pb americas the investment landscape – july 2011 private banking americas investment strategy...

PB Americas

The Investment Landscape – July 2011

Private Banking AmericasInvestment Strategy & Advisory Group

The Investment Landscape

July 2011


This document is not complete without attached “Important Legal Information.”

Table of Contents

Key Focus: – Small Cap, Big Impact

Asset Allocation/Outlook

Appendix– Key Forecasts

– Global Returns Dashboard

– Historic Snapshots

2

PB Americas


Key Focus: Small Cap, Big Impact

3



Small capitalization stocks had the highest return of all major asset classes in 2010 – up 27%.

The DRIVER framework captures the major catalysts of small cap performance, and can help in determining large cap vs. small cap portfolio split.

Small cap valuations currently trade near a record- high premium relative to large caps.

Small cap co’s typically very correlated to the US economy – only 17% of sales come from abroad, vs. half of sales for large caps.


Source: Credit Suisse Small/Mid Cap Equity Strategy, Russell BNY/Mellon

Small Cap vs. Large Cap Valuations

Small Cap DRIVERs Framework

Source: Credit Suisse Small/Mid Cap Equity Strategy Team

4

Read more about Small Cap in this month’s key focus

article: “Small Cap, Big Impact.” Contact your Relationship Manager for more

information.

Key Indicator(s)

D DealsMerger & Acquisition (M&A)

activity

R RevisionsUp/downward earnings revisions

as % oftotal

I InvestorSentiment

VIX Volatility Index & high yield spreads

V ValuationAbsolute valuations & valuations

relative tolarge cap

E EconomyInflation/US dollar outlook & non-

US sales exposure

R Retail Flows

ETF/Mutual fund money flows

0.70

0.80

0.90

1.00

1.10

1.20

1.30

Jun-81 Jun-86 Jun-91 Jun-96 Jun-01 Jun-06 Jun-11

Ratio of Small-to-Large Cap P/Es

Small Cap at Premium

Small Cap at Discount



Large cap companies are on average covered by 25 equity research analysts – small cap co’s are only covered by about 7.

ETF/mutual fund flows into small cap generally strongest in the beginning of year, taper off in summer months – may signal soft performance.

S&P 500 corporate balance sheets are flush with cash. Could lead to increased M&A activity, which should benefit small cap.

Our neutral position for US equity is 75% large cap / 25% small cap. Our current recommendation based largely on valuations is a split of 80% large cap / 20% small cap.


Equity Research Analyst Coverage

Source: The BLOOMBERG PROFESSIONALTM service

S&P 500 Sector Cash Levels (as of Q1-2011)

Source: The BLOOMBERG PROFESSIONAL Service

5

25

15

7

0

5

10

15

20

25

30

Small Cap Mid Cap Large Cap

Avg. # of Analysts Covering Each Stock in Index

33

1924

15

0

50

100

150

200

250

300

350

Energy Healthcare Industrials Technology

Cash added since Q1-2010

In $ Bln

Read more about Small Cap in this month’s key focus

article: “Small Cap, Big Impact.” Contact your Relationship Manager for more

information.

PB Americas


Asset Allocation &Economic Outlook

6



Cycle ClockThe Cycle Clock framework breaks the economic cycle into 4 phases (Overheating, Slowdown, Contraction & Recovery). For each of the 4 phases we examine which asset classes perform best.

GDP robust

Unemployment low

Tighter rate policy

Inflation rising

GDP dropping

Employment slowing

Tight rate policy

Inflation slowing

GDP contracting

Unemployment high

Easier rate policy

Inflation low

GDP picking up

Employment off

Easy rate policy

Inflation tame

Source: PB Global Research 7



Markets rebound on improved economic data, progress on Greek debt issues

Jul.Jun

Equity

- USA

- Non-US Developed

- Emerging Markets

Economic momentum slowing, expected to reaccelerate in H2-11

European sovereign debt issues persist, contagion risks remain

Inflation pressures have eased, monetary policy remains supportive

Cash Underweight due to unfavorable investment returns

Source: PB Americas Investment Strategy & Advisory

Positive* Negative* Neutral** Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.

8

Improvement in market sentiment and rising yields negative for sector

Fixed Income

- US Tax-Exempt

- US Taxable

- Non-USD

Local government fiscal issues & rising interest rates warrant caution

Quality credit fundamentals expected to peak; Greek debt rollover still an issue

EM valuations appear fair, credit selection remains key

Outlook Summary:



Outlook Summary:

Global Macro remains top opportunity in the space

Private equity funds currently holding record amounts of cash – buyout activity may flourish.

Suggest diversified exposure; current opportunities in US commercial property, Asia

Current negative sentiment creates opportunity for long-term investors

Jun Jul.


Alternative Investments

- Commodities

- Gold

- Hedge Funds

- Private Equity

- Real Estate

Global Macro funds poised to outperform during H2 2011 reacceleration

Positive* Negative* Neutral** Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.

9

Remains strong cyclically and technically with further upside



Guidance Allocations


BAA SAA BAA SAA BAA SAA BAA SAA BAA SAA

Cash 5.0% 4.0% 5.0% 3.0% 5.0% 2.0% 5.0% 2.0% 5.0% 2.0%

USD 5.0% 4.0% 5.0% 3.0% 5.0% 2.0% 5.0% 2.0% 5.0% 2.0%

Equities 0.0% 0.0% 20.0% 22.0% 40.0% 43.0% 55.0% 58.0% 65.0% 67.0%

USA 0.0% 0.0% 10.0% 11.5% 20.0% 22.5% 27.5% 30.5% 32.5% 35.0%

Developed Equities ex-US 0.0% 0.0% 6.0% 5.5% 12.0% 11.0% 16.5% 14.0% 19.5% 16.0%

Emerging Markets 0.0% 0.0% 4.0% 5.0% 8.0% 9.5% 11.0% 13.5% 13.0% 16.0%

Fixed Income 80.0% 80.0% 55.0% 54.0% 30.0% 29.0% 10.0% 9.0% 0.0% 0.0%

USD, Tax-Exempt 56.0% 54.0% 38.5% 36.5% 21.0% 20.0% 7.0% 5.0% 0.0% 0.0%

USD, Taxable 24.0% 22.0% 16.5% 14.5% 9.0% 7.0% 3.0% 2.0% 0.0% 0.0%

Non-USD, Taxable 0.0% 4.0% 0.0% 3.0% 0.0% 2.0% 0.0% 2.0% 0.0% 0.0%

Alternative Investments 15.0% 16.0% 20.0% 21.0% 25.0% 26.0% 30.0% 31.0% 30.0% 31.0%

Commodities 2.5% 3.0% 2.5% 3.0% 2.5% 3.0% 2.5% 3.0% 2.5% 3.0%

Gold 2.5% 3.0% 2.5% 3.0% 2.5% 3.0% 2.5% 3.0% 2.5% 3.0%

Hedge Funds 5.0% 5.0% 5.0% 5.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Private Equity 0.0% 0.0% 5.0% 5.0% 5.0% 5.0% 10.0% 10.0% 15.0% 15.0%

Real Estate (Property) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 0.0% 0.0%

TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Risk Budget5) HIGH1) LOW 2) LOW-MEDIUM 3) MEDIUM 4) MEDIUM-HIGH

The proposed Benchmark and Strategic Asset Allocations for each of the risk budgets referenced above are created by the Private Banking Americas Investments Strategy & Advisory

group. The Benchmark Asset Allocation (BAA), for a 3-7 year time horizon, is the neutral position reflecting the predefined risk budgets and meets investment objectives over a full market cycle.

The Strategic Asset Allocation (SAA), for a 6-12+ month time horizon, expresses views resulting in temporary deviations from the BAA to generate expected excess returns or reduce risk.

Alternative investments are typically high-risk investment vehicles which are available only to qualified individuals or entities that are willing to assume above average risk and sustain limited

liquidity with a portion of their net worth. Please refer to the attached “Important Legal Information” for important disclosure relating to alternative investments. 10



a Temporarily soft economic data turning more

positive, second half 2011 reacceleration gaining traction.

Lower gas prices and easing agriculture commodity prices point to decreased inflationary pressure.

Greece’s near-term funding issue appears solved. Medium-term support and possible private sector participation still being negotiated.

Japan’s industrial production is rebounding and alleviating some global supply chain bottlenecks caused by the natural disaster earlier this year.

China tightening is unlikely to result in a hard landing as increased wages and government spending support growth.

Recent weak economic data mask strong global fundamentals; H2 reacceleration projectedEconomics

US Gas Prices Decline: Freeing Up Income

Japan: V-Shaped Recovery


11

2.40

2.60

2.80

3.00

3.20

3.40

3.60

3.80

4.00

06.09 12.09 06.10 12.10 06.11

US Gasoline Price

USD per gallon

-20%

-15%

-10%

-5%

0%

5%

10%

05.07 05.08 05.09 05.10 05.11

Japanese Industrial Production

% MoM




Markets rebound on improved economic data, progress on Greek debt issuesEquities

Developed Markets Emerging Markets

USA

Asia

Asia Pacific ex-Japan

Latin America

Canada

Europe, Mid East, Africa

UK Japan Europe ex-UK

Despite recent uptick in markets, valuations remain compelling, particularly in the US.

Some clarity reached in Greek sovereign debt situation, though ultimate solution yet to be reached, volatility could persist.

Valuations attractive in Emerging Asia and Russia, momentum strong in Russia as well, despite oil trading well off 2011 highs.

Small caps look richly valued vs. large caps, and benefit relatively less from global reacceleration – prefer large cap.

As reacceleration thesis plays out, cyclicals should outperform (e.g. Technology and Materials).

Sector Outlook

Source: Credit Suisse Investment Strategy & Advisory

Information

Technology Financials

Materials

Health Care

Consumer Discretionary

Industrials

Consumer Staples

Telecomm Services

Energy

Utilities

Regional Outlook

Source: Credit Suisse Investment Strategy & Advisory Positive* Negative* Neutral** Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.

12



Improvement in market sentiment and rising yields negative for sectorFixed Income

With economic growth reaccelerating in second half of ’11 and corporate leverage expected to further increase, prospect of add’l spread tightening limited.

Risk averse investors: focus on short-to-medium term maturities in A to BBB space

HY default rates likely to bottom in the next 2-3 quarters. Specific opportunities still offer value.

Improvement in market sentiment with more transparency around Greece and economic reacceleration could benefit the EM space.

Local government fiscal issues and rising rates calls for caution in muni space.

Exposure to select IG credits may offer value. Favor financials.


Fixed Income Outlook

IG Spread: Further Compression Unlikely

Source: PB Americas Investment Strategy & Advisory Positive* Negative* Neutral** Arrows represent the current PB Americas Investment Strategy & Advisory absolute market view for 6-12 months.

Emerging Markets

US Treasury Inflation Protected

US Securitized

US Investment Grade Corp.

US High Yield

US Treasuries

US Municipal

13

0

100

200

300

400

500

600

700

06.01 06.03 06.05 06.07 06.09 06.11

US Investment Grade Spread Average

In bps



USD stabilizes, but still likely to weaken over the medium termCurrencies

Wide interest rate gap in favor of EUR is offset by risk premium. EUR remains overvalued, but supports remains in place.

Commodity currencies (AUD, NZD) overvalued, but commodity prices warrant current level.

Bank of England rate hike less certain and hike to occur later than anticipated.

Improving risk sentiment may weigh on JPY vs. other currencies. Narrow rate spreads at short end of curve.

EM currencies expected to outperform against USD. Low US yields and ample liquidity projected to lead to further EM capital inflows.

FX Outlook

CAD: Lower oil price may pressure currency



14

USD vs. CAD USD vs. CHF

GBP vs. USD NZD vs. USD

USD vs. JPY AUD vs. USD

USD vs. BRL USD vs. MXN

EUR vs. USD

0.6

0.8

1.0

1.2

1.4

1.6

1.8

06.01 06.03 06.05 06.07 06.09 06.11

0

20

40

60

80

100

120

140

160

USD vs. CAD Oil Price WTI (inverted)

In USD



Further downside risk to commodities limited as macro environment improves and various markets tighten. Current levels present a good entry point.

Despite recent selling pressure, palladium likely to perform well as a result of Russian supply shortages and increasing car production.

Natural gas remains attractive due to favorable valuation and supply constraints. Above average summer temperatures requires increased power to run air conditioning – benefits nat gas.

Agriculture prices closer to bottom, but overvaluations remain an issue, upside will be capped.

Current negative sentiment creates opportunity for long-term investorsCommodities

Palladium: Poised for Growth


Commodities Outlook


15

Precious Metals

Industrial Metals

Livestock

Agriculture

Energy

675

695

715

735

755

775

795

815

835

855

875

12.10 01.11 02.11 03.11 04.11 05.11 06.11

USD/oz



Global Macro funds poised to outperform during H2 2011 reaccelerationAlternatives

Mixed economic indicators and increased volatility have kept hedge fund capital on sidelines on fears of a double-dip recession and/or Greek default – neither of which is likely.

Remain constructive on global macro funds, despite recent performance issues, given prospect of H2 2011 reacceleration.

Private equity funds currently holding record amounts of cash – buyout activity may continue to flourish.

Real property remains a key part of a global asset allocation. Focus on select parts of US and Asia.

ISM Manufacturing Index: Turning Up


Greek 5yr CDS: Elevated Levels on Default Fear


16

30

35

40

45

50

55

60

65

12.08 06.09 12.09 06.10 12.10 06.11

800

1000

1200

1400

1600

1800

2000

2200

12.10 01.11 02.11 03.11 04.11 05.11 06.11

in bps

PB Americas


AppendixKey Forecasts Global ReturnsHistoric Snapshots

17



Key Forecasts*

Global Equity Indices 6/30/11 12M

US (S&P 500) 1,321 1,404

Euro Area (Euro Stoxx 50) 2,849 3,061

UK (FTSE 100) 5,946 6,236

Japan (Nikkei 225) 9,816 10,500

Asia Ex-Japan (MSCI Asia AC ex-Japan) 567 655

6/30/11 Year-endBrazil (Bovespa) 62,404 85,000

Mexico (IPC) 36,558 40,000

Commodities6/30/1

13M 12M

EnergyWTI Crude Oil (USD/barrel) 95.42 98 105US Natural Gas (USD/mmbtu) 4.37 4.50 5.50

Precious Metals (Spot, USD/ounce)

Gold 1,500.35 1600 1700

Silver 34.69 34 31Platinum 1720.20 1850 1950

Base Metals (Spot, USD/pound)

Aluminum 1.15 1.25 1.30Copper 4.28 4.17 4.80

Agriculture ($/bushel)Wheat 5.85 7.50 7.10Corn 6.29 7.70 7.20

Real GDP (In %) 2011E 2012E Inflation 11E

Global 4.40 4.40 3.70US 2.70 2.70 2.50Euro Area 2.30 2.10 2.60Japan 0.20 2.60 0.20Non-Japan Asia 7.80 7.60 5.40Latin America 4.30 3.90 7.00

Interest Rates (10-yr Gov.)

6/30/11

3M 12M

US 3.163.2 – 3.4%

3.3 – 3.5%

Euro Area 3.033.0 – 3.2%

3.1 – 3.3%

UK 3.383.3 – 3.5%

3.7 – 3.9%

Japan 1.141.0 – 1.2%

1.2 – 1.4%

Currencies (USD vs.)6/30/1

1 3M 12M

Euro** 1.45 1.44 1.42

Japanese Yen 80.56 84.00 87.00

British Pound** 1.61 1.65 1.67

Swiss Franc 0.84 0.88 0.92

Canadian Dollar 0.96 1.00 1.02

Australian Dollar** 1.07 1.05 1.05

New Zealand Dollar** 0.83 0.79 0.79

Mexican Peso 11.71 11.50 11.40

Brazilian Real 1.56 1.57 1.60

Source: PB Global Research, The BLOOMBERG PROFESSIONALTM service, Thompson Reuters DataStream*3month, 12month, or Year-end forecasts as indicated; **Level with USD as counter currency, price change with

USD as base currency18



Global Returns Dashboard

Source: The BLOOMBERG PROFESSIONALTM service, Thompson Reuters Datastream

*Level with USD as counter currency, price change with USD as base currency

Global Equities (TR, Local Currency)

Jun-11 YTD

S&P 500 -1.7% 6.0%

Canada (Toronto Stock Exchange) -3.3% 0.2%

Euro Area (Euro Stoxx 50) -0.3% 4.6%

UK (FTSE 100) -0.4% 2.7%

MSCI Asia/Pacific ex-Japan -2.7% 0.0%

Japan (Nikkei 225) 1.3% -3.0%

MSCI EM Asia -2.2% 1.5%

MSCI EM Europe, Middle East/Africa -1.0% 2.2%

Brazil (Bovespa) -3.4% -10.0%

Mexico (IPC) 2.1% -4.4%

Fixed Income (TR, USD)

Jun-11 YTD

Barclays US Government Bond -0.3% 2.2%

Barclays US Municipal Bond 0.3% 4.4%

Barclays US Inflation Linked (TIPS)

0.8% 5.8%

Barclays US Mortgage-backed 0.1% 2.9%

Barclays US Investment Grade -0.9% 3.2%

Barclays US High Yield -1.0% 5.0%

JP Morgan Emerging Markets 1.3% 5.0%

Barclays Global Aggregate 0.1% 4.4%

Commodities (TR) Jun-11 YTD

DJ-UBS Commodities Index -5.0% -2.6%

DJ-UBS Agriculture Sub-index -8.2% -7.1%

DJ-UBS Energy Sub-index -6.4% -1.7%

DJ-UBS Industrial Metals Sub-index

-0.4% -3.5%

DJ-UBS Precious Metals Sub-index

-4.1% 6.9%

WTI Crude Oil (USD/barrel) -7.1% 4.4%

Gold (USD/ounce) -2.3% 5.6%

Currencies (USD vs.) Jun-11 YTD

Euro* -0.7% -7.7%

Japanese Yen -1.2% -0.7%

British Pound* 2.5% -2.7%

Swiss Franc -1.6% -10.1%

Canadian Dollar -0.5% -3.5%

Mexican Peso 1.2% -5.1%

Brazilian Real -1.1% -5.9%

Australian Dollar* -0.5% -4.6%

New Zealand Dollar* -0.6% -5.9%

19



Historic Snapshots

Source: The BLOOMBERG PROFESSIONAL TM service,, Thompson Reuters DataStream

US 10-Year Tsy Yield & Consumer Price

Index

S&P 500 & MSCI Emerging Markets

Index

US GDP Growth & Unemployment Rate

S&P 500 & MSCI Emg Mkts 12M Fwd P/E

Ratio

20

200

400

600

800

1000

1200

1400

1600

06.91 06.95 06.99 06.03 06.07 06.11

200

400

600

800

1000

1200

1400

S&P 500 MSCI EM (r.h.s.)

5

10

15

20

25

06.91 06.95 06.99 06.03 06.07 06.11

S&P 500 MSCI EM

1

2

3

4

5

6

7

8

9

06.91 06.95 06.99 06.03 06.07 06.11

-3

-2

-1

0

1

2

3

4

5

6

10-Yr Treasury Yield CPI (r.h.s.)

In % Y-o-Y % Change

-8

-6

-4

-2

0

2

4

6

8

10

03.91 03.95 03.99 03.03 03.07 03.11

0

2

4

6

8

10

12

GDP Q-o-Q Ann'd Unemployment Rate (r.h.s.)

In % In %

v



Historic Snapshots

Source: The BLOOMBERG PROFESSIONALTM service,, Thompson Reuters DataStream

DJ-UBS Commodity Index

S&P/Case-Shiller Home Price Index

US Dollar Trade Weighted Index

Gold & WTI Crude Oil Price

21

80

100

120

140

160

180

200

220

04.00 04.02 04.04 04.06 04.08 04.10

0

300

600

900

1200

1500

1800

06.91 06.95 06.99 06.03 06.07 06.11

0

20

40

60

80

100

120

140

160

Gold Oil (r.h.s.)

In $/oz In $/bbl

60

70

80

90

100

110

120

06.91 06.95 06.99 06.03 06.07 06.11

50

100

150

200

250

300

350

400

450

500

06.91 06.95 06.99 06.03 06.07 06.11



Important Legal InformationThis information is not intended to be a recommendation or opinion regarding the equity securities of the referenced companies. This material may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with Credit Suisse Securities (USA) LLC (CSSU). This material has been prepared by the Investment Strategy & Advisory Group of the Private Banking USA business of CSSU and not by the CSSU research department. It is provided for informational purposes, is intended for your use only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. The material is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of the Investment Strategy & Advisory Group, which may be different from, or inconsistent with, the observations and views of CSSU research department analysts, CSSU traders or sales personnel, or the proprietary positions of CSSU. Observations and views expressed herein may be changed by the Investment Strategy & Advisory Group at any time without notice. Past performance is not an indication or guarantee of future performance, and no representation or warranty, expressed or implied is made regarding future performance. The material set forth above has been obtained from or based upon sources believed to be reliable but CSSU does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes in market factors. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view of a particular market. CSSU may, from time to time, participate or invest in transactions with issuers of securities that participate in the markets referred to herein, perform services for or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. The material does not constitute objective research under FSA rules. The most recent CSSU research on any company mentioned is available to online subscribers at www.credit-suisse.com/pbclientview. CSSU does not provide legal or tax advice. Consult your personal accounting, legal, and tax advisor with respect to any legal or tax implications.

Private equity funds, hedge funds and other alternative investments are complex instruments that are not suitable for every investor, may involve a degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Before entering into any transaction, an investor should determine if the product suits his or her particular circumstances and should independently assess (with his or her professional advisers) the specific risks and the legal, regulatory, credit, tax and accounting consequences. CSSU makes no representation as to the suitability of any alternative investment product for any particular investor nor as to the future performance of any such products. Any offering of interest in any private equity fund, hedge fund or other alternative investment product shall only be made pursuant to the offering material for each such product, which will be provided to each prospective investor before making his or her investment decision and which contains information about such product's investment objectives, the terms and conditions of an investment in such product and also contains tax information and risk disclosures that involve significant risks, such as loss of entire investment, illiquidity, restrictions or transferring of interests, volatility of performance, and currency risks. Before deciding to invest in a private equity fund, hedge fund, or other alternative investment, prospective investors should read the relevant offering material for such product and pay particular attention to the risk factors contained therein. Prospective investors should have the financial ability and willingness to accept the risk characteristics of such investment.

The Private Banking USA business in CSSU is a regulated broker dealer and investment advisor. It is not a chartered bank, trust company or depository institution. It is not authorized to accept deposits or provide corporate trust services and it is not licensed or regulated by any state or federal banking authority. Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

This material may be distributed in Mexico by Banco Credit Suisse (México), S.A., for information purposes only, this may not be construed as an offer or an invitation to enter into any transaction or purchase any security or investment product that may not be undertaken under Mexican applicable regulation.

©2011 Credit Suisse Securities (USA) LLC. All rights reserved

22

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