1、 DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be awa
2、re that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.2 July 2019 Global Equity Research Strategy Global Equity Strategy Research Analysts Andrew Garthwaite 4
3、4 20 7883 6477 andrew.garthwaitecredit- Robert Griffiths 44 20 7883 8885 robert.griffithscredit- Nicolas Wylenzek 44 20 7883 6480 nicolas.wylenzekcredit- Mengyuan Yuan 44 20 7888 0368 mengyuan.yuancredit- Asim Ali 44 20 7883 2480 asim.alicredit- STRATEGY Style:Buy growth in US,not in Europe,and Over
4、weight US growth:We believe the US cost of equity,currently at 8.6%,should fall from here,helping to re-rate long-duration assets further.Historically,when earnings revisions ex TMT have been negative,growth as a style has outperformed.Growth also has outperformed 80%of the time in the 6 and 12 mont
5、hs following an initial Fed rate cut.Late-cycle bull markets do not tend to see a change in sector leadership,with breadth normally narrowing around a small group of growth stocks.The P/E of growth vs.value is 0.8 std above its norm,with the absolute P/E of US growth at 27x vs.45-60 x seen for what
6、was perceived to be growth at the end of most bull markets.The value side of the equity market has rarely been so disrupted.Price momentum is extreme,but historically,growth as a style has continued to outperform from current levels 85%of the time.We focus on quality growth stocks such as MSFT,Booki
7、ng Holdings and Northrop Grumman,with a focus on free cash flow.Benchmark European growth we see more risk of underperformance than outperformance:The price of growth relative to value is above its March 2000 peak,and price momentum is at levels where growth historically has underperformed 86%of the
8、 time over the subsequent 12 months.Unlike the US,European growth underperforms when Bund yields rise(owing to the sector composition,with growth in Europe being very overweight consumer staples and value being overweight financials).In our opinion,Bund yields have much more upside than Treasury yie
9、lds given a much higher likelihood of a positive growth surprise in Continental Europe than in the US.The valuation of growth is at the top end of its historical range vs.value and in many instances European stocks are trading on a growth premium to US peers(e.g.ASML and SAP).Value is overweight cyc
10、licals and European cyclicals are pricing in c0%GDP growth.The main reason we do not go underweight growth as a style is that historically growth in the US and Europe has decoupled only very rarely.Attractive quality growth includes:Capgemini and Kone.Attractive value:IAG,BMW.We would avoid expensiv
11、e growth with leverage:Inditex,Reckitt.We raise US small caps to overweight from benchmark:US small caps are pricing in much lower bond yields and ISM remaining below 50,and they appear cheap(1 std below their historical average valuation)and oversold.We stick to our overweight of European small cap
12、s as they are trading modestly cheaply and tend to outperform when PMIs and the euro rise.Relative earnings revisions are also turning up).In both Europe and the US,small caps are pricing in much wider credit spreads.Attractive small cap stocks include ASM,Logitech and A.Elsewhere:We are benchmark d
13、ividend aristocrats in Europe,but note they have unusually lagged the fall in bond yields and look cheap(Sanofi,Prudential).We remain underweight leverage as a style.We show that quality is more sensitive than growth to PMIs and bond yields,and therefore we are benchmark pure quality(down from overw
14、eight).2 July 2019 Global Equity Strategy 2 Table of contents Key charts 3 Investment styles 4 Growth as an investment style.4 US growth:overweight.6 US quality vs US growth.15 European growth vs value benchmark,but with risk to the downside.18 Japanese growth.27 Small vs large caps.28 Underweight l
15、everage as a style.36 Dividend aristocrats.44 Appendix 50 2 July 2019 Global Equity Strategy 3 Key charts Figure 1:Growth relative to value is at an all-time high Figure 2:and growth as a style is overbought Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research Figure 3:The
16、 US cost of equity is still in its normal range,unlike other asset classes Figure 4:European growth performs in line with the Bund yield Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research Figure 5:European and US growth rarely decouple Figure 6:Small caps tend to outperf
17、orm if PMIs rise Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research 506070809010011019741979198319881992199720012006201020152019MSCI Global growth rel value perf-9%-5%-1%4%8%12%16%200420072010201320162019US growth rel value,deviation from 6mmaAverage(+/-1 SD)-1.2-1-0.8-0
18、.6-0.4-0.20US cost ofequityUS IG yieldUS 10yr realbond yieldUS High yieldUS 10yr govtbond yieldStandard deviation below respective 20 year norm-1%0%1%2%3%4%5%0.60.70.80.911.11.21.320052007200920112013201520172019MSCI Europe growth rel value price perfGerman 10yr bond yield,rhs inverted60708090100110
19、1201309011013015017019021019972000200320062009201220152019Period of decouplingUS growth vs valueEurope growth rel value-10%-8%-6%-4%-2%0%2%4%6%2025303540455055606570200620072009201020122014201520172019Eurozone PMI manufacturing newordersEurope ex-UK small rel large capdetrended,rhs 2 July 2019 Globa
20、l Equity Strategy 4 Investment styles Growth as an investment style The price relative of global growth relative to value is close to hitting a 35-year high.Moreover,as shown in the Credit Suisse Global Investment Returns Yearbook 2019(February 2019),the recent run of values underperformance is the
21、deepest and longest since 1960.Unsurprisingly,since the beginning of the year,we have had many discussions with clients about the right time to switch from growth to value.However,in this report,we reiterate our preference for being overweight of sustainable/quality growth in the US and globally,whi
22、le maintaining a more cautious view on European growth.Figure 7:The price relative of global growth relative to value is close to an all-time high Source:Refinitiv,Credit Suisse research Clearly,both growth and momentum as a style are overbought(especially in the US),but looking at historical perfor
23、mance from current levels is not giving us a sell signal(see Appendix).In the case of US growth,it continued to outperform value 85%of the time over the subsequent 12 months by 5.1%on average.In regards to US momentum,it continued to outperform the market 60%of the time over the subsequent 12 months
24、 by 3.6%on average.506070809010011019741979198319881992199720012006201020152019MSCI Global growth rel value perf 2 July 2019 Global Equity Strategy 5 Figure 8:Growth as a style is overbought Figure 9:as is momentum as a style Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse res
25、earch Definition of MSCI growth When analyzing growth as a style,we use the MSCI growth indices,which classify stocks based on the following five variables:long-term forward EPS growth rate,short-term forward EPS growth rate,current internal growth rate and long-term historical EPS growth trend and
26、long-term historical sales per share growth trend.Stocks are ranked on these measures and the top 50%in the regional index(e.g.MSCI US)are included in the growth index.Weightings on MSCI growth indices With regards to the MSCI growth indices,we are overweight US growth but benchmark European growth.
27、We favour growth stocks with reasonable FCF,which are able to self-finance a large part of their growth.We are more cautious on European growth as it suffers from more extremes of valuations and price momentum than growth in the US.Moreover,there is a much greater likelihood of a positive GDP growth
28、 surprise,while the sector composition makes growth versus value in Europe much more of a bond play.However,we did not overweight value in Europe as it is very unusual for European value to outperform and US value to underperform(this has happened only c3%of the time over the past 20 years).-9%-5%-1
29、%4%8%12%16%200420072010201320162019US growth rel value,deviation from 6mmaAverage(+/-1 SD)-10%-8%-6%-4%-2%0%2%4%6%8%10%2004200620092011201420162019US momentum style%dev from6mma,rel mktAverage(+/-1sd)2 July 2019 Global Equity Strategy 6 US growth:overweight We remain overweight US growth for the fol
30、lowing reasons:1.The US cost of equity has scope to fall We think that the cost of equity(ERP+risk free rate)in the US remains too high(8.6%).The equity risk premium,currently at 6.6%,should be closer to 5.4%,according to our warranted ERP model(which relies on lead indicators and credit spreads to
31、determine where the ERP should be).Indeed,bull markets in the past have seen much lower ERPs at this stage of the cycle.A 1ppt fall in the ERP would more than offset a limited rise in the US treasury yield and lead to a falling cost of equity.When the discount rate falls,long-duration assets tend to
32、 re-rate and therefore growth outperforms.Figure 10:The cost of equity is high relative to IG yields Figure 11:The cost of equity is still in its normal range,unlike other asset classes Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research As we show below,a 1 percentage po
33、int fall in the discount rate re-rates a growth stock(g=6%)by 50%,but a low-growth stock(g=2%)by less than 20%.Thus,in the example below,a growth stock would outperform by 30%if the discount rate fell by 1 percentage point.P/E=RoE CoE 1RoE 246810121419871990199319961999200220052008201120142017US IG
34、yieldUS cost of equity-1.2-1-0.8-0.6-0.4-0.20US cost ofequityUS IG yieldUS 10yr realbond yieldUS High yieldUS 10yr govtbond yieldStandard deviation below respective 20 year norm 2 July 2019 Global Equity Strategy 7 Figure 12:A fall in the cost of equity re-rates high-growth stocks disproportionately
35、 Figure 13:High-growth stocks have much larger upside from a fall in the cost of equity Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research 2.Growth outperforms as earnings revisions fall When earnings revisions(ex.TMT)turn negative,investors tend to pay a premium for com
36、panies that can grow.Consequently,growth as a style has historically outperformed on all occasions when earnings revisions(ex.TMT)have turned negative.While 13w earnings revisions rose recently,we would note that four-week revisions have already fallen again very sharply.Figure 14:Earnings revisions
37、 in the US are falling sharply Figure 15:and this usually leads growth to outperform Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research 3.Valuation is not yet a cap Despite outperforming for many years,US growth is only 0.8 std expensive.US growth is valued on 27x traili
38、ng P/E this is still low compared with the TMT or Nifty Fifty bubbles,when the P/E of growth stocks rose to 45-60 x trailing earnings.This is at a time when there is a very good reason for growth to be expensive relative to value namely the unprecedented disruption facing many value sectors.Fair val
39、ue P/ECost of EquityP/E,g=4%P/E,g=2%P/E,g=6%CoE=RoE0%50%100%150%200%250%13%12%11%10%9%8%High growth(=6%)stockLow growth(=2%)stockCost of EquityCost of Equity falls%change in the fair value of:-80%-60%-40%-20%0%20%40%2004200720092012201420162019S&P 500 Earnings Revisions,net upgrades ex TMT4wk13 wkTu
40、rn negativeTurn positive againEuropeUSNov-07Aug-09+8%+9%Aug-11May-12+11%+5%May-12Feb-17+6%+8%Oct-18+8%+7%Earnings revisions ex TMTGrowth rel value performance inAverage 2 July 2019 Global Equity Strategy 8 Figure 16:US growth relative to value trades well above its average on P/E Figure 17:Historica
41、l equity bubbles and the change in bond yields Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research 4.Very late-stage bull markets tend to see strong growth outperformance As we have argued before,this is a bull market clearly moving into its final stage.Late-stage bull ma
42、rkets tend to be led by growth stocks(or what was perceived to be growth at the time),as experienced in Japan in the late 1980s,the TMT bubble in the late 1990s or the Nifty Fifty period in 1970-1972(peaking in January 1973).This happened despite bond yields either rising fairly sharply or remaining
43、 largely unchanged.The only exception to this rule of bull markets ending in excess was the market peak in October 2007,but in this instance it may not have even been a classic bull market because inflation-adjusted,the S&P 500 did not rise above previous peaks.This is partly due to the fact that in
44、 the late stages of a bull market,earnings breadth narrows(because typically margins fall as labour gets pricing power or corporates start to over-invest),but also because retail investors tend to get involved in late-stage bull markets and in turn follow price momentum not value.In our opinion,this
45、 has not happened so far.We have seen neither excessive flows into equities overall with$145bn of equity selling YTD(and flows into tech have not regained their 2018 highs)nor the loss of breadth normally observed in late-stage bull markets.40%90%140%190%240%1998200020022005200720092012201420162019U
46、S growth trailing PE rel valueAverage(+/-1SD)S&PTreasury yieldsP/E01/12/1970876.505/01/19731206.445xChange(%,bps)37%-631/08/19989575.024/03/200015276.260 xChange(%,bps)60%122TOPIXJGB yields04/01/198816904.518/12/198928855.550 xChange(%,bps)71%97TMT BubbleNifty FiftyJapanese stock bubble 2 July 2019
47、Global Equity Strategy 9 Figure 18:Flows into global funds equities vs bonds Figure 19:Tech inflows have re-accelerated,although they remain below 2018 highs Source:EPFR,Credit Suisse research Source:the BLOOMBERG PROFESSIONAL service,Credit Suisse research We proxy a narrowing of breadth by looking
48、 at an advance-decline momentum oscillator against the same measure for the market.During the TMT bubble and in Japan in the late 1980s,there was a very large gap between the advance-decline and market oscillator,which is not really the case today.Figure 20:The late 1990s equity bull market in the U
49、S was characterised by narrow breadth Figure 21:this is currently not the case Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research 523-5030814176-10329457-1451,936494-9312149148346-28165-300-1001003005007009001,1001,3001,5001,7001,9002,100SinceMar2009201220132014201520162
50、0172018YTDFlows into global funds,USD bnEquitiesBonds30,00035,00040,00045,00050,00055,00060,00065,00070,00075,00080,000201420152016201720182019NASDAQ(QQQ)total cumulative inflows($m)-12%-7%-2%3%8%-26%-16%-6%4%14%1995199619971998199920002002S&P500 deviation from 6mma6m rolling advance/decline oscilla
