In a recent report titled ‘Growth: on the way to Nifty Fifty’, Credit Suisse identified 7 key growth themes for 2013. In the report, CS explains that the current environment is almost ideal to invest in growing companies and sectors. In the first part of the report, Credit Suisse explains why investors should be focus on growth as a style and mentions 4 reasons:
Growth as a style is a play on low real interest rates: The more real bond yields fall, the more longer duration assets – and, therefore, growth stocks – re-rate relative to shorter duration assets. Credit Suisse explains:
We continue to believe that the main solution to the developed market debt crisis is for real interest rates to fall even further – from the current minus 80bps to between minus 1.5% to minus 2%. Only at this level on our calculations can developed markets both stabilise government debt to GDP and unemployment. Over the course of 2013, we believe that QE will become more aggressive.
A sluggish recovery puts a premium on growth Three years after the recovery started, US real GDP is only 2.2% above the previous peak. This compares to an average of 11.2% above previous peak at the same point in previous post recession periods. In nominal terms, global GDP growth is running just below 5%, compared to a 10 year CAGR of 7%. Such a scarcity of growth should result in a premium on companies that can generate it.
Excess liquidity Excess liquidity is rising and that has historically tended to support the valuation of growth stocks.
Other performance drivers remain supportive Growth as a style tends to outperform the market unless economic lead indicators rise sharply (typically ISM new orders needs to be above 57 for growth to underperform) or high yield bond spreads narrow sharply, neither of which Credit Suisse expects to occur in coming months. Credit Suisse identified 7 secular growth trends that investors should be focusing on in 2013:
1) Branded Emerging Markets consumer plays
We think that the consumer share of GEM GDP is set to rise, partly as a result of currency appreciation and partly on account of policy. Discretionary consumption looks set to rise faster than total consumption (with on average a third of income in emerging markets being spent on non-discretionary items, according to the World Bank). Hence, under our central case, discretionary consumption will be 9% in real terms and just under 14% in nominal terms (with a currency that near term is unlikely to depreciate).
The key drivers of GEM consumption are higher wage growth (compounding at c.10% p.a) and a fall in the savings ratio. In the case of China, the savings ratio is still c.40%. This is set to fall, as there are moves towards a more state-sponsored social security system that diminishes the need for individuals to save for old age or ill health.
In order to play this trend, CS recommends: Las Vegas Sands (LVS): Generates 73% of its sales from China and trades at a P/E of 17.5x, which is 44% below its average. The stocks has a high Free Cash Flow yield of 5.6% and yields 2.3% annual.
Yum! Brands (YUM): Yum generates 32% sales from Non Japan Asia (NJA) and trades at 19x earnings. The stock does not appear cheap, trading at a P/B of 18.2.
Nike (NKE): Nike generates 25% of its sales from Emerging Markets and 14% from NJA. It trades at a reasonable P/E of 17x which is 23% below its average. The company has a high FCY of 5.4% and it has a buy recommendation from CSFB analysts.
2) Industrial automation
The robot density (industrial robots per manufacturing employees) in emerging markets is only a fraction of the penetration seen in developed economies. In emerging markets (which account for 50% of global manufacturing output), there are only 7 industrial robots per 10,000 manufacturing employees, against 149 for the developed markets, or just 5% of the density of developed markets. Non-Japan Asia accounts for 35% of the world’s manufacturing output, but only has a robot density of 11. There is already evidence of an accelerating move towards automation even among emerging markets companies that have long benefited from the abundant supply of cheap labour. Foxconn, for example, one of the world’s largest maker of electronic components, has recently announced that it would replace a part of its 1m workforce with robots (New York Times, 18 August 2012). This suggests that automation may be at an inflection point in China. Credit Suisse recommends Rockwell Automation (ROK) to play this trend, as the company has 100% exposure to automation, it has a P/E of just 13.6, which is 41% below its average. In addition, the company has a strong FCY of 5.28 and a reasonable dividend of 2.38%. The company is rated Outperform by CS Industrial research team.
3) Global Travel
As emerging market consumers grow richer, they are likely to travel more. World Bank data suggest that the beta of the growth in flights per capita to growth in income per capita is around 2x (i.e. if GDP per capita increases by 10%, flights per person should be expected to increase by 20%). Projections from the IMF and the UN suggest that GDP per capita in the emerging markets could increase by 5% per year over the next five years, suggesting an increase in flights per capita of around 10% per year. Furthermore, when developed markets were at roughly the level of development of emerging markets today, transportation was the fastest growth area within consumer spending after telecommunication, growing on average by around 12% per year in real terms, compared with real consumer spending growth of around 8%. In order to play this trend I like Priceline (PCLN), Expedia (EXPE) and TripAdvisor (TRIP). For investors interested in a pure Chinese play, Ctrip (CTRP) could be interesting considering that Omega Advisors hedge fund recently initiated a position in the current prices.
4) Energy efficiency
We think that the oil price, as discussed in the section on oilfield services, is unlikely to fall significantly below $90 per barrel.
The European Union has a stated goal of increasing the share of renewable energy in gross final energy consumption, from its current share of 12.5% to 20% by 2020. As the International Energy Agency notes, “economic barriers” to greater use of renewable energy remain, barriers which would only be overcome by a higher power price. Electricity production is likely to be abnormally high cost because the low-cost areas (particularly coal and nuclear) are being increasingly shut down by governments for a combination of environmental and safety reasons and replaced by much higher-cost renewables. This in turn pushes up the price of electricity. The BDI (the German industry federation) estimates that the price of electricity is likely to rise c20% by 2020 as a result. CS European utility team highlight the cost of renewable subsidies—as defined by the excess of renewable remuneration above the baseload power price—has risen to c€32bn p.a. across the five largest EU power markets: and that the PDV of charges that the consumer will incur is c€422bn (c74%) through higher bills. This equates to c5% of GDP! Credit Suisse highlights Cree (CREE), a company that offers solid state lighting solutions, where the replacement of incandescent lighting technologies with LED solutions offers potential energy savings of over 80%.
5) Reducing car emissionsClosely related to the theme of energy efficiency within industrial processes is the theme of greater energy efficiency within the auto industry. This will become much more important as urbanisation rates increase and cars per capita rise in emerging markets. In China, for example, cars per capita are only around one fifth of US levels, while in India cars per capita are around 2% of US levels.
Our Autos team highlights that the European Commission is capping emission at 130g of CO2/km by 2015 and 95g/km by 2020. These targets represent reductions of 18% and 40%, respectively, compared with the 2007 fleet average of 158.7g/km. We also believe the average age of the auto fleet cannot get much higher in the US (it is already at a 17-year high of 11 years); replacement demand alone would underpin US car sales at 12.5m.
CS recommends Amazon (AMZN), projecting scope for margin expansion as digital media and web services account for a large proportion of the company’s sales. They also highlight the prospect of further fulfilment productivity gains, with new fulfilment centres having opened over the past two years enabling the company to generate cost savings by having additional facilities closer to end customers.
Also CS likes Google (GOOG), the leader in online advertising. CS US Consumer Internet research team, led by Stephen Ju, believes that the core global search market can sustain 12–13% compound annual volume growth over the next five years. The analysts also highlight the comprehensive mobile presence being built by Google, placing it at the centre of the mobile internet ecosystem.
7) Big Data
Data (total global IP traffic) is likely to see growth of 29% per year over the next five years, according to Cisco VNI (Visual Networking Index).
CS US software analyst, Philip Winslow, particularly stresses the innovation of Big Data (the number of devices is likely to triple over the next four years, according to the tech team) and Fast Data (the ability to analyse unstructured data, owing to the move away from HDD to NAND and Flash storage, where response times fall exponentially, allowing a significant increase in the number of applications).
CS analysts recommend Oracle (ORCL), SAP (SAP), Salesforce.com (CRM) and Netsuite (N). Oracle has a FCY of 8.5 and trades at a very cheap P/E of 11x and P/B of 3.5x.