Event Driven, Global Macro, Convertible Arb
Commodities 5% 7% 8% 10% Oil & Base Metals
Projected Volatility 0-4 4-7 7-9 9-11 11+
Volatility Budget
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Market / Strategy Summary
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– Data point to decelerating, positive growth after strong rebound Growth momentum to slow somewhat, markets to focus on extent of growth moderation Deficit reductions to have small growth impact, help limit rise in gov’t bond yields US consumer remains tentative amid uncertain jobs outlook, recovery to be slow
– Equity: neutral near-term (weak sentiment), positive long-term (valuations) Investors cautious; valuations, fundamentals and cash support long term upside Favor quality growth and high dividend, themes: emerging consumer, infrastructure Overweight US, Asia ex-Japan (+ China & Korea, India: cautious) and Brazil
– US Treasuries supported by weak sentiment, low inflation expectations Rates likely stay low for longer, yields to rise only gradually (10Yr near 3.0% end-10) Credit spreads may tighten further (stretch for yield amid low rates); credit selection key
– Dovish Fed, lower US yields removes some dollar support – USD neutral Bearish euro sentiment has likely peaked, but still little support given regional concerns UK inflation likely pushes BOE to hike rates before Fed, giving support to pound
– Commodities: expect cyclical sectors (oil & base metals) to outperform Gold supported near term (low rates, weaker USD), longer term underperform Agriculture (wheat) prices jump on supply crunch; strong demand = long term upside
Market/Strategy Summary – August 2010
Source: Credit Suisse Investment Strategy & Advisory
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Global Purchasing Managers Index (Above 50 = Expansion) Indicators point to decelerating, positive growth after rebound
Source: Bloomberg, Credit Suisse IDC
35
40
45
50
55
60
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
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US GDP Component Contribution (with Real GDP growth Q/Q) Q2: Investment +2.1%, Consumer +1.2%, Net Exports -2.9%
Source: Thomson Reuters Datastream
(2.4%)(3.7%)
(5.0%)
(1.6%)(-0.7%)(-4.9%)
(-6.8%)(-4.0%)
(0.6%)
(-0.7%)
(2.9%)
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10
Inventories Consumer Gov't Spending Net Exports Investment
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July price change in local currency All major equity indices gained in July led by Brazil and China
Source: Thomson Reuters Datastream
6.9%
6.9%
6.7%
6.2%
4.5%
3.7%
3.7%
3.6%
10.8%
10.0%
0.9%
1.6%
Bovespa (Brazil)
Shanghai SE Comp (China)
FTSE 100 (UK)
S&P 500 (USA)
MICEX (Russia)
DJ Euro Stoxx (Euro Area)
Hang Seng (Hong Kong)
S&P TSX Comp (Toronto)
Bolsa (Mexico)
Kospi (S Korea)
Nikkei 225 (Japan)
BSE Sensex (India)
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MSCI World Forward P/E Valuations attractive at current market levels
Source: Thomson Reuters Datastream
5
10
15
20
25
Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10
Avg: 17
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Market Expectations of Fed Rate Moves in next 12 months Investors have lowered expectations for fed hikes in next year
Source: Bloomberg
0
20
40
60
80
100
120
140
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10
19 bps
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10Yr Treasury Yield less 10 Yr Treasury Inflation-linked Yield
(TIPS implied) inflation expectations lower, above crisis lows
Source: Thomson Reuters Datastream
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10
1.79%
0.05%
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US 2Yr Yield Premium and EUR/USD Exchange RateYield spread has turned in favor of euro (2Yr +24 bps vs US)
Source: Thomson Reuters Datastream
-250
-200
-150
-100
-50
0
50
100
150
200
250
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
US 2Y Yield Premium EUR/USD (Inverse, Rt Axis)
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DJUBS Commodity Index and US Industrial ProductionCommodity prices have lagged upturn in industrial production
Source: Bloomberg
100
120
140
160
180
200
220
240
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
-15
-10
-5
0
5
10
DJ UBS Commodity Index US Industrial Production (Y-o-Y) Rt Axis
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Dashboard 2010Key Focus: Credit
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Credit Lending to small businesses showing slow improvement Corporate borrowing costs (bond yields) at historic lows TED spread points to lower levels of perceived credit risk US consumers continue to reduce debt levels Credit issues in peripheral Europe have eased, remain contained
Consumer Jobs growth needed to sustain US incomes and spending
China China’s inflation contained as growth moderates at high levels
Commodities Precious metals brief outperformance reversed as oil & base metals
gain
Cash Investor cash remains elevated, fuel for an equity rally Cash on corporate balance sheets at record levels, may be deployed
Dashboard 2010 - Key Focus: Credit
Source: Credit Suisse Investment Strategy & Advisory
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0
2
4
6
8
10
12
14
16
18
Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10
% of small businesses reporting credit harder to get vs 3 months ago Lending to small businesses showing slow improvement
Source: Thomson Reuters Datastream via Credit Suisse IDC
2010 Dashboard: Credit
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3
4
5
6
7
8
9
Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10
LUCI Index A-Rated Corporate Bond Yield in % Corporate borrowing costs (yields) at historic lows
Source: Credit Suisse LUCI Workbench
2010 Dashboard: Credit
Click to Print / View PowerPoint
Avg: 5.5%
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TED Spread (US 3Mo Treasury less 3 Mo LIBOR) TED spread points to lower levels of perceived credit risk
Source: Thomson Reuters Datastream
2010 Dashboard: Credit
Click to Print / View PowerPoint
0
50
100
150
200
250
300
350
400
450
500
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10
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1800
1900
2000
2100
2200
2300
2400
2500
2600
Jun-02 Jun-04 Jun-06 Jun-08 Jun-10*
US Consumer Credit Outstanding (USD Bln) US consumers continue to reduce debt levels
Source: Thomson Reuters Datastream
2010 Dashboard: Credit
Click to Print / View PowerPoint
-6.3%
* Latest data available
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Sovereign CDS Spreads (cost of insuring against default) Credit issues in peripheral Europe have eased; remain contained
Source: Thomson Reuters Datastream
2010 Dashboard: Credit
Click to Print / View PowerPoint
0
200
400
600
800
1000
1200
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10
Greece Portugal Spain
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US Personal Income Y-o-Y % ChangeJob growth is needed to support US incomes and spending
Source: Bloomberg
2010 Dashboard: Consumer
-4
-2
0
2
4
6
8
10
Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10*
*Latest data available
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China CPI Inflation and Industrial Production (Y-o-Y % Change)China’s inflation contained as growth moderates at high levels
Source: Thomson Reuters Datastream, Bloomberg
2010 Dashboard: China
-3
0
3
6
9
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
0
5
10
15
20
25
CPI Y-o-Y Industrial Production Y-o-Y (Rt Axis)
*Latest data available
*
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2010 YTD Price Changed (Indexed to 1.0 at 12/31/09) Precious metals May/June outperformance has reversed
Source: Bloomberg
2010 Dashboard: Commodities
0.8
0.9
1.0
1.1
1.2
Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10
Crude Oil DJ UBS Base Metals DJ UBS Precious Metals
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US Money Market Mutual Fund Assets in $ TrillionInvestor cash remains elevated, fuel for an equity rally
Source: Datastream, ICI
2010 Dashboard: Cash
$2.8T
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10*
*Latest data available
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S&P 500 Co. Cash & Equivalents ($ 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*
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The Investment Landscape – August 2010
Key Focus: Earnings
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All major global regions expected to post positive year-over-year earnings growth for 2010 and 2011
Rising US earnings expectations push 2010 EPS forecast to $83 (+36% vs 2009) up from $77 in January– Seven of ten S&P 500 sectors have seen 2010 earnings upgrades since Q2 reports
began, led by utilities (+3.6%), industrials (+3.4%), energy and discretionary (+3.3%)
– 2010 forecast cuts for staples, materials and telecomm– Q2 earnings growth now forecast +36% (vs 26% on Jun.30) as earnings reports
surprise to upside at high rate (77%); 63% of companies beat sales forecasts
Asia ex-Japan 2010 earnings growth now expected at +37% (up from 29% in January), following a strong 2009 (+17%)
Europe (DJ Euro Stoxx) earnings growth expectations have remained relatively flat at about 33% vs 2009 drop of 28%
Key Focus: Earnings
Source: Credit Suisse Investment Strategy & Advisory
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Global Earnings Snapshot: Projected EPS Growth 2010 & 2011
Source: Credit Suisse, Thomson Reuters Datastream, I/B/E/S
KEY FOCUS: EARNINGS
Market/Region 2010E 2011EJ apan 74.8% 21.0%Emerging Asia 40.6% 12.8%UK 36.4% 18.9%S&P 500 36.3% 14.6%Switzerland 34.4% 12.5%Continental Europe 30.7% 18.8%Latin America 26.5% 23.5%Middle East/Africa 24.7% 26.2%Emerging Europe 22.9% 26.7%Canada 16.1% 21.4%Pacific ex-J apan 16.0% 17.8%
MSCI AC World 34.3% 17.7%
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S&P 500 2010 EPS Forecast 2010 earnings expectations +8.4% since January
Source: Credit Suisse Quantitative Research, IBES
EPS: Consensus Earnings Per Share
KEY FOCUS: EARNINGS
$76.7$78.2
$80.9$82.0 $81.6
$82.6 $83.1
Jan-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Aug-9
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% Change in 2010 EPS Estimate 6/30/10 to 8/9/10 2010E EPS +2% since June 30, upward revisions broad based
Source: Credit Suisse Quantitative Research
KEY FOCUS: EARNINGS
-1.5%
-0.9%
-0.1%
1.1%
1.9%
2.6%
3.3%
3.3%
3.4%
3.6%
1.9%
Telecomm Services
Materials
Consumer Staples
Health Care
Financials
Information Technology
Consumer Discretionary
Energy
Industrials
Utilities
S&P 500
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S&P 500 Sector EPS Forecasts 2010 & 2011 (Y-o-Y % Growth) Growth expected for all sectors in 2010 & 2011
Source: I/B/E/S
KEY FOCUS: EARNINGS
Sector 2010 2011
Consumer Discretionary 63.5% 14.3%
Consumer Staples 5.4% 10.6%
Energy 52.3% 14.7%
Financials 141.6% 28.3%
Health Care 9.0% 6.3%
Industrials 23.7% 16.6%
Information Technology 41.5% 10.9%
Materials 81.7% 28.9%
Telecomm Services 2.9% 13.5%
Utilities 3.6% 3.1%
S&P 500 36.3% 14.6%
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S&P 500 Q2 2010 EPS Forecast (% change from previous year) Q2 earnings expectations rose 500 bps in July (peak of reports)
Source: Credit Suisse Quantitative Research, IBES
KEY FOCUS: EARNINGS
20.9% 21.8%
24.4%26.4% 25.5%
33.1%
35.9%
Jan-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Aug-9
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Q2-10 S&P 500 Sales & Earnings Reports vs Expectations Q2 earnings and sales reports above expectations
Source: Bloomberg
KEY FOCUS: EARNINGS
Above Match Below
Earnings 77% 8% 15%
Sales 63% 0% 37%
89% of companies have reported as of Aug 9
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S&P 500 EPS Forecasts & Valuations Consensus EPS of $83.13 supports higher market levels
Source: Credit Suisse Quantitative Research, IBES
EPS: Consensus Earnings Per Share
KEY FOCUS: EARNINGS
2010E +10% -10%EPS 83.13$ 91.44$ 74.82$
16x 1330 1463 119717x 1413 1555 127218x 1496 1646 1347
PE
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MSCI Asia ex-Japan 2010 EPS Growth Estimate (Y-o-Y) Asia ex-Japan should see another strong year of growth
Source: IBES
KEY FOCUS: EARNINGS
2009E: +17%
28.6%29.9% 30.3%
33.0%
36.7% 37.2% 37.2% 37.3%
Jan-1 Feb-1 Apr-1 May-1 Jun-1 Aug-1 Aug-9 Aug-16
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DJ Euro Stoxx Earnings Growth Forecast (Y-o-Y) DJ Euro Stoxx growth to improve in 2010 after weak 2009
Source: IBES
KEY FOCUS: EARNINGS
2009E: -28%
32.2% 32.9% 32.3%
25.0%
27.2%29.1%
32.2% 32.3%33.2%
Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Aug-9
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Global Markets Recap
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Global Markets Recap Equities
After a difficult first half equity markets posted a broad based rally in July; all major global regions and sectors gained. A strong start to Q2 earnings season propelled US markets - S&P 500 +7% in July, near break even for the year. Brazil (+10.8%) and China (+10.0%) led July’s gains, both join most markets in negative territory YTD.
July saw reversal from H1 sector trends as cyclical sectors (industrials, basic materials) outperformed defensive sectors (health care, staples). YTD, industrials and consumer discretionary are top performers while sectors with regulatory overhang (health care, energy) lag.
Little size and style differentiation in the US in July – all categories rose about 7%. YTD small cap has outperformed large, value over growth.
Currency The dollar weakened against all major currencies in July as US rate
advantaged faded. USD lost 6% vs euro after gaining 17% in H1.
Source: Credit Suisse Investment Strategy & Advisory
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Global Markets Recap Interest Rates & Fixed Income
US Treasury yields moved lower as inflation and rate hike expectations fell. US 10Yr Treasury ended July at 2.91%, 2Yr at 0.56%. 10Yr gov’t yields rose in euro area (to 2.8%) and UK (to 3.4%).
Longer dated fixed income indices outperforming in 2010 as rates fall - US Treasury long term index +13%. Credit has also performed well due to lower rates, spreads mostly wider YTD. Yields on US tax-exempt bonds above Treasurys at longer dated maturities.
Commodities Precious metal prices suffered in July as safe haven demand dried up
(gold -5.5%, silver -5.8%) while all other segments gained. Oil +4.4% to $79, copper +12.6% to $3.31, wheat +25% on supply concerns.
Volatility As equity markets rallied the Volatility Index (VIX) fell and ended July
at a 3 month low at 23.5.
Source: Credit Suisse Investment Strategy & Advisory
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GLOBAL MARKETSTotal Return Through 07/30/10
Source: Thomson Reuters DataStream
Level Jul-10 YTD
EQUITIES (TR)S&P 500 1,102 7.0% -0.1%
MSCI EAFE (Local) 747 4.7% -2.7%
MSCI EM (Local) 43,195 6.2% 1.8%
US DOLLARVS. EURO 1.30 -6.0% 10.1%
VS. YEN 86.66 -2.1% -6.9%
COMMODITIESOIL ($ / barrel) 78.95 4.4% -0.5%
GOLD ($ / ounce) 1,175.47 -5.5% 7.3%
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GLOBAL EQUITY MARKETS YTD Price change in local currency (YTD through 7/30/10)
Source: Thomson Reuters Datastream
-4.8%
-3.9%
-2.9%
-1.6%
-1.2%
-0.3%
0.6%
2.0%
2.3%
4.5%
-19.5%
-9.6%
Shanghai SE Comp (China)
Nikkei 225 (Japan)
DJ Euro Stoxx (Euro Area)
Hang Seng (Hong Kong)
FTSE 100 (UK)
Bovespa (Brazil)
S&P 500 (USA)
S&P TSX Comp (Toronto)
Bolsa (Mexico)
MICEX (Russia)
BSE Sensex (India)
Kospi (S Korea)
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GLOBAL SECTORS (S&P 1200 Global)Price change in USD (YTD Through 07/30/10)
Source: Thomson Reuters Datastream
Sector Jul-10 YTD
Industrials 9.5% 4.4%Consumer Discretionary 8.3% 2.2%Consumer Staples 5.9% 0.0%Telecomm Services 9.5% -3.3%Financials 11.7% -3.4%Information Technology 7.2% -3.8%Basic Materials 9.7% -6.3%Utilities 8.3% -9.1%Health Care 1.2% -9.9%Energy 9.4% -10.4%
S&P Global 1200 8.3% -3.7%
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US EQUITY RETURNS (Size & Style)Total Return Through 07/30/10
Source: Thomson Reuters Datastream, Bloomberg
Jul-10 YTD
Russell 1000 (Lg Cap) 7.0% 0.1%
Russell 1000 Value 6.8% 1.3%
Russell 1000 Growth 7.1% -1.0%
Russell 2000 (Sm Cap) 6.9% 4.8%
Russell 2000 Value 7.1% 5.4%
Russell 2000 Growth 6.6% 4.2%
DJIA 7.2% 1.9%
NASDAQ 7.0% -2.8%
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US SECTORS (S&P 500)Price Change Through 07/30/10
Source: Thomson Reuters Datastream
S&P Sector Jul-10 YTD
Industrials 10.3% 8.2%Consumer Discretionary 7.7% 5.3%Financials 6.6% 2.1%Consumer Staples 5.8% 1.3%Utilities 7.3% -2.5%Basic Materials 12.2% -3.1%Telecomm Services 7.9% -3.9%Information Technology 7.2% -4.6%Energy 8.0% -6.2%Health Care 1.3% -8.6%
S&P 500 6.9% -1.2%
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CURRENCY% Change As of 07/30/10
Source: Thomson Reuters Datastream
Level Jul-10 YTDMAJORS
USD vs. Euro 1.30 -6.0% 10.1%
USD vs. Japanese Yen 86.66 -2.1% -6.9%
USD vs. British Pound 1.57 -4.5% 3.1%
USD vs. Swiss Franc 1.05 -3.0% 1.2%
AMERICASUSD vs. Canadian Dollar 1.03 -3.1% -1.8%
USD vs. Mexican Peso 12.64 -1.9% -3.2%
USD vs. Brazilian Real 1.76 -2.4% 0.9%
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GLOBAL INTEREST RATES10Y Gov’t Bond Yield (12/31/09 & 07/30/10)
Source: Thomson Reuters Datastream
3.8
3.4
4.1
1.3
3.6
1.9
2.92.8
3.4
1.1
3.1
1.5
USA Euro area UK Japan Canada Switzerland
Dec-09 Jul-10
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US FIXED INCOME & RATESAs of 07/30/10
Source: Thomson Reuters Datastream
Level Jul-10 YTD
Barclays US Aggregate (TR) 105 1.62% 6.77%
US TREASURY
5 Yr Treasury Yield 1.59% -18 bps -109 bps
10 Yr Treasury Yield 2.91% -3 bps -93 bps
Yield Curve (10Y - 2Y) 236 bps 2 bps -34 bps
LENDING RATES
Fed Funds 0.25% Unch Unch
3 Mo LIBOR 0.45% -8 bps 20 bps
1 Yr LIBOR 1.04% -14 bps 5 bps
Prime 3.25% Unch Unch
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CREDITSpread to 10-Yr Treasury As of 07/30/10 (Basis Points)
Source: Thomson Reuters Datastream
Current Chg (Bps) Chg (Bps)Spread Jul-10 YTD
Barclays US Muni Bond 33 -14 55
Barclays US Inv Grade Corp 175 -18 30Barclays US High Yield 543 -79 21
Barclays Global Aggregate Credit 60 -19 33
Barclays Global High Yield 554 -78 -1
JPM Emerging Market Bond 313 -45 18
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US FIXED INCOME YTDTotal Return YTD through 7/30/10
Source: Bloomberg, Thomson Reuters Datastream
0.2%
4.4%
4.6%
4.6%
5.4%
5.6%
6.1%
7.0%
8.2%
10.5%
13.3%
14.5%
US Cash
US Agencies
US Inflation Linked (TIPS)
US Munis
US MBS
US Treasury Med
US ABS
US Inv. Grade Med
US High Yield
US Inv. Grade Long
US Treasury Long
US CMBS
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NON-US FIXED INCOME YTDTotal Return YTD through 7/30/10 (In Local Currency)
Source: Bloomberg, Thomson Reuters Datastream
2.6%
2.6%
3.4%
4.4%
4.9%
5.5%
9.7%
12.5%
Japan Government
Euro Govt InflationLinked
Europe Govt Med
Europe Govt Long
Euro Inv. Grade
UK Government
EM (USD)
Pan European HighYield
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COMMODITIES% Change As of 07/30/10 (Spot Price)
Source: Thomson Reuters Datastream
Level Jul-10 YTD
WTI Crude Oil ($/bbl) 78.95 4.4% -0.5%
Natural Gas (Henry Hub, $/MMBtu)
4.81 5.6% -17.1%
Gold ($/oz) 1,175 -5.5% 7.3%
Silver ($/oz) 17.66 -5.8% 3.9%
Platinum ($/oz) 1,734 -4.5% 6.3%
Copper ($/lb) 3.31 12.6% -0.6%
LME Metals Index 3,348 11.5% -1.5%
Corn ($/Bushel) 3.65 9.9% -2.9%
Wheat (Soft Red, $/Bushel)
5.94 24.6% 44.6%
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HEDGE FUNDS & PRIVATE EQUITY
Source: Dow Jones Credit Suisse Hedge Fund Index, Cambridge Associates, Thomson Reuters Datastream
Jun-10* YTD*
BEST PERFORMING HF STRATEGIES DJ CS Dedicated Short Bias 5.5% -2.8%
DJ CS Fixed Income Arbitrage 0.9% 5.5%
DJ CS Global Macro 0.6% 4.2%
WORST PERFORMING HF STRATEGIES DJ CS Long/Short Equity -2.1% -3.2%
DJ CS Event Driven -1.6% 1.8%
DJ CS Equity Market Neutral -1.0% -4.6%
Dow Jones/CS HF Index -0.8% 0.6%
S&P 500 Total Return -5.2% -6.7%
*June 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
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CBOE Volatility Index (VIX)
Source: Thomson Reuters Datastream
0
10
20
30
40
50
60
70
80
Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
PB Americas
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Looking Ahead – 2010Market & Economic Outlook
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Market & Economic Outlook Summary Global growth should continue at slower pace as stimulus wanes;
double dip unlikely. H2 2010 likely to see decelerating growth with slight growth drag from fiscal tightening offset by strong global trade activity. Asia will remain global driver as the US and Europe move along slow upward paths. Inflation muted, deflation unlikely given proactive policy responses.
Equity valuations attractive at current market levels. Positive earnings growth and strong corporate balance sheets supportive of long-term upside, weak sentiment may keep levels neutral near term. Focus on exporters, fiscal flexibility and natural resources (Germany, Scandinavia, Asia).
Overweight US, emerging Asia (Korea & China) and Brazil; underweight euro area and emerging Europe.
US: focus on quality growth and high dividend. Overweight technology (upgrade cycle, business investment) and consumer staples (valuation & cash flows, focus on strong brand names).
Source: Credit Suisse Investment Strategy & Advisory
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Market & Economic Outlook Summary US government bonds well supported by weak sentiment and low
inflation expectations, yields to rise only gradually. Expect US 10Yr Treasury yield near 3% end-10. Fed rate hike unlikely until 2012. ECB not expected to raise rates until 2011; BOE likely +50 bps in Q4 amid higher inflation.
Credit spreads may tighten further as investors reach for yield in low rate environment, higher beta and longer duration may see increased demand. We highlight importance of careful credit selection.
With Fed expected to remain on hold US has lost yield spread advantage vs euro. Bearish euro sentiment has likely peaked, but still little support given regional concerns. Positive near term outlook for AUD and CAD due to higher rates, strong growth and higher commodity prices. Global recovery supportive for EM currencies.
Cyclical commodity sectors (oil and base metals) expected to outperform as market focus turns to supply/demand fundamentals; safe haven demand for gold is drying up. Supply concerns drive near term agriculture gains; growing demand (fuel, food, feed) supportive of long term upside.
Source: Credit Suisse Investment Strategy & Advisory
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GLOBAL ECONOMIC OUTLOOKReal GDP Growth
Source: Credit Suisse estimates
2010E 2011E Comments
Global 4.6% 4.4%Global recovery expected to continue, yet at a slower pace (Q3E 4.6% & Q4E 4.2% q-o-q annualized). Double dip unlikely.
USA 3.0% 2.8%Somewhat slower growth momentum forecasted in H2 2010 as consumer spending and construction activity see declining growth rate. Q3E 2.5%
Euro Area 1.5% 2.5%Q3 & Q4 growth anticipated to be strongest period of 2010 as business investment picks up and consumption gradually accelerates. Q3E 3.9%
UK 1.5% 2.5%Growth levels projected to be maintained in H2 '10 with consumer spending at 2.0% in both quarters. Q3E 2.8%
J apan 2.9% 1.0%Slowdown in exports in H2 possible (from double digit levels). Consumer spending, investment to accelerate. Q3E 0.7%
Non-J apan Asia
8.6% 7.6%Chinese growth revised downwards to 9.7% from 10% as PMI data (J uly 51.2) suggests less momentum. Signs of moderation in India's industrial production also suggest moderation of strong growth. India '10E 8.3%
EEMEA* 4.0% 4.6%Growth expected to gain momentum in region through '11 (except Turkey). '10E: Russia 4.7%, Turkey 5.5%
Latin America
5.5% 4.1%Brazil: signs of slight deceleration apparent. Chile, Argentina and Panama saw ratings upgrade. 2010E Brazil 8.0%, Mexico 4.4%
* EEMEA = Emerging Europe, Middle East, Africa
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Healthy growth outlook led by emerging markets & US 2010 and 2011 Real GDP Growth Forecasts (Y-o-Y)
Source: Credit Suisse estimates
1.5% 1.5%
2.5%3.0% 2.9%
4.6%
8.6%
5.5%
1.0%
4.4% 4.1%
2.8%
7.6%
2.5%
Global Non-JapanAsia
LatinAmerica
US Japan Euro-15 UK
2010E
2011E
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GLOBAL EQUITIES OUTLOOK
Source: Credit Suisse estimates
Weight (Local) Comments
USA OverQ2 earnings reports continuing trend of beating estimates across sectors. Valuation points to higher levels. Sentiment weak, equities still under-owned by retail investors.
Asia ex-J apan
OverGrowth outlook in China remains intact, $2 trillion+ in reserves can buffer downside. China and Korea remain top picks, express caution on India given rich valuation.
Latin America
NeutralOverweight Brazil given domestic outlook. Consumption trends (demographics, use of credit) in Brazil look favorable - positive for select sectors (financials, real estate).
UK NeutralDefensive profile, dividend yield high - both positives should market uptick falter. Valuation cheap, but see no major catalyst for significant outperformance.
J apan NeutralGlobal growth outlook still improving, but modestly - if GDP trends sideways, J apan should follow. Wary of valuation which is richest of major global regions.
EEMEA* UnderMore positive on Russia as its post-crisis performance has lagged & oil prices are ranging higher, domestic outlook needs to improve further. Cautious on S. Africa.
Euro Area UnderMacro surprised to upside, need evidence of sustained trend before upgrading region. Continued strength in euro may impair exports. Highlight Germany as a positive.
* Emerging Europe, Middle East, Africa
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Global Equities Snapshot (As of 07/30/10)
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) 2.7% 36.3% 13.1 SPY, IVV
MSCI Canada -3.5% 16.1% 14.9 EWC
MSCI Europe ex-UK -2.5% 31.1% 11.4 EZU, IEV, FEZ
MSCI UK 4.9% 36.4% 10.6 EWU
MSCI Japan -19.2% 74.8% 14.9 EWJ, ITF
MSCI Australia -2.8% 7.6% 14.4 EWA
MSCI China -6.5% 23.9% 13.1 GXC, FXI
MSCI Brazil 15.5% 28.6% 11.0 EWZ
MSCI India 7.8% 23.7% 17.2 PIN
MSCI Russia 19.7% 27.6% 6.5 RSX
MSCI All Country World 8.9% 34.3% 12.7 ACWI, VT
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EQUITY INDEX FORECASTS
Source: Credit Suisse estimates
Jul-10 End-10E
S&P 500 1,102 1,300 - 1,350
DJ EURO STOXX 262 290 - 300
FTSE 100 (UK) 5,258 6,000 - 6,200
NIKKEI 225 (Japan) 9,537 10,300 - 10,700
BOVESPA (Brazil) 68,384 77,000 - 80,000
BOLSA (Mexico) 32,309 35,000 - 37,000
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S&P 500 SECTOR OUTLOOK
Source: Credit Suisse estimates
Sector Weight Comment
Information Technology
OverContinues to offer very favorable valuation and growth and strong cash flow production; trends in consumer electronic and corporate upgrade cycle support
Consumer Staples
OverConcerns that US$ strength weighs on sector were short lived, strong international aspect of sector a key, focus on well known brand names
Financials NeutralAdjustments in regulatory environment remains a challenge, deleveraging continues keeping loan growth low, valuation supportive but risks remain high
Health Care NeutralSector torn between concerns about patent expiration and cost pressure from governments worldwide, yet valuation and growth remain attractive
Industrials NeutralBest performing sector year to date, US factory activity has picked up and global economic activity remains healthy, valuation becomes stretched
Energy NeutralSupply and demand fundamentals are gradually tightening as global demand is growing robustly, limiting downside though inventory levels remain elevated
Materials NeutralPrecious metals segment acts as safe haven investment in uncertainty, remains volatile. Industrial metals fundamentals are encouraging, demand growing.
Consumer Discretionary
NeutralStimuli encouraging households to spend is fading, disposable income remains under pressure based on weak employment. However, valuations supportive
Telecomm Svcs
UnderIncreasing demand for mobile technologies goes beyond voice, requires more/ faster data, costly network upgrades necessary; valuation stretched
Utilities UnderHigh dividend yield attracts investor seeking shelter from volatile markets, valuation relative to market above average and growth outlook remains muted.
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S&P 500 Sector Snapshot (As of 07/30/10)
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 12.7% 63.5% 14.7 XLY, VCR
Consumer Staples -1.6% 5.4% 14.3 XLP, VDC
Energy -8.2% 52.3% 12.1 XLE, IYE
Financials 1.6% 141.6% 13.9 XLF, IYF, IYG
Health Care -9.4% 9.0% 11.2 XLV, IYH
Industrials 14.2% 23.7% 15.7 XLI, IYJ
Materials -1.0% 81.7% 15.6 XLB, IYM
Technology 1.1% 41.5% 13.3 XLK, IGM, IYW
Telecomm Services -9.5% 2.9% 14.9 IYZ, VOX
Utilities -6.9% 3.6% 12.4 XLU, IDU
S&P 500 11.6% 36.3% 13.5 SPY, IVV
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HEDGE FUND & PRIVATE EQUITY OUTLOOKThrough June, 2010 (most recent data available)
Source: Credit Suisse estimates
Strategy Weight Comments
Event Driven OverBoth merger arb and distressed debt strategies should outperform due to healthy M&A activity and restructuring opportunities, respectively.
Convertible Arb OverLower grade names underperformed investment grade amid flight to quality. Many managers are underinvested; will re-deploy cash when they see opportunities
Global Macro OverA diverging macro performance between developed and emerging world, combined with traditional business cycles, continues to create opportunities for strategy.
Emerging Markets NeutralExpect a choppy ride in H2 although EM HF provides a less volatile exposure to EM theme. EM fundamentals remain intact.
Fixed Income Arbitrage
NeutralMost managers benefited in J une from volatile gov't bond markets. Opportunity set should remain expansive in 2H due to conflicting views about rate hikes.
Equity Long/Short UnderJ une was difficult month for bottom-up stock pickers due to high correlations. Losses driven by long books. European markets outperformed US but still negative.
Private Equity NeutralFocus on small & mid-size LBO funds, infrastructure funds, secondary market funds, emerging market private equity and clean tech venture capital.
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POLICY RATE OUTLOOKGovernment Policy Rates (%)
Source: Credit Suisse estimates
Jul-10 2010E Comments
USA 0-0.25 0.25With path of economic recovery unusually uncertain, likelihood of Fed Funds rate hike is low. No increase anticipated before 2012.
Euro Area 1.00 1.00No major changes at last ECB meeting as European bond market stabilized somewhat over passed month. No rate change expected through year end.
UK 0.50 1.00Inflation remained on higher end due to currency depreciation & VAT hike earlier this year. Divergence in BOE is growing. Rate hike expected in Q4 '10 by +50bps.
J apan 0.10 0.10BoJ expected to be on hold over next 16 months. Central bank upgraded growth outlook to 2.6% in 2010 from 1.8% in April.
Canada 0.75 1.50J uly rate hike by +25bps. Canada employment picture remains positive (J une +93k). Additional rate hike in Sept by +25 bps expected.
Mexico 4.50 4.50No rate change at last meeting. Central bank foresees inflation to be in line with forecast. Bank slightly hawkish, yet no rate change expected in 2010.
Brazil 10.75 11.25Rate increase by 50 bps at last meeting below expectation of +75 bps, pointing to a more benign inflationary trend. Expect no rate hike at Sept. meeting.
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INTEREST RATE OUTLOOK10-Yr Government Bond Yield
Source: Bloomberg, Credit Suisse estimates
Jul-10 2010E Comments
USA 2.91% 2.90% - 3.10%With rates likely to stay lower for longer (no rate hike before 2012), yields expected to rise only gradually.
Euro Area 2.67% 3.00% - 3.25%With passage of European bank stress test and further policy normalization by ECB, rates projected to trend higher.
UK 3.33% 3.50% - 3.75%Economic recovery could give BOE room for some tightening pushing yield curve higher.
J apan 1.07% 1.00% - 1.25%Yields could continue to trend to below 1% in near term. Yields to stay low and stable.
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FIXED INCOME OUTLOOK
Source: Credit Suisse estimates
Weight Comments
US Investment Grade Corp.
OverSpreads should continue to tighten. Any sell-off should be short-lived. Add exposure to high-beta credits for valuations - financials (banks, brokers) and non-financials (paper, metals) as they are still well off April tights.
US High Yield OverHY spread now again below historical average. Default rates should decline as economic recovery continues. Corporate balance sheets healthy. Significant new issuance.
Emerging Markets OverEM spreads tighter due to improved risk appetite. Many EM countries in better fiscal condition than developed ones. Overweight Russia, Argentina and Venezuela.
Treasury Inflation Protected (TIPS)
NeutralInflation currently low, but some inflation likely to emerge in longer run. 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. Focus on high quality GOs and short to intermediate maturity. Credit selection critical. Tax-exempt bonds should be in high demand as tax rates rise.
Mortgage-Related NeutralMBS spreads tightened further in J uly. Favorable supply/demand and a benign prepay outlook should keep MBS spreads structurally tight.
US Treasuries UnderFlight to safety pushed yields to unsustainable low levels. Limited upside potential. 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 Jul-10 2010E Comments
vs. Euro* 1.31 1.30 -1.35Fed expected to remain on hold until 2012, pushing spreads in favor of euro. Euro area weathered major refinancing tests (Portugal & Spain). Bearish euro sentiment now less extreme, but not yet supportive. Euro neutral.
vs. J apanese Yen
86.5 85 - 90Low yields in US and Europe benefit yen. However yen unlikely to remain much below 85 due to valuation. Yen neutral.
vs. British Pound*
1.57 1.60 -1.65BoE likely to raise rates before Fed. Fiscal tightening measures improved credibility. However, pound vulnerable to de-leveraging. Pound marginally bullish.
vs. Canadian Dollar
1.03 0.97 - 1.02C-dollar is the least overvalued among commodity currencies and could be destination for reserve currency for diversification purpose. However, it remains exposed to bouts of risk aversion. C-dollar marginally bullish.
vs. Mexican Peso
12.65 12.00 - 12.30Peso should benefit from US recovery. Mexico's addition to a major bond index could drive portfolio inflows. Peso outlook marginally bullish.
vs. Brazilian Real
1.75 1.60- 1.70Robust growth and expected rate hikes should translate into bullish real. Strong carry appeal.
*indicates inverse exchange rate quotation
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CURRENCY FORECASTS
Source: Credit Suisse estimates
Jul -10 2010EINTEREST RATE DRIVEN CURRENCIES
Euro / US Dollar 1.31 1.30 -1.35=US Dollar / Japanese Yen 86.5 85 - 90
British Pound / US Dollar 1.57 1.60 -1.65
US Dollar / Swiss Franc 1.04 1.00 -1.04
US Dollar / Mexican Peso 12.65 12.00 - 12.30
COMMODITY CURRENCIESUS Dollar / Canadian Dollar 1.03 0.97 - 1.02
US Dollar / Brazilian Real 1.75 1.60- 1.70
Australian Dollar / US Dollar 0.90 0.90 - 0.94
NZ Dollar / US Dollar 0.73 0.70 - 0.74
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COMMODITIES OUTLOOK
Source: Credit Suisse
Weight Comments
Base Metals
Over
Recent price gains buoyed by improved investor sentiment likely to continue. Rising demand and falling inventories support further upside. Copper prices tend to lag economic growth and has catch-up potential. Less positive on zinc and nickel (supply).
Energy Over
Oil supply/demand fundamentals gradually tightening along with demand growth = prices well supported, target $85-95 end-10. Spare capacity limits upside somewhat. Natural gas longer term outlook improving as it becomes larger part of energy mix.
Agriculture Neutral
Supply issues may drive further near term gains. Longer term outlook driven by growing demand (food, fuel and feed). Market sentiment for sector also improving. Expect corn to outperform; wheat benefits as corn substitute. Less positive on sugar.
Precious Metals
Under
Low rates, a weaker dollar and positive seasonal factors may provide price support through Q3. But sector should underperform as economic activity and investor sentiment improves. Prefer platinum - appears cheap relative to gold.
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COMMODITIES FORECASTS
Source: Thomson Reuters Datastream, Credit Suisse estimates
Jul-10 2010E
ENERGYWTI Crude Oil (USD/ barrel) 79.0 85 - 95
US Natural Gas (USD/mmbtu) 4.81 5.00 - 5.50
PRECIOUS METALS (Spot, USD/ounce)Gold 1,175 1100 - 1200
Silver 17.7 18 - 19
Platinum 1,734 1800 - 1900
BASE METALS (Spot, USD/Pound)Aluminum 0.89 1.00 - 1.05Copper 3.31 3.80 - 4.00Zinc 0.80 0.85 - 0.90
Agriculture (USD/bushel)Wheat 5.94 4.5 - 5.5Corn 3.65 4.0 - 5.0
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