Credit Suisse reviews equity strategy after Brexit vote

The Swiss bank, which has been underweight domestic UK since last September, upgraded non-London housebuilders to ‘benchmark’ from ‘underweight’, saying the house price to wage ratio is not extended, the rental yield is around 2% above the mortgage rate, it is a highly undisrupted sector where supply is two-thirds of required demand and government policy will likely remain supportive.

UBS recommended focusing on housebuilders with lower exposure to prime/high-end London, such as ‘outperform’-rated Bellway, which is 20% London but has very low exposure to Prime. It also highlighted Persimmon’s very low exposure to London.

It remained ‘underweight’ London-centric names such as Berkeley Group and Foxtons, and UK real estate investment trusts.

“The relative performance of UK real estate has the strongest positive correlation with trade-weighted sterling, and tends to underperform as sterling weakens. Though we think we have seen the bulk of the sterling sell-off, we continue to have a negative view on the currency.”

UBS also kept its ‘benchmark’ stance on general retailing, purely on valuation grounds; it highlighted Kingfisher and Associated British Foods as the least sterling-sensitive retailers.

Elsewhere, it upgraded UK life insurers to ‘overweight’ from ‘benchmark’ saying the rally in their portfolio holdings of corporate bonds and equities since the vote to leave the European Union should have more than offset the fall in real estate valuations, and thus portfolio valuations. In addition, it pointed out that the price-to-earnings discount of life companies to asset managers is now extreme at 40%.

The bank remained ‘benchmark’ European cyclicals. “Continental European cyclicals look to be pricing in too much growth pessimism, and we add to employment agencies. Cyclicals are now trading at their cheapest against defensives since 2009 and have decoupled sharply from PMI new orders. Sector risk appetite is an extremely low -1.7 standard deviations.”

CS said the problem remains disruption, mixed US lead indicators, China and the yield curve, which is why it is not upgrading.

The bank downgraded European regulated utilities to ‘underweight’ from ‘benchmark’, in both the UK and Continental Europe, and cut European auto OEMs to ‘underweight’ from ‘benchmark’.

Credit Suisse stuck to its view that GBPUSD should drop to 1.20 in the event of a full Brexit. However, it said in a ‘Brexit lite’ – to which it ascribes a 30% probability – sterling should trough near current levels at around 1.25-1.30.