One trend I am seeing consistently in these 2013 annual strategy reports is the risky environment that is building in corporate credits. In this summary, Credit Suisse provides a rationale for being overweight equities relative to credit in 2013:
1) Credit has outperformed strongly, leaving equities appearing cheap on a number of valuation scores.
2) A rise in government bond yields helps equities relative to IG.
Our rate strategists expect US 10yr yields to rise from the current 1.6% to 2.25%. A rise in yields has historically been associated with an outperformance of equities relative to IG (Exhibit 44). This relationship has recently weakened, but we see this as reflecting the changed behavior of spreads at ultra-low yield levels rather than an indication that IG would outperform equities in a rising yield environment.
3) We expect corporate net buying of equities to pick up in 2013.
Given high levels of cash on the balance sheet, low borrowing rates, and low relative equity valuations, we believe that corporates have an incentive to buy back their shares. A more optimal leverage ratio could see the corporate sector buying in $1.4 trillion of equity, which would be a positive for equities relative to credit.
4) Relative risk appetite shows a wide divergence.
As discussed above, inflows into fixed income funds (particularly corporate credit funds) have been exceptional, while inflows into equity funds muted. On our risk appetite monitors, this is reflected in an unusually wide divergence between credit risk appetite (in euphoria) and equity sector risk appetite, which is low, particularly in the US.
Source: Credit Suisse
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