Credit Suisse is telling its private clients to get back into equities, but says they must be prepared for lower than historical returns over the next 10 or so years.

David McDonald, the head of strategy and research in Australia for Credit Suisse private banking, told a media briefing that the bank was forecasting “3.5 per cent to 4.5 per cent” returns from equities, compared with an historical average for the period from 1900 of around 5 per cent.

“This still suggests a large increase in wealth compounded over time,” said McDonald. “And we expect even lower returns from bonds and cash, so equities still offer enormous pick up over cash.”

McDonald outlined the Credit Suisse view articulated in the bank’s global research, Megatrends, which advises clients to follow six major investment themes in 2013.

The themes are:

–       Beyond cash – a return to credit, particularly corporate credit.

–       Recovery stocks that are benefiting from the global recovery.

–       Dividends and beyond. Locating equity investments with solid dividend streams.

–       New oil and gas discoveries, such as shale oil in the US.

–       US real estate. Credit Suisse says the cycle has bottomed.

–       New hard currencies, such as the Singapore and New Taiwan dollars, and the South Korean won.

Beyond these themes, McDonald said the bank also saw “three pillars,” or global “megatrends,” where investors should look to allocate around 5 per cent of their portfolios across assets.

These were demographics, which were driving emerging consumer trends, the multi-polar nature of the world in terms of geopolitics and economics, and also sustainability.

The Credit Suisse pick’n’mix

Some of the assets and sectors McDonald said Credit Suisse liked at the moment included US financial stocks, such as JP Morgan and Citibank, which were riding the wider recovery story and were also exposed to the recovering US housing market.

Defensive stocks with good dividend streams included GE, fast-food group McDonalds and Vodafone.

Stephen Cabot, vice president of investment consulting for Credit Suisse private banking, said that while the bank advised its clients to have around 40 per cent of their portfolios in equities, split between 60 per cent domestic and 40 per cent global, there was a swing to be overweight in global equities.

Part of this was due to a view on the Australian dollar, which the bank forecast would go below parity with the US dollar by the end of the year.

“We are seeing some clients now moving into more global than domestic equities,” said Cabot. “We are very comfortable with the USA, and we still like emerging markets.”

The danger for investors, said McDonald, was that they were “not really pricing risk” in their current thinking, which was focused on chasing yield as returns from cash and fixed income have subsided. “People think they can sleep at night and forget about the equity markets,” said McDonald. “The markets have almost gone to the other extreme.”