瑞信-全球投资策略-全球股票策略：行业加入奢侈品和可再生资源及其他变化

10June2022

EquityResearch

Global|Europe|UnitedKingdom

GlobalEquityStrategy

Sectors:addtoluxuryandrenewablesand

otherchanges

InvestmentStrategy|Strategy

Amonthago,westartedtoaddtocyclicalsforthefirsttimesinceJuly2021(seeCyclicalsrevisited:somechanges,5May).Asofnow,thepriceratioofcyclicalstodefensivesisdiscountingaPMIof52inEurope.Weexpectittofalltoc45.

Weraiseluxurytobenchmark(fromunderweight):ItisaChina-opening-upbeneficiary,withc40%ofenddemandbeingChinese(wherepolicyhasbecomemorestimulatory,andwethinkChinawillfocusonconsumption/infrastructure);valuationsarebacktoneutrallevels(havingbeenveryexpensive)forasectorthathasstructuralgrowthwithhighbarrierstoentry;andwealth-to-incomeratiosarestillveryhighintheUS(supportingluxury).CShasOutperformratingsonLVMH,Puma,Swatch.

Weaddtoouroverweightinutilitiesviarenewables:Fromamacroperspective,EuropeanutilitiestendtooutperformwhenPMIsfall,anditistypicallythebestperformingsectorwhentheyieldcurveflattens(whichitshoulddofromhere).Thereisabigpolicytailwind,withbothenergyindependenceanddecarbonisationhelpingthissectorbecomemoregrowth-likethaninthepast.ValuationslookreasonableonFCF(10%onmaintenancecapex)anddividendyieldrelatives.Fallingindustrialcommodityprices(fromrecentpeaks)helpmargins.Apeakinfossilfuelpriceswouldalsopotentiallyhelptoreducethepoliticalpressureonutilities.OurEuropeanUtilitiesteam’stoppicksare:Acciona,Enel,RWE.

Wereduceregulatedutilitiestobenchmark:ValuationsonP/EandP/RABareatall-timehighs.WethinkEuropeanandUKinflationexpectations,unliketheUS,arenowrealistic(UKandItalianregulatedutilitieshaveindex-linkedreturns).UKwaterstockshavecaughtupwithindex-linkedbonds,andwealsoseeariskofincreasedpoliticalpressureonwaterstocks.

Wetakeindustrialgasesdowntobenchmark,primarilyonvaluation(theP/ErelativetogrowthandtheP/ErelativetoEuropeanmarketsareclosetoall-timehighs);thesectorisdefensivebutdiscountinga-c10ptfallinPMIs.

Weslightlylowerouroverweightinbig-cappharmabecausewethinkmostoftheriseincommoditypricesisbehindus(pharmawasthekeydefensivewinnerfromthis)andpharmaisnowdiscountingalargefallinPMIscloseto40.Whystilloverweight?i)Pharmaisthebiggestdollarearner(andwecanseethedollargettingclosetoparitywiththeeuro);ii)ittendstobethebestperformingsectorwhencreditspreadsrise(aspharmaarelowlyleveraged);iii)valuationslookreasonable(unlikeregulatedutilities,industrialgases,orfoodproducerswhereP/Erelativesareclosetooratall-timehighs);iv)itrankswellonourscorecard(2ndoveralland1stonfundamentals—betterthansemis);v)earningsrevisionsarebetterthanthemarket’s;andvi)weseelittlepoliticalpressureondrugpricesneartermintheUS.OurEuropeanPharmateam’stoppicksareSanofiandAstraZeneca.

Weareunderweightfoodproducers:P/Erelativesareatall-timehighs,GEMexposureisproblematicasfoodpricesriseandthedollarrises(theyhavethebiggestexposuretoGEMofanymajorsector),thepriceelasticityofdemandisprobablyhigherthannormalbecauseofthegrowthofprivatelabel,andearningsrevisionsareworsethanthemarket’s.

Germanrealestate:smalloverweight:P/Brelativetothemarketisbackatrecessionlevels.ThesectorispricinginaBundyieldof2.3%(thisistoohigh).Wedonotseerealestatepricesfallingsignificantly(asisbeingdiscountedbyshareprices),giventherentalyieldisstillabovethemortgagerate.

Mining:Wekeepasmalloverweight(seenoteof5May).

ResearchAnalysts

AndrewGarthwaite

442078836477

andrew.garthwaite@

RobertGriffiths

442078838885

robert.griffiths@

AsimAli

442078832480

asim.ali@

MarcelKoussa

442078833896

marc.elkoussa@

AndjelaBozinovic

442078837364

andjela.bozinovic@

DISCLOSUREAPPENDIXATTHEBACKOFTHISREPORTCONTAINSIMPORTANTDISCLOSURES,ANALYSTCERTIFICATIONS,LEGALENTITYDISCLOSUREANDTHESTATUSOFNON-USANALYSTS.USDisclosure:CreditSuissedoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethattheFirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.

10June2022

GlobalEquityStrategy2

TableofContents

Keycharts3

Sectors:addtoluxuryandrenewables4

Luxury:uptobenchmarkfromunderweight

5

Strongoverweightutilities:Weaddabittorenewablesbutreduceregulatedutilities

10

Whyweaddtorenewables10

Whattobuy?16

Wewouldreducethewatercompaniesandregulatedutilitiestobenchmark18

Industrialgases:downtobenchmark

20

Big-cappharma:reduceoverweight

22

Weslightlyreduceouroverweightforthreereasons:22

Whyarewestilloverweight?24

Germanrealestate:smalloverweight

29

Foodproducers:increaseunderweight

34

Appendix

39

10June2022

GlobalEquityStrategy

Keycharts

Figure1:ThePErelofluxuryischeapvsstaples

210

EuropeanLuxury12mfwdPErelConsumerstaples

190Average(+/-1stdev)

170

150

130

110

90

70200220042007200920122014201720192022

Source:Refinitiv,CreditSuisse

Figure3:Renewablesearningsrevisionsareimproving

40.0%

30.0%

20.0%

10.0%

0.0%

-10.0%

-20.0%

Eurrenewablesrelperf,%yoychgrhs

EuropeanRenewables3mbreadthrelMarket

100

80

60

40

20

0

-20

-40

-30.0%-60

20012004200720102013201620192022

Source:Refinitiv,CreditSuisse

Figure2:Utilitiesperformwellwhentheyieldcurveflattens

80.0%

60.0%

40.0%

20.0%

0.0%

-20.0%

-40.0%

-60.0%

Retailers

Autos

Telecoms

Media

Banks

HHGoods

Constr.Mats.

Beverages

FoodProd.

Pulp&Paper

Pharma

Cons.Dur.

Software

Insurance

Tobacco

Tech.Hardware

Transport

Energy

CapGoods

Med.Equip.

Mining

Semis

Hotels

Chemicals

RealEstate

DivFin.

Utils

AverageEuropeansectorcorrelationtoyieldcurve(2s10s)

whenthe2yisrisingfasterthanthe10y

Source:Refinitiv,CreditSuisse

Figure4:Industrialgasstockslookexpensive

2MSCICont.Europeanindustrialgas,12mfwdPErelative

Average(+/-1s.d.)

1.8

1.6

1.4

1.2

1

0.8

2007

2009

2011

2012

2014

2016

2020

2022

2018

Source:Refinitiv,CreditSuisse

Figure5:Thewaterstocks’multipleisupwithevents

-4

-3

2.2

UKwaterstocks12mfwdPErelmktInflation-linkedgilt,rhs,inv

2

1.8

-2

1.6

-1

1.4

0

1.2

1

1

2

0.8

0.6

0.42000

3

4

20022005200820112013201620192022

Figure6:EuropeanPharmaisnowpricingPMIsat40

75

55

35

15

-5

-25

-45

Europeanpharmapricerelmarket,%chgy/y

EuroareaPMImanufacturingneworders,rhs,Inverted

17

27

37

47

57

67

2000

2004

2008

2013

2017

2022

Source:Refinitiv,CreditSuisse

Source:Refinitiv,CreditSuisse

10June2022

GlobalEquityStrategy

Sectors:addtoluxuryandrenewables

InearlyMay(Cyclicalsrevisited:somechanges,5May),weaddedtocyclicals(i.e.reducingthe

sizeofourunderweight).Rightnowwefindthepriceratioofnon-financialcyclicalsto

defensivesisdiscountingaPMIneworderofaround52inEurope(equatingtoc1%GDPYoY

inEurope),whereaswethinkPMInewordersfallto45.Thisismuchmorerealisticthanused

tobethecase,inourview,thoughitisstillnotlowenough.Wefoundthatcyclicalsnormally

troughedwhenPMIstroughed(andwewouldexpectthetroughtobeinlatesummer).

Additionally,cyclicalswerenotcheaponourfavouredmeasureofP/Bwhichadjustsforthe

cycle.

Figure7:Cyclicalsarepricingin52onPMIs

Europecyclicalsexfin,extechreldefensives

82%

77%

72%

67%

62%

57%

52%

EuroareaPMImanufacturingneworders,rhs

73

66

59

52

45

38

31

24

17

20002003200620092012201520182022

Source:Markit,Refinitiv,CreditSuisseresearch

Figure8:CyclicalsremainexpensiveonP/Brelatives

EuropeanCyclicals(extechexfin)

97%rel.todefensives:PB

avg(+-stdv)

87%

77%

67%

57%

47%

37%

1994199820012004200720102013201620192022

Source:Refinitiv,CreditSuisseresearch

Cyclicalshavebounced(theyarenolongersooversold),andourstancehasbeentoaddto

cyclicalsincheapareas(constructionmaterials,automations,withasmalloverweightinbanks

andmining)buttoremainunderweightoverall.Inthisnotewereviewsomedefensiveareasas

wellasaddingtoluxury.

Figure9:Cyclicalsarenolongersooversold

Deviationfrom6mmovingaverage

19.0%

EuropeancyclicalsextechvsdefensiveAvg(+-1stdv)

14.0%

9.0%

4.0%

-1.0%

-6.0%

-11.0%

-16.0%

-21.0%

19972001200420082011201520182022

Source:Refinitiv,CreditSuisseresearch

10June2022

GlobalEquityStrategy

Luxury:uptobenchmarkfromunderweight

1.IthasperformedverypoorlythisyearrelativetotheotherChinaplays.

Thiswassomethingofacatch-downfromitsearlierstrongoutperformance.

Figure10:Europeanluxuryisamongtheworst-performingChina-exposedsectors

thisyear

140

130

120

110

100

90

80

relPanEurope(YTDperf)

capgoods

Europeanluxury

Europeanchinaexposed

Europeanmining

GermanAutos

70

Dec-21Jan-22Feb-22Mar-22Apr-22May-22

Source:Refinitiv,CreditSuisseresearch

2.WebelievethatChinaPMIswillpickupasthecountryopensup.

Chinaisthekeydriverforluxurywitharound40%oftotaldemandcomingfromChina(and

moreofincrementaldemand).Fromhere,weexpectChinaPMIstotroughandChinatoease

policymoreandtoopenup.Thereisevidenceatlastthatzero-COVIDisworking.Moreover,as

wepreviouslyhighlighted,ifitdoesnotwork,wethinkapossiblesolutionthecountrymight

considerwouldbemandatoryvaccinationforover60yearsold(wherethevaccinationrateis

c60%withaboosterjab)andimportingforeignMRNAvaccine.HongKongUniversityhas

highlightedveryhighefficacyusingtheChinesevaccines(aslongastherehasbeenabooster

jab)andourpharmateambelievesFosanhasthecapacitytoquicklyproduce1bndosesof

PfizerMRNAvaccinesifitwerelicensed.Moreover,bySeptemberitappearsthataneffective

anti-viraldrugwillbeavailable.

Figure11:NBSandMarkitnewordersarenowrecovering

65ChinaManufacturingPMIneworders(averageofNBSandMarkit)

60

55

50

45

40

35

30

2005

2007

2009

2011

2015

2017

2019

2022

2013

Source:Markit,Refinitiv,CreditSuisseresearch

Figure12:Zero-COVIDnowappearstobeworking

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

3/1/22

3/5/22

3/9/22

3/13/22

4/6/22

4/10/22

4/30/22

5/4/22

5/8/22

5/12/22

5/16/22

4/14/22

4/18/22

4/22/22

4/26/22

28,000

24,000

20,000

16,000

28-Mar:Shanghai

lockdown

12,000

14-Mar:Changchun

lockdown

17-May:alldistricts

inShanghai

reachedzero

14-Apr:Jillinprovince

reachedzerocommunityspread

8,000

community

spread

07-Mar:Jilinlockdown

27-Apr:Jilincity,Changchunremovedlockdowngradually

4,000

0

3/17/22

3/21/22

3/25/22

3/29/22

4/2/22

Changchun

Jilincity

Shanghai(RHS)

Source:Refinitiv,CreditSuisseresearch

10June2022

GlobalEquityStrategy

CurrentconsumptionshareofGDPdifferenceto

20yaverage

EstoniaJapanLatviaMexico

Moreeasingofpolicyappearstobeontheway.Thecombinationofanincreaseinspecialbond

issuance,transferstolocalgovernmentsandcorporatetaxrebatesamountstonearly3%of

GDP(seethe6thJunenoteofourChinaeconomistDavidWangformoredetailsChina:How

does2022fiscalspendingcomparetothat).Averysharpriseinspecialbondissuancetends

toprecedeanaccelerationofgrowth.Wethinksuchaneasingisgenerallyhighlypolitically

desirableaheadofthe20thCPCinNovember.

Figure13:TSFgrowthseemstobeatatrough

15%

14%

13%

12%

11%

10%

9%

RMBloangrowth,PBOC

TSFgrowth,PBOC

Jan-16

Apr-17

Jul-18

Jan-21

Apr-22

Oct-19

Source:Refinitiv,CreditSuisseresearch

ItisalsoobviousthatChinesegrowthhastobeconsumer-drivengivenofGDPissolowcomparedtonearlyeveryothermajorOECDcountry.focusonconsumervouchersandinfrastructureprojects.

Figure15:China’sconsumershareofGDPisverylow

Figure14:Specialbondissuanceisexpectedtopickup

sharply

6000

5000

4000

3000

2000

1000

0

Newspecialbondissuance(RMBbn),cumulative

2020

2021

2022

2022CSForecast

JanFebMarAprMayJunJulAugSepOctNovDec

Source:CreditSuisseChinaEconomics

thattheconsumershare

Weexpectpolicyto

12%10%8%6%4%2%0%-2%-4%

-6%

Egypt(83%,8.1%)

Malaysia

HongKong

SaudiArabia

IndiaBrazil

ChileArgentina

RussiaIndoneiUS

ChinaFrancouthAfricaPhilippines

Thailand

KoreaGermanyLithuania

Poland

Hungary

Bulgaria

Turkey

37%47%57%67%77%

CurrentconsumptionshareofGDP

Source:Refinitiv,CreditSuisseresearch

40

30

20

10

0

-10

-20

-30

3.SomesignsthatChinesepropertymightbegettingnoworse,andifanything

luxuryhasperformedworsethanpropertydevelopers.

80%ofChina’swealthcomesfromrealestate.Wewouldexpectthemonthonmonthfallin

propertypricestoslowonthebackpolicysupport(i.e.,easingofregulationanddown

payments)andthecutinthe5y-LPR(i.e.lowermortgagerate).Yearonyearpricesarestillup.

OurChinaQuantitativeInsightsreportsshowsignsofanemergingturningpointinresidential

property.Normallythereisaclosecorrelationbetweenrealestatedevelopersandluxury.

Figure16:Chinesehousepricesarestillupyearonyear(70citiesaverage,onRefinitivdata)

1.00.20.0-0.2-0.4

China70citieshouseprice

12

10

8

6

4

2

0

Month-on-month Year-on-year,rhs

201720182019202020212022

Source:Refinitiv,CreditSuisseresearch

Figure17:EuropeanluxuryseemstohavedecoupledfromtheChinesedevelopers

50

MSCIChinarealestaterel.toMSCIChina,6mchange%

Europeanluxuryrel.toMSCIEurope,yoy,6mchange%

-40

201220142016201820202022

Source:Refinitiv,CreditSuisseresearch

4.Valuationsarenowmiddling.

P/Erelativesagainstthemarketarenowneutral.Thesectorisnowmarginallycheapagainst

theothermajorbrandedconsumerarea,namelyconsumerstaples.

Figure18:Luxurygoods12mforwardP/Erelativetothemarketisnowbacktoneutrallevels

250EuropeanLuxury12mfwdPErelmkt

Average(+/-1stdev)

230

210

190

170

150

130

110

90

70

50

200220042007200920122014201720192022

Source:Refinitiv,CreditSuisseresearch

Figure19:Comparedwithotherconsumer-brandedsectors,luxuryisslightlycheap

210

EuropeanLuxury12mfwdPErelConsumerstaples

190Average(+/-1stdev)

170

150

130

110

90

70200220042007200920122014201720192022

Source:Refinitiv,CreditSuisseresearch

10June2022

GlobalEquityStrategy

5.Assetpriceperformancestillapositive.

UShouseholdwealthtoincomeisstillwayabovetrend(evenadjustingforcurrentequityprices).

Equitypriceswouldneedtofallnearlyanother25%-30%forthistofallbacktotrend.This

shouldsupportluxurydemand.

Figure20:Householdnetwealthtoincomeisstillveryhigh

850

800

750

700

650

600

550

500

Householdsnetworth%ofdisposableincome

199820012004200620092012201520182021

Source:Refinitiv,CreditSuisseresearch

6.Performancehasbeenworsethanearningsrevisions.

Figure21:Luxuryrelativeearningsrevisionshaverolledover

EuropeanLuxurygoodsperfrelmkt,y/y%chg

70

EuropeanLuxury3mearningbreadthrelmkt,rhs

60

50

40

30

20

10

0

-10

-20

-30

2002200420062008201020132015201720192022

20%

15%

10%

5%

0%

-5%

-10%

Source:Refinitiv,CreditSuisseresearch

7.Luxury:astrongstrategicstory.

Risingmiddleclassesinemergingmarketstendtoseekitemsofconspicuousconsumption

tohighlighttheirenhancedeconomicstatus.Therefore,tosomeextentluxuryoffers

exposuretotheindustrialisation/urbanisationofemergingmarkets,whichhasmuchfurther

togo.

10June2022

GlobalEquityStrategy

Figure22:Urbanpopulationas%oftotalpopulation

100

90

80

70

60

50

40

30

Urbanpopulationas%oftotalpopulation

Brazil

Germany

China

Indonesia

India

UnitedStates

Source:Refinitiv,CreditSuisseresearch

Moreover,luxuryisveryhardtodis-intermediate,andmanyluxurybrandscanactasa

storeofvalue(e.g.high-endCartierwatches).Forexample,PatekPhilippeisoneofonlya

fewbrandstohaveexistedforover150yearsandhaspartlybeenastoreofvalue(prices

haverisenmorethaninflation).

Leveragetendstobelow.

Insomeinstances,therearemeaningfulproductionconstraints,givingsignificantpricingpowertotheproducer.

Wetrytoproxybrandvaluebylookingatenterprisevalueless(inflation-adjusted)netassetmarketvalueofinvestmentsandminorityinterestsasashareofEV,whichshowstheluxurysectorisabletogeneratesignificantvaluewithrelativelylowlevelsofinvestment.

Figure23:Theluxurysectorhashighbrandvalue

90%80%70%60%50%40%30%20%10%0%

EVlessnetassets,marketvalueofinvestmentsandminorityinterest,%EV

Technology

Tobacco

Luxury

Pers&HHGoods

Food&Bev

HealthCare

Retail

IndsGds&Svs

Chemicals

Travel&Leis

Media

Con&Mat

Auto&Parts

Telecom

BasicResource

Oil&Gas

Source:Refinitiv,CreditSuisseresearch

Figure24:Thesectorhasverylittleleverage

90%80%70%60%50%40%30%20%10%0%

CommSvs

Utilities

Cons.Discretionary

Energy

Cons.Staples

Industrials

Materials

Healthcare

Luxury

IT

PanEursectors-Netdebttomktcap

Market

Source:Refinitiv,CreditSuisseresearch

10June2022

GlobalEquityStrategy

Retailers

Autos

Telecoms

Media

Banks

HHGoods

Constr.Mats.

Beverages

FoodProd.

Pulp&Paper

Pharma

Cons.Dur.

Software

Insurance

Tobacco

Tech.Hardware

Transport

Energy

CapGoods

Med.Equip.

Mining

Semis

Hotels

Chemicals

RealEstate

DivFin.

Utils

Figure25:EuropeanLuxurynameswhichCSratesOutperform

Name

FCFYeild

---

Abs

--P/E(12mfwd)------

reltomkt%

above/below

average

relto

Industry

------P/B-------

reltomkt%

Absabove/belowaverage

2022e,%

FCYDY

HOLT

Price,%

changeto

best

2022eMomentum,%

3mEPS3mSales

Consensusrecommendation(1=Buy;5=Sell)

CreditSuisse

rating

Outperform

TheSwatchGroup

8.0%

13.2

90%

-26%

1.1

-54%

6.4

3.1

-9.6

-5.6

-1.4

2.3

Kering

4.0%

14.7

101%

-13%

4.6

-1%

6.2

2.9

48.7

5.0

6.7

2.1

Outperform

Lvmh

3.7%

21.1

144%

0%

6.3

21%

4.1

1.9

4.2

4.1

3.1

2.0

Outperform

Puma

3.4%

22.0

151%

-29%

4.4

-3%

4.4

1.3

35.0

-5.3

2.3

1.9

Outperform

Source:IBES,MSCI,HOLT,Refinitiv,CreditSuisseestimates

Strongoverweightutilities:Weaddabittorenewables

butreduceregulatedutilities

Whyweaddtorenewables

1.Macrosupports

i.UtilitiesareoneofbestperformingsectorswhentheyieldcurveflattensandPMIsfall.

FromherewewouldexpecttheyieldcurvetoflattenandPMIstorollover.Utilitiestendsto

benefitfromthat.

Figure26:Utilitiesisthebestperformingsectorwhentheyieldcurveflattens

AverageEuropeansectorcorrelationtoyieldcurve(2s10s)whenthe2yisrisingfasterthanthe10y

80.0%

60.0%

40.0%

20.0%

0.0%

-20.0%

-40.0%

-60.0%

Source:Refinitiv,CreditSuisseresearch

Figure27:UtilitiestendstooutperformwhenPMIsfall

EuroareaPMImanufacturingneworders

70

-30

EuropeanUtilitiespricerelmarket,(%chgy/y)rhs,inv

65

-20

60

-10

0

55

10

50

20

45

30

40

35

40

199920042008201320172022

Source:Markit,Refinitiv,CreditSuisseresearch

ii.Theheadwindofrisingrealbondyieldsdiminishes.

WecanseethatutilitieshavethehighestleverageofanysectorandthattypicallyiftheTIPS

yieldfalls,thenutilitiesoutperform.WethinkthattheTIPSyieldisclosetoitspeak.

10June2022

GlobalEquityStrategy

Figure28:WhenTIPSyieldsfall,utilitiestendtoperformbetter

23

18

13

8

3

-2

-7

-12

-17

Europeanutilitesreltomarket,6m%chg

US10-yearTIPSyields,6mchg,rhs,inv.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2014

2017

2019

2022

2012

Source:Refinitiv,CreditSuisseresearch

Figure29:Utilities,particularlytheregulatedsubsector,remainahighlyfinanciallyleveredsector

RegulatedUtilities

Auto&Parts

Non-regulatedUtilities

Food&Bev

Telecom

Chemicals

Retail

IndsGds&Svs

Media

HealthCare

Pharma

Oil&Gas

ConsPrd&Svcs

Mining

6

EuropesectorNetdebt/EBITDA

5

4

3

2

1

0

Source:Refinitiv,CreditSuisseresearch

iii.Thebondtoequitycorrelationisstartingtoturnnegativeagain,thusutilitiesdiversify.

Thedefiningcharacteristicofthiscorrectionhasbeenthatasbondyieldshaverisensoequities

fell.Thishasstartedtochangeinthepastmonth.Thustosomeextentutilitiesnowoffer

diversificationwithinaportfoliocontext.

Figure30:Thebondtoequitycorrelationhasturnednegativeagain

3.1

US10yYield S&P500,rhs

2.9

2.7

2.5

2.3

2.1

1.9

1.7

1.5

1.3Dec-21Jan-22Feb-22Mar-22Apr-22May-22

5000

4800

4600

4400

4200

4000

3800

Source:Refinitiv,CreditSuisseresearch

Wearealsostartingtoseeinflationexpectationsfallinspiteofoilpricesrising(thisimpliesthat

themarketisseeingapeakininflation).WealsothinkthatEuropeaninflationexpectationsare

nowclosetorealisticlevelsof2.3%(thatisthe5yearrateimpliedin5years’time).

Figure31:Europeaninflationexpectationsarenowfairat2.3%

3

Eurinflationswap5y5yfwd

2.5

2

1.5

1

0.5

2012

2014

2016

2018

2020

2022

2010

Source:Refinitiv,CreditSuisseresearch

iv.USutilitiestendtooutperformwhencreditspreadsrise.

Figure33:USutilitiesoutperformwhenIGspreadswiden

Figure32:5yinflationbreakevenshavedecoupledfromthe

energyprice

130

120

110

100

90

80

70

60

50

2.42.2

2

Jan-21

May-21Sep-21Jan-22

May-22

Brent5ybreakevens,rhs

Source:Refinitiv,CreditSuisseresearch

400

80%

350

60%

300

40%

250

200

20%

150

0%

100

50

-20%

0

IGspreads,bps,rhs

MSCIUSUtilitiesrelmkt,yoy%

-40%2000

-50

2006

2009

2012

2015

2019

2022

2003

Source:Refinitiv,CreditSuisseresearch

WecanseebelowbothIGandHYarestillfarremovedfromrecessionlevels(asshowninthe

utilitysection).

10June2022

Figure34:IGspreadsinUSandEuropearestilllowrelativeto

levelsassociatedwitharecession

IGspreads%

6

5

4

3

2

1

0

-1

-2

198819921995199820012004200720102013201620192022

Recession(NBER,US)USEurope

Source:Refinitiv,CreditSuisseresearch

Figure35:HYspreadsinUSandEuropearestillwellbelowlevelsassociatedwithrecessionfears

25HYspreads%

20

15

10

5

0

198819921995199820012004200720102013201620192022

Recession(NBER,US)USEurope

Source:Refinitiv,CreditSuisseresearch

v.Fallingcommoditypricesisapositiveforutilities.

Steelandcopperpriceshavestartedtorollover,andthishelpslowerthecostofbui