Credit Suisse has set out what it
calls its top investment ideas for 2014 against a general stance that favours
stocks in general, including a belief that European equities could perform
relatively well in the next 12 months.

The Zurich-listed bank said five of its top ideas can be
incorporated into the core portfolios of clients while two of them are more
suited as “satellite ideas”.

The five “core” top ideas are “Europe’s
recovery”; “Seeking equity alpha”; “Emerging markets”; “Fixed income in a world
of rising yields" and “Forex as the Fed tapers”.

The “satellite ideas are “Cash-rich companies” and China reform
re-accelerates”.

Europe’s recovery

The bank said the economy in Europe
is slowly picking up pace and it expects earnings growth to accelerate in
2014. Another plus is that equities are relatively cheap compared with the US market; Credit Suisse in particular favours
the Germany
market. For higher-risk investors, European small and mid-cap stocks, cyclicals
and selected banks at low valuations are attractive. For lower-risk investors,
the bank recommends dividend-yielding stocks as they offer potentially lower
risk with higher yields than fixed income markets.

Seeking equity alpha

Credit Suisse said that after a strong run for most stock
markets (apart from some emerging market indices) in 2013, it expects further
improvements in 2013.

Equities are the preferred asset class for 2014. 

“Investors should choose sectors, styles, countries and
individual stocks based on prevailing market dynamics; our current favourites
include cyclicals and momentum stocks from the IT, financials and capital goods
sectors,” the bank said in a note.

Emerging markets
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The bank said it expects that most emerging markets will
benefit from a cyclical upswing, supported by export opportunities to the
developed markets in 2014. “Emerging market trend growth rates remain above
those of developed markets (albeit lower than before) and could further
re-accelerate with structural reforms,” it said.

Credit Suisse argued, however, that deficits in some
emerging market countries are still causing volatility and therefore investors should
gain exposure to export-led, growth-sensitive countries, such as Taiwan, and
also look for those where the potential for successful structural reforms is
not yet fully discounted.

Fixed income in a
world of rising yields

It will be a challenge, the bank said, to obtain reasonable
returns on fixed income when duration is unattractive due to the risk of rising
yields amid US Federal Reserve “tapering” and rising economic growth. “Investors
should focus on short-duration assets in areas where value still exists, like
corporate senior loans (usually held via a fund), bank subordinated debt, bank
CoCos, corporate hybrids and distressed debt,” the bank said. (CoCos are contingent
convertible bonds, where the convertibility of the security is dependent on a
particular event or trigger.)

“While credit spreads on high yield and floating rate debt
are near historic lows, limited amounts of such debt from strong issuers can be
included in an overall portfolio. We believe investors should avoid currently
overvalued assets such as bank senior debt,” Credit Suisse continued.

Forex as the Fed
tapers

The bank said that as the Fed reduces its quantitative
easing programme, the dollar will appreciate against other currencies, such as
the Japanese yen, and trade at a stronger end of ranges against others, such as
the euro. It says investors should position themselves accordingly to take
advantage of such a move.

Cash-rich companies

Companies’ holdings of cash are near the highest levels for
several years, Credit Suisse said, and that rising confidence among company
bosses and shareholder pressure should encourage more mergers and acquisitions
in 2014.

“Moderate risk-appetite investors should favour companies
with strong free cash-flow and the ability to buy back shares. Investors with higher
risk-appetite should focus on companies that are the potential targets of
industry consolidation or which will benefit from asset disposals through restructurings,” the bank said.

China reform re-accelerates

The bank noted that the recent package of reforms announced
by the Chinese ruling Communist Party gave a clear direction for structural
reforms, pointing the way towards rising growth.

Credit Suisse said investors should gain exposure to global,
regional and domestic firms that can benefit from China’s structural reforms with a
focus on private companies, services sectors and winners from economic
re-balancing toward consumption.