Credit Suisse favours National Grid, Diageo, BT, Vodafone

Credit Suisse recommended adding to National Grid, Diageo, BT and Vodafone in a move towards "cyclical" defensive shares.

Despite strong economic data and rising inflation expectations, non-financial cyclical shares have not outperformed because they are already very expensive, Credit Suisse said in a global equity strategy note.

"This is why we have been reducing non-financial cyclicals and adding to ‘cyclical’ defensives (alcoholic beverages, CPI-linked utilities and telecoms), e.g. National Grid, Diageo, BT and Vodafone," Andrew Garthwaite and colleagues wrote in the note.

Credit Suisse also said European banks appear undervalued in an ideal environment for equities created by rising US inflation.

The yield on US Treasury inflation-protected securities (Tips) is almost back to November levels but will not rise from here, Credit Suisse said. Combined with rising inflation expectations, this is typically an ideal combination for equities until inflation reaches 3%, the bank said.

"Such an environment is particularly positive for financials (European banks look c30% cheap on our models)," Garthwaite wrote.

Despite strong economic data and rising inflation expectations, non-financial cyclical shares have not outperformed because they are already very expensive, Credit Suisse said.

"This is why we have been reducing non-financial cyclicals and adding to ‘cyclical’ defensives (alcoholic beverages, CPI-linked utilities and telecoms), e.g. National Grid, Diageo, BT and Vodafone," Garthwaite wrote.

The dollar has not strengthened by much despite US growth being revised up strongly and the dollar is expensive on all purchasing parity measures, Credit Suisse said. This is positive for domestic European banks, budget airlines and utilities and US international earners such as eBay, Alphabet and Citigroup, Credit Suisse said.

China's credit bubble will not unwind until real estate prices fall sharply and the signs are they will stay resilient so investors can stay structurally exposed to China once its round of tightening has finished, Credit Suisse said.

Commodity prices have been driven by the recovery in countries excluding China, rising inflation expectations and strong green-related demand, the bank said.

"This shows the strength of the structural story in mining. We are only a small overweight of mining and note the sector should benefit once China’s tightening is complete," Garthwaite wrote.

Russia's fundamentals are similar to South Korea's but its credit spreads are akin to Indonesia's, the bank said. "We are overweight non-commodity Russia as the negatives appear largely priced in."