Credit Suisse recently detailed their 6 dominant themes for 2011 and how they’re likely to influence markets:
(1) The rise and rise of the emerging market consumer remains the most dominant macro theme – for the third year in a row.
(2) Investors should focus on corporate spend areas in the stock market, one of our key themes since mid-2009. Corporate free cash flow, profitability and investment intentions are all abnormally high, while corporates have seldom been as under-leveraged. We believe corporates will want to focus on non-discretionary or short-cycle areas, i.e. areas where there is a relatively quick pay-back.
(3) Plays on abnormally low real interest rates: we believe that the monetary authorities in the developed world will keep real rates artificially low to facilitate the deleveraging of $6.3tn of G4 excess leverage. If real yields rise too far and threaten the economic recovery (which they would if QE2 ended, in our judgement) or if the fiscal authorities over-tightened, we believe QE would be renewed in the US – and via a weaker dollar would force other developed market central banks to respond.
(4) M&A is set to increase sharply
(5) Investors will pay more of a premium for both growth and pricing power. Growth will be at premium because the discount rate is likely to remain abnormally low (increasing the value of long duration earnings), while it is hard to see how this will be a normal recovery, with $6.3trn of excess leverage in the developed world, making growth more valuable. Companies with pricing power deserve a premium, given excess capacity of around 4% of GDP in the developed world on our estimates, increasing Chinese competition and rising input costs.
(6) Investors should avoid companies exposed to increased competition from Chinese companies.
in The PragCap