Hope for the best but prepare for the worst. In fact, investors would be better off expecting the worst as well.
That’s the word from the team of strategists at Credit Suisse, led by Atul Lele, who it must be said, tends towards the “glass-half-empty” school of thought.
But as the market fever rises, cooler heads are welcome. Lele, in a note to clients, says he and his team are most worried about overly optimistic earnings growth forecasts for 2013-14. This financial year already looks to be a write-off: the consensus forecast from analysts is for zero growth in 2012-13, down from the 13 per cent “the street” initially forecast.
As we’ve said many times before, analysts tend to overestimate earnings during downturns and then underestimate earnings when things rebound, and vice versa. In other words, they tend to miss turning points (like almost everybody else).
Credit Suisse’s view is that shareholders should take a cautious view coming into this interim reporting season, particularly in regards to companies in the retail, media and building materials sectors, which have received a real shot in the arm from increasingly bullish investors. Lele thinks those sectors will get sold down in coming months as the reality of weak domestic economic conditions bites.
In that vein, the Reserve Bank is likely to continue to ease interest rates this year, reckons Lele.
He recommends investors have a higher relative weighting in their portfolios to “bond proxies”, such as A-REITs, infrastructure stocks and utilities. These stocks will continue to have stable dividends with “the potential for a valuation uplift should long bond rates decline”.