They’re not sexy but they’re dependable: Aussie banks and mining companies are overweight positions for Credit Suisse stock-pickers, as they walk the line between unfettered exuberance and, well, fettered caution.

“We’re positive on the global economy and positive on risk assets for this year, and that means Aussie equities,” Credit Suisse Australia Private Bank CIO Andrew McAuley said during a webinar on Thursday.

This view is based on continued monetary and fiscal support, both internationally and locally – even as JobKeeper switches off later this month. 

Key macro reasons for optimism:

• The US$1.5 trillion plan in the US;
• Global central banks keeping rates down; and
• Quantitative easing at home and abroad.

“It’s very interesting to see the RBA upping the volume of the bonds they buy at the long-duration end,” McAuley said. 

The Reserve Bank of Australia on Tuesday 2 March announced a resumption of bond purchases via its yield curve control programme. This new $4 billion daily high, part of its $200 billion quantitative easing programme, is perhaps a further effort to convince markets of the RBA’s dedication to keeping interest rates lower into at least 2023. 

And McAuley emphasised that inflation fears, which continue to dominate the economic news cycle, aren’t really about inflation itself. 

“The market’s worried about unexpected (emphasis my own) inflation, and we see nothing out of the ordinary, that reflation will be gradual,” he said.

“Both the Fed and the RBA have said inflation won’t go above their aim of 2.5%, and we’re happy with that.”

How are Credit Suisse positioned? Banks and cyclicals, yes: but don't forget commodities, copper and electric vehicles 

McAuley and his team like the most economically sensitive sectors of the market are driving this recovery – banks and cyclicals, retail; the media sector and housing.

“Across the Australian profit cycle, we see aggregate earnings getting back to pre-COVID levels by the middle of this year, which would be the fastest earnings recovery in the history of the ASX," said McAuley

“The big sectors are sitting on surplus capital rather than needing to raise capital,” said portfolio manager Mike Jenneke. This is a positive for shareholders of the big miners in particular, especially for income investors.

“We’re overweight energy in our portfolios, as a result of the vaccine news we see that the reopening-led recovery will increase energy demand,” said Jenneke.

Even prior to production expansion, which preceded COVID but has become even lower-risk since then, miners took advantage of higher materials prices and returned profits to shareholders via dividends.

For a few reasons, demand has increased further still for commodities like iron ore – think China, think copper, think electric vehicles. Stimulus programs around the world are also driving goods consumption.

“In a pretty bombed-out sort of sector, we saw the opportunity to raise our weighting, and we now have a modest overweight to resources,” Jenneke said.

In line with this view, they’ve increased their pre-COVID overweight to iron ore miners over the last year. Oz Minerals (ASX: OZL) is one such company he added to the portfolio 12 months ago. Since then, its share price has grown more than 270%, from under $6 in mid-March to $22.35 at midday on Thursday 4 March.

Did we say banks?

Contrasting with pre-pandemic, when the market was pessimistic on nearly all drivers of bank profitability, their bad debts have emerged much lower than expected; capital levels have held up and bank revenues have improved as funding costs have fallen, helped along also by the RBA’s funding facility. 

Other positive indicators include:

• Very significant policy support from the government – a crucial distinction between this cycle and others, particularly the GFC
• Banks were improving their risk positioning even before the pandemic, meaning capital positions were very strong.

“We raised our positions and went overweight in the sector. Perhaps we didn’t expect all of the following factors to reverse, or as quickly, as this cycle has unfolded, but that’s exactly what is happening,” Jenneke said.

“And you’re seeing that play-through in the bank profit results, and we think there’s more to go,” Jenneke said.

Other stocks and sectors

The manager also holds some exposure, albeit far smaller, to the longer-term recovery of travel, with positions in both flagship airline Qantas (ASX: QAN) and travel agent Flight Centre (ASX: FLT).

Jenneke likes Qantas for its domestic exposure, local flights the biggest revenue driver for the airline; and Flight Centre for its international bookings business.

“They have very good hibernation strategies that are very credible and which will see them through the downturn.”

He anticipates that if vaccine developments and roll-outs continue as expected, international travel is likely to open up and perhaps strengthen later in 2021.

“That said, investors should be prepared to ride out some volatility here.”

Are the bears too eager?

“To a degree, investors are being over-optimistic,” said Credit Suisse CIO McAuley.

“I would say the market has factored in probably 90% of the successful rollout and expect it will happen quicker than it probably will.”

This is why, as Jenneke points out, the manager’s holdings in travel-related stocks are only small, “because we’re cognizant it might be a bit of a bumpy road.”

What are the no-go areas?

The bigger positions explained above were offset by “rotations away” from commercial property, infrastructure and healthcare, where the fund manager is now underweight, as Jenneke explained.

“These are areas that are more richly valued, and that face a few more headwinds in the environment we see ahead, which has seen us introduce a more cyclical bias into the portfolio.”

The wrap-up

Credit Suisse is neither cautious nor gung-ho in its current approach, holding tight to some of the big cyclical categories including an overweight to banks. At the same time, its Qantas and Flight Centre holdings - albeit only small - suggest its quiet confidence in a vaccine-led recovery. But as always, tread carefully, seek professional advice and invest with your head, not your heart.

Learn more

Credit Suisse Private Banking specialises in asset diversification, holistic wealth planning, next-generation training, succession planning, trust and estate advisory, philanthropy. Stay up to date with our latest insights by hitting the follow button below.