Credit Suisse Private Banking is positive on oil and emerging market (EM) equities for next year.
The Swiss private bank’s investment committee turned overweight on oil last week, amid a sell-off that brought Brent crude oil futures to levels of $60 per barrel (bbl) and West Texas Intermediate (WTI) crude futures to $50/bbl.
‘We felt that the commodity had been almost egregiously oversold,’ Asia Pacific CIO John Woods said at a press briefing held in Singapore.
Global growth concerns and swelling inventories in the US have driven down oil prices in recent weeks, with Qatar’s decision to quit Opec further affecting sentiment.
However, oil prices are set to go higher following a decision overnight by Opec+ leaders to cut production. The oil cartel will be meeting later today to decide on the size of cuts.
‘We felt that some of the supply shocks were more run off rather than structural in nature and we have decided that there is some upside in WTI to around the $65-67/bbl area,' Woods said.
‘I think if we continue to see this momentum towards a cut of 1.3 million barrels a day, that type of target is eminently achievable,’ he added.
Aside from oil, Credit Suisse is also overweight EM equities for the next three to six months on the grounds of cheap valuations and strong economic growth expectations.
The bank forecasts Asia excluding Japan’s GDP to grow at an average of 5.7% in 2019, led by India’s 7.2%.
‘We are seeing a constant re-pricing of EMs in the last year, to the point that the divergence in price activity and valuations [relative to the rest of the world] is really quite pronounced,’ Woods said.
‘Historically, this tends to correct and I think that's going to happen over the course of next year.'
The private bank is overweight China, Singapore and Indonesia and negative on India. In terms of sectors, it expects IT and healthcare to offer attractive opportunities.
Credit Suisse is also overweight global equities on slower, but robust, global growth expectations and does not believe that there will be a recession next year.
Fixed income view
However, the bank’s investment committee has turned underweight investment grade bonds in its tactical asset allocation.
‘In a late stage of a business cycle, we tend to see bond yields rising and tend to see risk outperforming, and that's precisely what we anticipate over the next six months,’ Woods explained.
He also expects corporate credit spreads to widen, and prefers US Treasuries and high yield bonds in this environment.
The bank favours EM hard and local currency bonds, and is cautiously positive on Asian high yield bonds.
According to Woods, clients can expect yields of close to 9% from short duration, risky fixed income investments in Asia.
The bank is predicting one rate hike by the US Federal Reserve in December and two additional hikes in the first half of 2019.