The financial services company believes 2014 for Australian equities will be a “battle between uninspiring valuations and sluggish profits versus accommodative monetary policy and rising cash flows”.
According to Credit Suisse, end-cycle profits contraction and poor policy development in Australia or overseas could, however, potentially weaken equity returns.
Credit Suisse research analysts Hasan Tevfik and Damien Boey said bottom-up factors were becoming more important in driving portfolio returns.
“In this light, our strategy long ideas have a focus on restructurers like Amcor, Caltex, QBE and Fortescue. Our preference for companies growing free cash flow leaves us overweight the big miners versus the big banks.”
Credit Suisse believe expectations for high single-digit growth in earnings per share are overly optimistic given the current macro outlook for company sales, revenue exposure to the domestic economy and China, and contracting non-residential investment constricting domestic demand. Access Economics data indicated non-residential construction activity could fall 45 per cent in the next two or three years, in line with the capex declining 10 to 15 per cent every year.
Mr Tevfik and Boey said most of this decline was likely to be in mining investment.
“Against this backdrop, in order to achieve an even-trend growth, we would need to see an acceleration in retail sales, combined with recovery in residential investment and a sizeable expansion in fiscal deficit spending.”
According to Credit Suisse, the saving rate is low in absolute terms and in relation to its own history. This indicates that the rate of consumption may fail to offset weakness in capex, meaning GDP growth will be slower for longer.
Credit Suisse is also concerned about high Australian profit margins limiting potential leverage from accelerating revenue growth.
Despite predictions of sluggish earnings per share, Credit Suisse believes companies will raise distributions due to a lack of income from other assets and a strong appetite for distributions. According to the company, this will be funded mostly by capex cuts.
It also expects price/earnings ratios to overshoot longer-term averages as cash and bonds remain uncompetitive.
