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Credit Suisse CIO: trades to help you relax on the beach

by Robert St George on Jul 17, 2014 at 14:38

And should there be a slight dip in markets through the months ahead, the CIO relays that he will ‘emphatically’ buy into the weakness.

So what are the implications of prolonged low volatility for investors?

‘It gives us a very different set of investment decisions than if we were in a high volatility market,’ O’Sullivan said. ‘We are still investing in a world where fundamentals matter just a little less.’

O’Sullivan sees several opportunities for exploiting this environment. First, he is long equities in the regions where there is scope for more easing, particularly Japan and Europe. Second, he is overweight in cyclical sectors like technology and materials that tend to outperform in low volatility periods.

Overall, O’Sullivan went overweight in equities in late May, shifting from high yield debt to high yielding shares. He warns that high yield bonds are now ‘becoming quite dangerous’ as valuations look stretched.

More tactically, he shares two trades he has put on for the summer. ‘These can continue to work while you are on the beach,’ he enthused.

One is investing in a basket of stocks identified as acquisition targets. These include companies in industries experiencing significant takeover activity, such as pharmaceuticals, with O’Sullivan also pointing out that healthcare serves as a ‘barbell’ to the cyclical exposure.

Credit Suisse screens the stocks to avoid companies that have blocking shareholders. Those coming to the fore tend to have smaller market capitalisations than their average peers and higher free cash flows. He suspects the M&A boom will continue into the middle of the rate hike cycle.

The second is a series of pair trades, with O’Sullivan arguing that low levels of volatility are ‘permissive’ in terms of allowing investors to make bets between companies. For such pair trades, he targets similar businesses in a sector to identify those where relative value can be found.

These are based on differences in recent price performance, analyst recommendations, and Credit Suisse’s Holt valuation system.

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