Where's the hot money going?

All the big City players are making important changes to their portfolios - after all, uncertainty creates opportunity. Credit Suisse is the latest to make switches and, after fresh sector weakness Wednesday, they're optimistic about housebuilders.

The pounding of sterling isn't over if Credit Suisse is right: it will fall to $1.20 in the event of a full Brexit, it says. But the analysts reckon an alternative "Brexit-lite" could emerge, which would bring the UK currency trough closer to current levels at $1.25-1.30.

Consensus is also over-optimistic in thinking the UK can avoid a recession in 2017, argues the broker, warning that a 1% contraction is more likely than 0.5% growth. This setback is sure to seep into consumer confidence, causing a drag on domestic earnings.

Credit Suisse has been 'underweight' UK domestic cyclicals since last September, but has just upgraded non-London housebuilders and UK retailing to 'benchmark' after the recent sell-off, leaving just real estate investment trusts in the cold.

The price is not right for the risk involved just yet, it says, despite the sector's underperformance versus UK corporate bonds, improving property yield and more reasonable valuations. Exposure to the pound and falling commercial property prices is a concern. After all, the last three cycles saw average rents fall 23%, 18% and 59%.

"We would expect this downturn in rents to be just as bad given the issues raised…on supply, Brexit-specific issues, and longer-term disruption."

Housebuilders

There are five pillars of support for the housebuilders, according to Credit Suisse: cheap valuations, conservative house price forecasts, demand, government mortgage support and price momentum. While falling house prices generally last for three years and lose around 23% of value, that house prices outside of London aren't overstretched suggests they will not fall as far this time.

But there are still serious issues holding analysts back from upgrading the sector. London remains a real problem and there is concern over escalating building costs.

So, Credit Suisse suggests investors should look to companies like Persimmon, which has little exposure to London and just announced a decent dividend programme to return 790p per share by 2021 against a 1,548p share price. Even though a fifth of Bellway's revenue is exposed to the London market, it steers away from the Prime locations.

It's keeping a wide berth of estate agents like Foxtons. As borrowing costs remain low, fewer homeowners will be forced to sell in this downturn.

"Moreover, the industry as a whole is under threat from online agents such as Purple Bricks (which charges a fixed-fee and uses internet portals such as Zoopla). Recently both Savills and Countrywide have started their own online agents. The only housing related area we would be overweight is Travis Perkins."

Retailers

Admitting it may have upgraded the retailers to benchmark "a little too early," Credit Suisse still reckons there is an investment case here. Not only do valuations look cheap at a 20% price/earnings (PE) discount to the UK market, our domestic retailers trade on a near 45% PE discount to the global general sector - it's averaged 25% over the past 20 years.

Tied in to an inverse relationship with the oil price, the analysts reckon the oversold sector will benefit from what they think is the end of the energy market rally.

Of course, there are issues. Not only is the sector very exposed to sterling, but earnings momentum is weak and the living wage could provide a difficult headwind.

Primark-owner AB Foods is the broker's favoured UK domestic stock, which generates only 40% of its sales here and should benefit from trading down in a recession. Credit Suisse also likes Kingfisher, which makes half of its sales in Europe and looks "abnormally cheap" compared to US peers.

There have been other adjustments to the broker's portfolio, with the UK life sector given a lift to 'overweight' from 'benchmark', joining European employment agencies and pharmaceuticals. While cyclicals remain at 'benchmark', European regulated utilities have been lowered to 'underweight', along with European autos.

While UK life is a risky Brexit tip, sector assets have longer duration assets than liabilities, and the rise of corporate bonds and equity should offset real estate concerns. The sector looks oversold, too.

"We think that life companies have superior scale, better products and stickier assets than fund managers. If we look at their PE relative to the asset managers, they are trading nearly 40% cheaper."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.