Credit Suisse Drops Bonds Preference to Favor Stocks (Update2) By Adam Haigh and Jeff Kearns
July 21 (Bloomberg) -- Credit Suisse Group AG advised investors to trim their holdings in government bonds and buy equities, reversing a recommendation from June. Credit Suisse raised its estimate for the Standard & Poor's 500 Index by 14 percent to 1,050 by the end of the year, citing improving economic indicators and earnings. Investors should increase holdings of global equities to "overweight" and reduce government bonds to "benchmark," according to London-based global strategist Andrew Garthwaite. The VIX and investment-grade corporate bond spreads have returned to more "normal levels" and this will allow money market funds to buy into the stock market, Garthwaite told clients in a note today. The S&P 500 has climbed 5.7 percent this year, recovering after a 25 percent plunge through March 9, as better-than- expected corporate profits and signs that the world's largest economy is stabilizing spurred the biggest rally since the 1930s. The U.S. stock benchmark climbed 0.4 percent today to 954.58, the highest Nov. 4. Valuations on equities are "not expensive" and consensus estimates for earnings in the U.S. are now being increased, something which precedes a rising stock market in the subsequent two to three months, Garthwaite wrote. Economic Recovery "Bonds no longer look attractive," he wrote. We expect "a positive macro surprise in the second half of the year. We believe that we are halfway through the first `V' of an upward sloping W-shaped recovery, with a likely peak in the early fourth quarter." A Merrill Lynch & Co. index of G-7 government bonds yielded 2.08 percent as of yesterday, compared with an average over the past five years of 2.90 percent. The yield was as high as 2.33 percent this year on June 11. Garthwaite also cited the drop in the Chicago Board Options Exchange Volatility Index, or VIX, to its level before the September collapse of Lehman Brothers Holdings Inc. as an example of investor sentiment returning to "normal." The benchmark for U.S. stock options is down 40 percent this year. On June 29 it fell below the Sept. 12 close of 25.66, the last session before Lehman filed for the biggest bankruptcy in U.S. history. The VIX surged to a record 80.85 in November. Goldman Sachs Group Inc.'s David Kostin yesterday increased his estimate for the S&P 500 index, saying the benchmark for U.S. equities will advance 15 percent from its June 30 level to 1,060 on Dec. 31, an increase from his prior projection of 940. JPMorgan Chase & Co. equity strategist Thomas Lee, the most bullish of 10 Wall Street strategists followed by Bloomberg News, said in a report yesterday that analysts have been slow to boost estimates out of concern that the recession will linger. That's similar to what happened during the 2002 stock market recovery, he said. Lee, who has maintained his annual S&P 500 forecast of 1,100 all year, recommends investors favor small companies and businesses that can grow profits the most as the economy expands. http://www.bloomberg.com/apps/news?pid=20601213&sid=auRbyaIpAtBU
