Investment Outlook 2020 - Resilience after all - Credit Suisse
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Investment
Outlook 2020
Resilience after all.
For Professional Investors in Hong Kong and Accredited Investors in Singapore Only. Not for redistribution.
Investment Outlook 2020
Resilience
after all.
credit-suisse.com/investmentoutlook 3
Letter from the CEO
From my perspective
Tidjane Thiam
CEO Credit Suisse Group AG
It is my pleasure to present our Investment Outlook 2020.
The past year has turned out better for most investors than
might have been expected, considering the geopolitical
uncertainty that prevailed during the period and weakening
economic momentum.
So what is in store for 2020? It is unlikely that all the The main results of our analysis and our key views for the
issues that have accompanied us since early 2018 will be economy and markets are presented in the pages that
resolved, be it the US-China trade conflict or political follow. I trust you will find our analysis both interesting and
uncertainties in Europe. Investors will also continue to have relevant as you plan for the year ahead.
to contend with extremely low (or negative) interest rates in
bond markets. These are among the key themes that In this vein, I wish you a prosperous – and resilient – 2020.
figure in my discussions with clients and other stakeholders.
Tidjane Thiam
Putting all of these issues into a broader context and differ-
entiating between what is of greater or lesser relevance
for businesses and investors alike is the paramount and
arduous task of our bank’s economists, financial
analysts and strategists. The sum of these efforts is a
central element of our holistic House View.
4
Overview
Contents
14 26
Global Main asset
economy classes
16 Overview 28 Overview
18 Regions 30 Fixed income
34 Equities
42 Currencies
6
04 Letter from the CEO
08 Editorial
10 Review of 2019
12 Core views 2020
60 Disclaimer
64 Imprint
44 54
Alternative Investment
investments strategy 2020
46 Real estate 56 Overview
48 Private equity 58 Forecasts
50 Hedge funds
52 Commodities
credit-suisse.com/investmentoutlook 7
Editorial Resilience after all Michael Strobaek Global Chief Investment Officer Nannette Hechler-Fayd’herbe Global Head of Economics & Research and RCIO IWM Unforeseen and surprising events have shaped 2019, and we have little doubt that they will impact the world in 2020 as well. In light of such uncertainty, it is of utmost importance for investors to build resilient portfolios. 8
Even if the US-China trade war eases and Brexit uncertainty The following pages lay out the key elements of the
diminishes, the year 2020 is unlikely to be entirely smooth Credit Suisse House View for 2020. We have strived
sailing: a polarized US presidential campaign, margin pres- to provide a consistent and well-structured guide
sure, high corporate debt, and fewer interest rate cuts across the most important asset classes, markets and
by the major central banks – not to mention unexpected sub-segments. It suggests that investors who hold
political developments – are likely to sporadically test well-diversified portfolios, tilted toward areas of extra return,
investor nerves. should continue to garner healthy returns. Furthermore,
sustainability is increasingly relevant for investors, as it has
Overall, however, we believe that the global economy and already become a matter of great importance for voters
risk assets will continue to show considerable resilience and consumers around the world.
in the face of these challenges. This is the message that
the title of this year’s publication, Resilience after all, is We hope you will find this publication helpful and wish you
intended to capture. a successful year ahead.
While we expect rather subdued economic growth in 2020
and returns that are generally lower than in 2019, a serious
market downturn or even financial crisis seems unlikely to
us. We observe a number of imbalances in various econo-
mies and sectors, but none of them seems serious
enough to trigger such a crisis. Conversely, technological
progress remains in full force and, importantly, policy
makers will continue to provide support.
credit-suisse.com/investmentoutlook 9
Review of 2019
Markets defy
weakening growth
Fed turns as global manufacturing weakens Rates follow manufacturing
Global growth and manufacturing sentiment have been
weakening since the USA first imposed tariffs on China + Hikes Global manu-
54 facturing PMI
and other countries. Problems in the German auto +3 Number of
sector only exacerbated the weakness. But because the rate changes
US economy held up, in large part thanks to the 2018 52 expected by
market (RHS)
tax cuts, the US Federal Reserve (Fed) projected continued 0
rate hikes going into 2019. After equities corrected 50 Last data point
September 2019
sharply in late 2018, the Fed changed course, moving Source Bloomberg,
-3
to policy easing. 2016 2017 2018 2019 - Cuts
Datastream,
Credit Suisse
Bonds rally across the board Bond yields plummet to new lows
US Treasury yields declined sharply, though not quite to Yield on 10-year government bonds (in %)
post-financial crisis lows as fears of a global downturn
took hold. In Germany and Switzerland, yields reached 4 USA
Germany
historic lows, with all now below Japanese levels. 3 Switzerland
Despite far higher debt, the rally also took hold in Italy Italy
2
as the government moved away from its anti-euro
and anti-Brussels stance. Emerging market bond yields 1
Last data point
also fell, though not quite as much. 0 25/10/19
Source Bloomberg,
2015 2017 2019 Credit Suisse
Commodities: Diverging paths Gold outperforms cyclicals
US tariffs on China and the slowdown in global Index, 01/01/2018 = 100
manufacturing weighed on industrial metals such as
copper. As for oil, early 2019 saw prices recover 120 Gold
Oil (WTI)
as the Organization of the Petroleum Exporting Countries 110 Copper
sought to restrain supply. But prices softened again
100
as demand slowed. Meanwhile, gold prices rallied on
the back of lower interest rates. 90
Last data point
80 25/10/19
Source Datastream,
2018 2019 Credit Suisse
10Equities: Testing highs Emerging markets lag behind developed markets
At the start of 2019, the major equity markets rebounded Total return indexes (01/01/2018=100)
strongly after their setback in late 2018, fueled by the
Fed’s shift to policy easing. The rally stalled temporarily 110 Developed
markets
mid-year on mounting worries over the global economy. (MSCI World)
Emerging market (EM) equities rebounded as well. But Emerging
markets (MSCI
whether the underperformance vs. developed markets 100 Emerging
Markets)
that began with the start of the US-China trade war
Last data point
in early 2018 has been broken remains to be seen. 25/10/19
Source Datastream,
2018 2019 Credit Suisse
Equity sectors: Gains across the board IT still tops
All of the major equity sectors participated in the early 2019 Total return indexes for MSCI global equity sectors
rebound, but only IT managed to build decisively on its (Index, 01/01/2019 = 100)
gains. In contrast, demand concerns and lower oil prices
130 IT
held back energy, while the drug pricing debate in the Industrials
USA weighed on the healthcare sector’s performance. Financials
120 Healthcare
In view of weakening manufacturing demand, it is Energy
surprising that the industrials sector held up so well.
110 Last data point
Financials slightly underperformed the MSCI World, 25/10/19
as flat or inverted yield curves dented earnings. 01/2019 07/2019
Source Datastream,
Credit Suisse
USD still strong Trade war drags down EUR, CNY
After 2018 gains, the USD continued to appreciate Currencies versus USD (Index, 01/01/2018 = 100)
against almost all major currencies, supported by better
US growth and the (remaining) interest rate advantage. 108 JPY
CHF
Only the JPY gained once again, as the Bank of Japan EUR
104
did not lower rates. China allowed the CNY to devalue CNY
to offset some of the tariff-related pressure. This weighed 100
on other EM currencies, in addition to local rate cuts;
96 Last data point
only the MXN held up as the country reached a new trade 25/10/19
agreement with the USA and Canada. 2018 2019
Source Bloomberg,
Credit Suisse
credit-suisse.com/investmentoutlook 11Core views 2020
Credit Suisse
House View in short
Geopolitics Economic growth
Our base case is a de-escalation in the Global economic growth is set to remain
US-China conflict, but uncertainty remains sluggish with only a minor recovery in industrial
high. The US presidential election campaign production, capital expenditure (capex) and
is likely to be highly polarized and may affect trade. However, a recession is unlikely in light
investor sentiment. European political of ongoing monetary policy support, ample
risks should abate as uncertainty over Brexit credit, some fiscal easing and low oil prices.
subsides.
Inflation Interest rates
Inflation looks to remain well below central We expect the US Federal Reserve (Fed) to remain
banks’ 2% target in Europe and Japan, on hold after the third rate cut in October 2019.
while it should decline in China and other The European Central Bank (ECB) will also stand
emerging markets (EM). However, pat on rates while pursuing quantitative easing
inflation is likely to exceed 2% in the USA, (QE). The Swiss National Bank (SNB) should be
at least temporarily. able to avoid rate cuts, but may need to continue
intervening in the foreign exchange market.
Rate cuts should continue in a number of EMs.
Fixed income Equities
Returns on most core government bonds are Against the backdrop of limited earnings growth
likely to be negative, except in the USA. Tight and flat to higher bond yields, returns in key
spreads imply anemic returns for investment grade equity markets are likely to be in the single-digit
bonds in developed markets (DM). Expect solid range. EM equities can recover if the trade war
returns on most EM hard currency debt, with abates, and financial stocks should benefit if yield
strong – albeit volatile – returns in some EM local curves continue to steepen. In a low yield
currency debt, as well as frontier markets. Sub environment, stable-dividend stocks would do well.
ordinated financial debt in DM remains attractive.
12A recession is unlikely in light
of ongoing monetary policy support,
ample credit, some fiscal easing
and low oil prices.
Real estate
Most real estate investments should continue to
deliver moderately positive returns. We prefer
direct real estate where lower interest rates do
not yet appear to be fully reflected in the price.
Commodities
Barring a major escalation involving Iran and
Saudi Arabia, oil prices are likely to continue
to stay subdued. Gold looks set to remain
supported on the back of extremely low interest
rates.
Forex
The USD should hold up initially, but the EUR
should gain in H2 as a Eurozone recovery takes
hold. The CNY could depreciate slightly more
vs. the USD on domestic weakness. The GBP
would gain strongly on the back of a Brexit
resolution. Our base case is for the CHF and
JPY to trade sideways.
credit-suisse.com/investmentoutlook 13Global economy
Global economy Overview
Moderate growth,
but no recession
We expect only sluggish global growth in 2020 of 2.5%,
almost unchanged from 2019, but a recession
continues to look unlikely given supportive macro policies.
De-escalation on the trade war front will be key.
Over the past year, we have witnessed a signifi- Path to recovery in 2020
cant slump in global manufacturing and trade, We expect the slump in manufacturing to bottom
with global export volumes dropping by about 2% out in the first half of 2020, not least because
from the high of 2018, the biggest decline in of a natural inventory cycle. As the slowdown in
recent decades except for periods of recession. manufacturing abates, the risk of it “infecting”
the services sector should also diminish. The
More than trade easing of policy by the US Federal Reserve (Fed)
The USA’s imposition of tariffs on China and over the course of 2019 has helped boost credit,
China’s retaliation undoubtedly contributed to this especially to US households. This support should
slump, but the domestic slowdown in China – remain in place in 2020 – although we do not
due to more cautious households and restrained expect further rate cuts – and should for instance
credit growth – played a key role as well. Weak- bolster home purchases as well as other
ness in German auto sales exacerbated the consumer spending.
manufacturing slump. As a result of heightened
uncertainty, global corporate capital expenditure Interest rate cuts by the Fed have also eased
(capex) slowed significantly as well. constraints on emerging markets dependent on
USD funding. Central banks in a number of
Meanwhile, the services sector lost some steam countries should be able to lower interest rates
but continued to grow in most countries. With further, not least because inflation is declining.
the services sector being the largest employer in In Europe, we expect fiscal policy to ease
developed countries as well as many emerging gradually, which should support the growth rate
markets, demand for labor continued to grow in the region. However, a key to recovery will be
and wages have been rising, albeit gradually. at least a partial resolution to the trade war.
As a result, consumer sentiment and spending A reduction in tariffs would improve profitability
remained relatively robust. and sentiment in both the USA and China,
which should help reignite capital spending.
16Main macro risks
The key risk remains that the damage done by the
trade war carries into 2020. Other geopolitical From Quantitative
risks, especially the potential for a flare-up in the Easing (QE) to
Middle East, remain in place but are less likely Modern Monetary
to materialize. In particular, we do not expect the Theory (MMT)
global economy to be hit by an oil-price shock
but rather expect oil prices to stay under pressure Find out more:
due to excess supply. credit-suisse.com/mmt
Even in the event of a trade deal, it seems likely
that China’s economy will continue to slow
somewhat, at least in H1 2020. High mortgage Meanwhile, the USA is likely to face an unusually
debt combined with greater job uncertainty are polarized election, which could negatively affect
likely to hold back consumer spending, while policy business and consumer sentiment. A further risk
makers will remain cautious regarding stimulus is that higher-than-expected inflation would raise
measures. Slowing growth in China will continue fears of stagflation. In such a case, the Fed
to limit the recovery potential of its main trading would be constrained in its actions. Bond yields
partners in the region. An escalation of tensions in might then rise substantially, triggering a general
Hong Kong would pose downside risks. tightening of financial conditions.
On the following pages, we look at the outlook
for 2020 on a country-by-country and regional
basis, focusing on the base case as well as risks.
Downturn in global manufacturing and trade US imports from China sharply lower
YoY changes (in %, 12-month moving average) YoY change (in %, 12-month moving average)
15 35
10
25
5
15
0
5
-5
-5
-10
2002 2006 2010 2014 2018 2002 2006 2010 2014 2018
Trade volume Last data point August 2019 Last data point August 2019
Industrial production Source Datastream, Credit Suisse Source Datastream, Credit Suisse
credit-suisse.com/investmentoutlook 17Global economy Regions
USA
Dodging recession
Growth: We expect sluggish gross tariffs. However, their full elimina- likely than a hike in 2020, and the
domestic product (GDP) growth for tion appears unlikely and the trade Federal Reserve could increase
the US economy in 2020 (1.8%), war could potentially escalate asset purchases. While a potential
accompanied by elevated recession in other areas. If the USA, for ex- rebound in manufacturing, as well
risks (20%–30% probability in the ample, implemented tariffs on as labor shortages that boost in-
next 12 months), and rising core European automobiles and Europe flation would, in principle, argue for
inflation – at least at the beginning retaliated, European producers rate hikes, any rate move close
of the year. While job growth will and US consumers would be hurt. to the election seems very unlikely.
moderate, rising labor costs will con-
tinue to weigh on corporate profits. What to watch: After cutting rates
Good news could come from a three times in 2019, our base case
recovery in manufacturing activity is for the Fed to remain on hold.
if the USA and China reduced Nevertheless, another cut is more
China
Cautious consumers
Growth: The government is likely However, assuming a de-escalation US trade policy. Unless the trade
to pare its growth target to 5.9%, of the trade dispute with the USA war escalates, the Chinese
and actual numbers could drop and moderate stimulus measures, authorities are likely to limit any
somewhat below that objective. the decline in economic growth will depreciation of the CNY.
Apart from the lingering impact of be limited.
US tariffs, the burden of real
estate debt, job insecurity, as well What to watch: At the end of the
as weakness in local financial first quarter, the Chinese govern-
markets will likely restrain domestic ment could announce added fiscal
consumer spending. The limited spending for 2020. With more
efficiency of credit allocation fiscal room, authorities are likely to
remains a key concern, and the rely less on special purpose bonds
manufacturing sector will remain and more on direct spending to
under pressure due to continued support growth, at least until there
overcapacity and competitive is greater visibility with regard to
disadvantages in some sectors. the 2020 US election and future
18Eurozone
Further fiscal support
Growth: We expect GDP growth should also support the ongoing impetus. More concretely, 2020
of 1%. A de-escalation of the US- economic expansion. Monetary might well mark the first year of
China trade dispute would reduce policy is unlikely to ease further Eurozone fiscal expansion in over
the drag on the Eurozone, and within the Eurozone, but the a decade. Furthermore, we could
Germany in particular, helping to European Central Bank (ECB) well see a more generous interpre-
end the contraction of exports decisions taken in September tation of the Stability and Growth
and industrial production. Given 2019 (rate cut and renewed asset Pact by the European Commis-
the resilience of domestic demand purchases) have already crea- sion, which would allow Italy and
and the Eurozone labor market ted a slight tailwind. other countries to further ease
throughout 2019, the removal of fiscal policy. A continued trade war
that headwind should allow Euro- What to watch: New leadership and its potential expansion to
zone GDP growth to gradually of the European Union (EU) and Europe poses the greatest risk,
improve. Resilient credit growth ECB could bring new political as well as a no-deal Brexit.
Japan
Olympic boost
Growth: The Japanese economy Meanwhile, the 2020 Summer tax hike will be offset to some
is likely to slow somewhat in 2020 Olympics will provide a tailwind by extent by added government spend-
(GDP growth of 0.4%), but the boosting inbound tourism. Public ing. Given its sensitivity to global
expected turn in global manufactur- investment is also likely to remain trade and the Chinese economy,
ing should limit the slowdown. The strong in the first half of the year. the outcome of the trade war and
consumption tax hike of October the evolution of demand in China
2019 may also continue to exert What to watch: Monetary policy are important as well. New trade
a drag. However, assuming there is will remain loose in 2020 and agreements with the EU and
no global recession, the Japanese beyond. In fact, the Bank of Japan the USA provide some long-term
economy will be able to overcome (BoJ) could potentially raise its upside.
domestic headwinds. inflation target. The consumption
credit-suisse.com/investmentoutlook 19Global economy Regions
Untangling the trade war
From trade peace to trade war
Have 90 years of trade liberalization ended?
Effective US tariff rate (in %) Trade wars
are good
1941 1964 – 1967 1994 1997 – 1999
Atlantic General North WTO agreements
Charter Agreement on American on IT, telecom,
(US-UK) Tariffs and Free Trade financial services
and easy
30 Trade (GATT) – Agreement
Kennedy Round (NAFTA) Tariff rate
created Forecast
to win.
1947 for 2020
20 GATT 1973 1995 9%
founded Abandon- World Trade
ment Organization Last data point
of fixed (WTO) October 2019
exchange created (2020 estimate)
10 rates Source Donald Trump
U.S. International
1930
Trade Commission
US President,
Smoot-Hawley Tariff Act
(March 2019) 2 March 2018 on Twitter
Non-tariff barriers have been on the rise The USA has ratcheted up the trade war…
since the financial crisis Average tariff rate on US imports from China (in %)
Number of trade distortions reported at year-end (absolute number)
30 26
1300 19
20 15
900
10
10 6
500 3 4
2009 2011 2013 2015 2017 Baseline 01/18 06/18 09/18 05/19 08/19 10/19
03/18
World total Last data point end of 2018 Last data point October 2019
World total excluding USA Source Global Trade Alert Source Peterson Institute for International Economics (2019)
...but China has retaliated against the USA while favoring others I don’t believe
Trade-weighted average tariffs on China’s imports (in %)
any country
25 from the USA in the world is going
to retaliate
from other countries
20
Increase in tariffs
15 Reduction in tariffs [against us].
10
02/04
23/08
06/07
24/09
01/06
01/05
01/09
01/07
01/01
01/01
15/12
01/11
Last data point Peter Navarro
15 December 2019 (estimate)
Source Bown, Chad P. (2019)
White House trade adviser,
2018 2019 US-China Trade War, PIIE 2 March 2018 on Fox News
20Many losers…
Tariffs hurt consumers, …or indirectly via higher … It’s less business
going on. It’s less
either directly… input prices
investment. It’s
more uncertainty.
Increase in prices for
steel mill products
Increase in prices for within six months after US
tariffs imposed
It weighs like a big,
washing machines
after US tariffs
dark cloud on the
imposed in global economy.
February 2018
Christine Lagarde
+9% +15% Incoming European
Central Bank President,
23 September 2019 on CNBC
Tariffs weigh on business plans… ...without solving structural issues
Survey of capex intentions of US companies US general government structural balance and trade balance (in % of GDP)
(Empire State and Philly Fed), indexed
0 Fiscal deficit
Trade
40 balance (excl.
-2
petroleum)
30
-4
20
-6
10
-8
2010 2012 2014 2016 2018 Last data point
2018 (2019 estimate)
Last data point October 2019 Source Datastream, Credit Suisse 2003 2007 2011 2015 2019 Source IMF, Bloomberg
…and a few lucky winners
Countries gained from the trade war … … as did Brazilian soybean farmers
US import shares and changes, 2015 to 2019 Soybean imports by China since the start of the trade war
from …
Vietnam
Taiwan
+48.5% -15.3% Brazil 78%*
United States 5%*
Mexico
+16.7% +9.8%
-83%
China
United States
Last data point
August 2019
Source
+30%
US Census Bureau
Brazil
* Share of soybean imports to China
from October 2018 to February 2019
Last data point February 2019
Source US Dept. of Agriculture, IHS
credit-suisse.com/investmentoutlook 21Global economy Regions
UK
Still all about Brexit
Growth: Assuming a smooth Brexit parliament could produce deadlock What to watch: The BoE’s wait-
process, our central expectation is and more uncertainty. While a no- and-watch approach is likely to
that the UK grows somewhat more deal Brexit is unlikely, in our view, continue while Brexit uncertainty
strongly in 2020 than in 2019. such a scenario would cause a remains high. If the UK leaves
A Conservative majority would allow significant recession, with a decline the EU with a deal or if Brexit is
the UK to leave the European in real GDP of 1% to 2% even if canceled, there would be consider-
Union (EU) with a deal, while a the Bank of England (BoE) eases able upside to corporate invest-
Labour government (in a majority monetary policy and the government ment and overall growth. The BoE
or coalition) would open the door loosens fiscal policy in response. might then begin hiking interest
to a second referendum. A hung rates in the course of 2020.
Switzerland
Trade holds key to recovery
Growth: We expect moderate The mechanical and electrical en- case, it could come to pass if the
GDP growth in 2020 (of 1.4%) gineering (MEM) sector will likely global economy remains weaker
in light of the still subdued global remain under pressure due to still than expected and other central
backdrop. Domestic demand weak demand from key export banks cut rates. US tariffs on
should remain supported by contin- markets, including Germany and pharma exports or the classification
ued immigration, robust employ- China. of Switzerland as a currency
ment and slightly higher wages. manipulator pose some risk.
Pharmaceuticals exports are likely What to watch: The Swiss Increased geopolitical tensions
to remain on a clear upward trend. National Bank (SNB) will do what would increase the risk of
it can to prevent CHF appreciation. renewed safe haven flows into
While a rate cut is not our base the CHF.
22Asian EM (ex-China)
Prospects hinge on trade war
Growth: The outlook for the more prominently Vietnam, stand to What to watch: A de-escalation
advanced countries of North Asia, benefit as production continues to of the US-China trade war would
i.e. South Korea and Taiwan, shift in their direction. Singapore significantly benefit the countries
remains subdued due to weakness suffered a significant setback in closely tied into China-based
in Chinese trade, with growth of 2019 in part due to the slowdown supply chains. Even more import-
just over 2%. The outlook for in global and China-oriented trade; ant is the evolution of domestic
Hong Kong will depend strongly a slight rebound to around 1.7% demand in China and its impact on
on local political developments. seems likely in 2020 if trade imports from the region. In India,
Meanwhile, economic growth tensions abate. Growth in India is which is much less dependent on
remains far stronger in much of likely to remain high in absolute global trade, domestic financial
Southeast Asia, which has more terms at around 6%, but well below and monetary stability are key to
catch-up potential and is less potential due to the ongoing a successful recovery.
integrated into China-based supply weakness in the banking and real
chains. Some countries, most estate sectors.
Australia
Eye on household debt
Growth: While low growth in What to watch: Although house The Reserve Bank of Australia
household income, weaker prices have already corrected to (RBA) lowered its interest rate in
housing market conditions and some extent, housing affordability several increments in 2019 to
elevated household debt weighed is still low. Real estate thus support the economy and could
on consumption in 2019, an remains high on the political continue to do so in 2020. At
increase in public spending agenda and further housing the same time, financial supervision
supported economic growth. supply reforms are very likely. will remain in focus given the
Infrastructure investment should stability risks related to real estate.
continue to provide support in
2020. After a relatively subdued
2019, we expect Australia’s
economy to pick up with an
estimated growth rate of 2.8%.
credit-suisse.com/investmentoutlook 23Global economy Regions
EMEA
Coping with setbacks
Growth: Turkey appears to have have suffered setbacks due to also complicate the outlook, in our
emerged from recession in Q2 their close ties with the German view. In Russia, low inflation (for
2019 and is likely to achieve growth auto industry, but growth is likely the previously mentioned reasons)
of 2%–3% in 2020. The headline to remain reasonably robust given should pave the way for lower
inflation rate, projected at 12% for strong domestic demand and interest rates. A pick-up in Germany
end-2019, could slow further these countries’ strong competitive would benefit Eastern Europe.
after Q1 2020. Growth in Russia position in other areas of trade. There are significant downside in-
is likely to remain anemic at only flation risks building in South
around 1%–2% due to unfavorable What to watch: In Turkey, policy Africa. If they come to pass, South
demographics, bureaucratic bur- mismanagement remains the Africa will probably be one of a
dens and low efficiency of public key risk against the backdrop of very few countries with large poten-
investment. Weak metals prices President Recep Tayyip Erdogan’s tial for policy easing in 2020. In-
as well as structural issues such as target for single-digit interest vestors will also be closely watching
labor market rigidities and a lack rates and real GDP growth of 5% to see if Moody’s downgrades
of public investment will continue to next year. The changing domestic its rating for South Africa after the
hold back South Africa. A number political landscape and ongoing 2020 budget.
of Eastern European economies (albeit muted) geopolitical risks
Latin America
Bottoming out
Growth: Brazil and Mexico, the We expect GDP growth of 2.7% What to watch: In Mexico, other
region’s two largest economies, in 2020. In Mexico, growth should reforms such as tax reform look
showed only marginally positive also improve somewhat (1.6% in more likely despite political ten-
growth in 2019. This was in part 2020), partly in response to mone- sions. In addition, US congressional
due to the global manufacturing tary policy easing. Meanwhile, approval of the new free trade
slowdown, but domestic policy some domestic risks have abated, agreement known as the United
uncertainty played an even bigger including uncertainty over the States-Mexico-Canada Agreement
role. The outlook for Brazil has 2020 budget and financing pres- (USMCA) would boost confidence,
improved, however, with the sures on state-owned oil company but this is not a given. Inflation in
approval of pension reform, which Pemex. That said, it is question- Mexico has declined to the central
will strengthen long-term fiscal able whether added government bank’s 3% target, and should
stability and should be positive for investment in the oil sector will remain fairly stable at below 4%
privatizations and a continuation produce adequate returns given in Brazil.
of the fiscal consolidation process. declining global oil prices.
24Regions
In summary
Our regional views amount to a view, given continued accommo- by the slowdown in global trade,
mixed global growth picture. US as dative monetary policy, ample bank for instance – which suggests
well as Chinese growth is likely to credit in most regions, as well as that even limited shocks, whether
be somewhat lower than in 2019. moderate oil prices. Apart from the geopolitical or economic in
At the same time, the expected global trade tensions, we see no nature, could turn a downturn into
recovery in the Eurozone and select obvious shocks that would trigger something more serious.
EM should offset some of the a recession. However, the global
softness. A major setback to global economy did come close to
growth seems unlikely, in our recession in 2019 – measured
Employment high and still growing Consumer confidence close to peak
Total employment in the USA, Eurozone and Japan Consumer confidence in the USA, Eurozone and Japan
(in millions) (GDP-weighted average, standardized)
380 1.5
370 0.5
360 -0.5
350 -1.5
2006 2010 2014 2018 2007 2011 2015 2019
Last data point Q2 2019 Last data point September 2019
Source Datastream, Credit Suisse Source Datastream, Credit Suisse
credit-suisse.com/investmentoutlook 25Main asset classes
Main asset classes Overview
More modest returns
Most asset classes showed a strong performance in 2019.
Investors should not expect to see this feat repeated in
2020, although financial assets will likely continue to benefit
from generally low yields.
While the trade war intensified and the global More restrained central banks
economy worsened, most asset classes showed Our base global economic scenario suggests that
a strong performance in 2019. This was largely monetary policy support will be less pronounced
due to the US Federal Reserve’s (Fed) sharp turn than in 2019. Our economists expect the Fed and
toward easing, which boosted investor confi- the European Central Bank (ECB) to keep
dence. Our forecast for 2020 is for most asset interest rates on hold, although the ECB’s quan-
classes to deliver lower returns than in 2019. titative easing (QE) program will continue.
Even though we expect manufacturing to stabilize Reduced monetary accommodation is likely to
and trade tensions to abate, a number of factors limit returns on most assets.
will likely weigh on performance.
(Geo)political wild cards
The drivers that played a key role in financial Forecasts regarding geopolitics are highly un-
markets in 2019 – geopolitics, economic momen- certain, but our base case is that the US admin-
tum and central bank policy – will undoubtedly istration will try to achieve some kind of trade
remain influential in 2020, but we are likely deal with China. If successful, such an outcome
to see some of them change direction. Other would favor risk assets, especially Asian equities.
factors, including corporate fundamentals However, the USA may face an unusually pola-
and investor sentiment, will also be important. rized presidential election campaign in 2020,
which could harm investor sentiment. Converse-
Economic momentum set to stabilize ly, a resolution of the Brexit uncertainty would
While we expect overall gross domestic product support European risk assets and the GBP.
(GDP) growth to be somewhat softer relative to Further flare-ups in the Middle East cannot be
2019, we forecast a slight acceleration of indus- excluded, though a major military conflict
trial production (IP). As our research has shown, remains unlikely.
there is a close link between IP momentum and
financial markets. Better IP momentum tends
to support risk assets while pressuring high-grade
bonds.
28Margin pressure intensifying Corporate leverage a risk for low quality
US companies have achieved high profitability in credit
recent years: subdued wages boosted profits Leverage of non-financial corporations has in-
as sales increased. Cuts in US corporate taxes creased in recent years and, according to some
also added to profits. Yet this “fairy tale” is measures, surpassed the levels we saw before
coming to an end, and we expect margins to be the 2008 global financial crisis. However, debt
subject to downside pressure going forward. today is far easier to finance given very low
While interest costs should remain subdued, labor interest rates. Yet risks on lower quality credit
costs are likely to continue to rise. Another have increased, in our view. We therefore
factor likely to weigh on profitability is tariffs on favor intermediate credit risk, including various
imports from China, which have increased segments of emerging market debt.
input costs for many companies.
Valuations still favor equities
However, relative valuations still clearly favor
equities. Although the price-to-earnings ratio
(P/E) of global equities has moved up slightly
over the past year, the valuation of high-grade
bonds has increased more markedly as real
yields have declined. That said, given the various
headwinds, we expect absolute returns on
major equity markets to be lower than in 2019.
Economic policy uncertainty has surged… …but investors have remained fairly calm
Economic Policy Uncertainty Index Credit Suisse risk appetite index
350 6
300 4
250 2
200 0
150 -2
100 -4
2007 2011 2015 2019 2007 2011 2015 2019
Last data point September 2019 Last data point 15/10/19
Source Datastream, Credit Suisse Source Datastream, Credit Suisse
credit-suisse.com/investmentoutlook 29Main asset classes Fixed income Sweet spots in credit While returns on many of the highest quality bonds will likely be negative in 2020, there are still opportunities, including in the BB segment for high yield bonds. 30
With the global economy cooling amid ongoing Positive returns are only likely in the case of a
US-China trade tensions, bond yields trended severe recession or geopolitical crisis. Then
downward during much of 2019, generating sub- yields for the high-grade segment would further
stantial capital gains. At the time of writing, govern- decline and the resulting capital gains could
ment and investment grade (IG) bonds were on even outweigh negative starting yields.
track for a significantly stronger performance than
in 2018 – this despite the fact that 35% of Tighter times for credit
European IG corporate bonds were already trading Spreads (the yield difference between riskier
at negative yields at the start of 2019. bonds and government bonds) in most credit
segments also narrowed in 2019. Absolute
Yields headed back up yields thus dropped to very low levels in most
According to our base case, the global economy segments. In some areas, yields now appear
should improve slightly in the coming year and inadequate to compensate for the risk of
IG and government bond yields are thus likely to worsening fundamentals and rising defaults.
rise. This would generate capital losses. As
yield curves are still rather flat, the setback would This applies in particular to those debtors with a
be more severe for bonds with long maturities. very low rating (e.g. single B) that are strongly
Many high-quality bonds will therefore likely pro- exposed if the global economy further weakens.
duce negative returns in 2020. If starting Moreover, leverage has increased in cyclically
yields are very low or even negative, avoiding vulnerable areas such as steel and energy.
negative returns will be close to impossible.
However, yields in some credit segments, both
We expect returns to be positive in only a few within IG and high yield (HY), look sufficient to
high-grade markets, such as US Treasuries or compensate for such risks even if they are low.
Australian government bonds. In contrast, The following pages provide more detail on the
returns are likely to be negative in much of the opportunities and risks in 2020 for fixed income.
Eurozone and in Switzerland.
Emerging market bonds offer good risk/return trade-off
Spreads over core government bonds in basis points
1641
800
700
600 555
500
402
400
300
200
129
100
Investment grade corporates EM (hard currency) High yield
IG Corporates: Bloomberg Barclays Global Agg Credit Average 2001– 2007 Global financial crisis (Nov – Dec 2008)
EM: JPMorgan EMBI Average 2009–2018 Current
High yield: Bloomberg Barclays Global High Yield Average since 2001
Last data point 25/10/19
Source Bloomberg, Credit Suisse
credit-suisse.com/investmentoutlook 31Main asset classes Fixed income
Narrow focus in
investment grade
Backdrop: Although yields in IG Opportunities: We see interesting remain sound. Some European
are very low in absolute terms, we opportunities in emerging market hybrids in non-cyclical sectors such
continue to see attractive opportu- (EM) investment-grade dollar cor- as utilities and communication
nities. Most of these bonds are porate bonds, not least in some also offer interesting risk-adjusted
unlikely to face downgrades even Asian markets, where worries over returns.
in an environment of subdued the impact of the US-China trade
economic growth. war have triggered a rise in spreads
even though corporate fundamentals
High yield: Focus on
subordinated financials
Backdrop: HY spreads could con- Opportunities: This includes conform to environmental, social
tinue to widen as long as recession subordinated financial bonds. and governance (ESG) standards
fears have not been overcome, Ongoing regulatory pressure to are of increasing interest and
with B rated bonds most vulnerable strengthen bank balance sheets relevance as well.
to a sharper rise in yields. How and the trend decline in non-
ever, we continue to see opportu- performing loans, not least in the
nities in the slightly better BB European periphery, should
segment. be supportive. HY bonds that
32Emerging market bonds:
Good risk/return
Backdrop: Spreads have declined Opportunities: The US Federal
less in the main EM bond indexes Reserve’s more accommodative
since the 2008 financial crisis than stance should continue to benefit
in a number of higher risk credit EM that are reliant on USD funding.
segments in developed markets, Economic fundamentals in some
where leverage is often higher. The of the large borrowing countries
latter may have benefited more such as Brazil, Mexico and Turkey
strongly, albeit indirectly, from should continue to improve in Frontier markets:
central banks’ asset purchase pro- 2020. Declining inflation rates The new high yield
grams, which focused on advanced should help bring down domestic
economy bonds. Conversely, EM interest rates in a number of Find out more:
bonds now offer a higher risk countries, which would, in particu- credit-suisse.com/
premium from which investors can lar, support EM local currency frontiermarkets
benefit. bonds. However, as some curren-
cies may come under pressure, a
selective approach is required.
Be conservative with
asset-backed securities
Backdrop: Structured credit Opportunities: European covered yields. In contrast, more than half
instruments, more generally known bonds still offer moderate returns of the US ABS issuers are from
as asset-backed securities (ABS), and a high credit rating. Collater the automobile industry, which is
are considered a primary catalyst alized loan obligations (CLO), undergoing structural change.
for the 2008 financial crisis and especially senior and mezzanine
have often been regarded with tranches, also offer a good risk-
skepticism since then. However, return tradeoff. They are typically
we see various interesting opportu- much less affected by rising
nities in this area. But caution is defaults than HY bonds or
advised in some areas including leveraged loans. Moreover, their
some of the traditional US and floating rate nature provides a
European ABS markets. buffer against rising longer-term
credit-suisse.com/investmentoutlook 33Main asset classes Equities Focus on growth sectors and dividends Despite numerous headwinds, the MSCI World Index provided investors with a total return of just above 20% in the first ten months of 2019, well above an average year’s return. We expect a more muted performance in 2020 as global central banks dial back interest rate cuts. 34
In 2019, the negative impact that diminishing Watch the margins
growth momentum had on equities was more than Since the financial crisis, corporate profits have
offset by the significant boost that lower interest generally been boosted by subdued costs. While
rates provided. In 2020, we expect economic some cost drivers will remain at bay, others
growth to stabilize. We expect central banks will will not. Interest costs will remain very low for the
only provide limited additional support, though foreseeable future and may even decline as
liquidity conditions should remain accommodative. maturing debt is refinanced at lower rates.
The US Federal Reserve (Fed) in particular will Wages, however, have been growing faster in
not lower interest rates, in our view, or at most developed countries, particularly the USA.
by very little, in contrast to what the market
currently expects. In addition, margin pressures The increase in the share of wages is a typical
are likely to increase as labor costs rise. This late-cycle phenomenon that should last for some
suggests that equity returns will likely be more years even if the economy entered into reces-
in line with an average year. sion. Moreover, while productivity growth has in-
creased, it is unlikely to fully offset these
Positive base case for equities additional costs. Rising labor costs could lead to
Nevertheless, our base case for equities is posi- reduced cash flows. When combined with
tive. As geopolitical tensions moderate and already extended financial leverage, this could
the trade war subsides, at least to some extent, limit stock buybacks, which have been an
business sentiment should improve and con- important driver in recent years.
tribute to a recovery in industrial production (IP).
Additional fiscal spending, especially in Europe, The X Factor: US presidential election
and the after-effects of monetary easing in 2019 The run-up to the 2020 US presidential and
should also support economic and sales growth. congressional elections in November 2020
Finally, relative valuations still clearly favor equities. could also have a meaningful impact on equity
Growth-oriented sectors and stocks that benefit markets, though there is no hard and fast
from sustained long-term societal changes statistical evidence that equity performance in
should continue to outperform. Stocks that pro- an election year differs from other years.
vide stable dividends are also favored.
What may be different this time around is that the
election year could be more turbulent than usual
given the deep split in the US electorate. More-
over, if polls shifted clearly in favor of one of the
left-leaning Democratic candidates, some sectors
exposed to potential future intervention (e.g.
healthcare, energy or financials) could come under
pressure.
credit-suisse.com/investmentoutlook 35Main asset classes Equities
Profit share likely to drop further as labor catches up
Shares of profits after tax and labor compensation in US national income (in%, 4-quarter moving average)
70 13
65 10
60 7
1965 1975 1985 1995 2005 2015
Last data point Q2 2019
Labor compensation Profits after tax (RHS) Source Datastream, Credit Suisse
Finding returns in a low-yield sea Growth-getters
Despite our expectation of mid-single-digit equity More growth-oriented investors may consider
returns in the year ahead, returns are likely to high-conviction sectors or themes that are likely
be significantly higher than for investment grade to experience strong earnings growth. One such
bonds. Stocks of companies that offer sustain- area is education technology, which is on the
able dividend payouts should be well supported. cusp of high growth as education is becoming
increasingly digital and therefore more cost-
Based on today’s equity prices, we expect a effective and impactful.
dividend yield for the MSCI World aggregate of
roughly 2.5%. Some sectors such as financials, Separately, sustainability is becoming more
energy or utilities should continue to pay important not only for consumers and companies,
above-average dividends. but also for investors. We believe that we are
at the start of a transition to a more sustainable
economy. While some companies and sectors
may come under pressure, significant new
opportunities should arise. Our five high-conviction
Supertrends touch upon these and other highly
relevant topics – please refer to page 40 for
details about them.
36A bird’s-eye view
on major markets
USA: Expect outperformance UK: Look beyond Brexit China/EM equities: Trade war
despite hurdles The UK market underperformed global de-escalation is key
Since the start of the bull market in equities quite significantly in 2019. Emerging market (EM) equities have
March 2009, the S&P 500 has However, this was not primarily due to underperformed developed markets
outperformed other markets by large Brexit uncertainty but rather a result of substantially since early 2018. Initially,
margins (around 210% vs. MSCI EMU weakness in the materials sector, tightening Fed policy weakened a
and around 245% vs. MSCI Japan). which makes up a large share of the number of markets that are reliant on
Our base case presumes continued UK equity market. Looking into 2020, cheap USD funding. Matters wors-
strong performance of the US market we believe the market will be among ened with the start of the US-China
due to superior economic growth and the weaker ones as continued trade war – note that China and other
the strong weighting of the IT sector. sluggish growth in China continues to northern Asian markets make up more
But its potential is limited by growing weigh on materials. A smooth Brexit than 55% of the MSCI EM index. A
margin pressure as a result of rising would paradoxically add to pressure on de-escalation of the trade war would
wages, the waning effects of the export-oriented sectors as the GBP thus likely support EM equities, even if
2018 corporate tax cuts, a less would likely appreciate significantly. other factors such as weaker growth
supportive Fed and, possibly, uncer- However, it would support domestical- in China may dampen the recovery.
tainty surrounding the presidential ly oriented smaller companies. In the Lower inflation and easier monetary
election. unlikely event of a hard Brexit, we policy should continue to support EM
would expect decisive easing by the such as Brazil.
Eurozone: ECB support versus Bank of England and a much weaker
trade war GBP. Japan: Hoping for an improvement
Considering the political worries and in the IP cycle
weakness in manufacturing, Eurozone Switzerland: Steady as she goes The past year was disappointing for
equities held up surprisingly well in Swiss equities continued to show a investors in Japanese equities as the
2019. The move back to monetary very strong performance in 2019, domestic as well as the global
easing and the associated weakening driven in part by the market’s consum- economy slowed amid the US-China
of the EUR no doubt provided support. er staples giant. Our outlook for 2020 trade dispute. For 2020, we think this
However, measured in USD, the suggests a steady but not spectacular market’s fortunes should improve, as
market underperformed the S&P 500 performance, as the defensive Swiss a pick-up in the global IP cycle and a
by 4.3%. Looking into 2020, we market would underperform more recovery of capex spending in parti-
believe the market should be support- cyclical markets if global manufactur- cular will benefit the cyclical Japanese
ed, among other factors, by the ing improves. If successful, efforts by market more than most others.
European Central Bank’s accommo- the Swiss National Bank to prevent Moreover, the market is attractively
dative monetary policy, a likely CHF appreciation would be supportive. valued, with a forward P/E of just
resolution of Brexit, and its unde- A weaker CHF in combination with a above 13 times. The Bank of Japan’s
manding valuation. The biggest risks steeper yield curve would in particular commitment to maintaining an
are a potential escalation of the US support financials. A shift in US accommodative stance and limiting
trade war with China and potential US healthcare policy following the 2020 JPY appreciation is also a positive.
tariffs on European autos. US presidential elections poses a
certain risk to Swiss pharmaceuticals.
credit-suisse.com/investmentoutlook 37Main asset classes Equity sectors
Sector views Directional indicators represent tactical views as of
October 2019; 3 – 6 month horizon
Tailwinds Headwinds
ȹ Innovation – e.g. 5G, Internet ȹ Saturation with smartphones limits
of Things, Artificial Intelligence (AI), hardware sales
digitalization – drives growth ȹ Slowing corporate investments
ȹ Software is key enabler of due to uncertainty
productivity enhancements
IT
ȹ Central bank “tiering” should boost ȹ Flat yield curve reducing net interest
profitability of European banks margins
ȹ Valuations attractive, fundamentals ȹ Margin pressures in retail and wealth
improving (e.g. return on equity) management
Financials
ȹ Significant growth rates of mobile ȹ Regulatory pressure, e.g. antitrust,
entertainment (video gaming, video privacy investigations, is challenging
streaming) business models
ȹ Shift of advertising from traditional ȹ Content creation and compliance
to online offers meaningful revenue pressures require significant spending
Communication
potential
services
ȹ Attractive dividend yields ȹ Elevated valuations
ȹ Defensive sector, economic ȹ Somewhat higher bond yields would
uncertainty or trade disputes have reduce appeal of this bond proxy
limited influence
Utilities
ȹ Attractive dividend yields ȹ Somewhat higher bond yields would
ȹ Outside retail, commercial real reduce appeal of this bond proxy
estate prices are expected to remain ȹ E-commerce reducing appeal of retail
stable real estate
Real estate
38Tailwinds Headwinds
ȹ Aging population ȹ Elevated political risks during 2020
ȹ Better healthcare coverage and US elections, healthcare costs and
affordability in emerging markets coverage a target of candidates
ȹ Litigation risk related to opioid
epidemic
Healthcare
ȹ Even a partial resolution of the trade ȹ Economic uncertainty reducing
dispute would lift economic corporate investments, industrial
uncertainty production
ȹ Potential increase of infrastructure ȹ Earnings growth could disappoint
spending in various countries
Industrials
ȹ Solid dividend yield ȹ Valuations elevated
ȹ Defensive sector, in favor if economic ȹ Appeal of this bond proxy sector likely
uncertainty persists to fade as interest rates expected to
back up
Consumer staples
ȹ Solid labor markets, wage growth ȹ If US-China trade dispute continues,
and household balance sheets slowdown in manufacturing could
support consumer demand and spread to labor markets and consumer
spending demand
Low interest rates support spending Traditional retailing faces structural
Consumer
ȹ ȹ
on home-related durables challenge from e-commerce
discretionary
ȹ Geopolitical tensions with potential ȹ Manufacturing weakness, a slower Chinese
to disrupt supply may boost risk economy reduces demand growth, while US
premium in oil prices shale oil producers add to abundant supply
ȹ Pressure to address environmental
ȹ Attractive dividend yield
issues could accelerate move
to sustainable energy solutions
Energy
ȹ Low interest rates could lift ȹ Low global economic growth and
construction-related demand strong dollar are a drag
ȹ Valuation attractive ȹ Slowing growth in China a risk
Materials
credit-suisse.com/investmentoutlook 39Main asset classes Equities
Supertrends
What do rising pet ownership, global climate school strikes,
and the launch of next-generation 5G mobile networks have in
common? They all are testimony to the sweeping societal
changes that we picked up on when we first launched our five
Supertrends in 2017.
Our Supertrends cover a broad variety of timely In addition, environmental, social and governance
topics: our increasingly multipolar world; infra- (ESG) criteria remain a key topic and investment
structure; population aging; the influence of the focus particularly for the Millennials, whose
next generation; and fast-paced technological voices as responsible consumers are increasingly
innovation. They are focused on structural driving being heard.
forces and aim to improve a portfolio’s overall
risk/return profile, outperforming the broader Long-term themes across sectors
market in the long run. Our conviction in these Thanks to the Supertrends’ modular concept,
trends remains strong. investors can invest in single stocks, more niche
themes, or the broader Supertrends themes.
A new addition: Education technology Together the five Supertrends provide broad
In June 2019, we introduced new angles to our diversification in terms of Credit Suisse’s single
Supertrends framework. In relation to the Silver stock selection, with every sector in the MSCI
Economy Supertrend, for example, there is a World part of a portfolio. The largest exposures
growing number of seniors living with pets. in a Supertrends portfolio context are in IT,
Animals have their own dietary and veterinary healthcare and industrials. In terms of regions,
needs, which should fuel growth in the pet care the USA makes up almost 50% of our Super-
market to over USD 200 billion globally by 2025. trends stock selection – less than its weight in
In terms of our Millennials’ Values Supertrend, the MSCI World. Conversely, we have a higher
being online and using social media comes exposure to emerging markets, which reflects
naturally to Generation Z. They drive demand long-term growth opportunities in many of these
for education technology, which is in the early countries, as well as worldwide societal and
stages of what we believe will be a major demographic trends.
transformation. Marketers Media expects the
digital education market in North America to
grow to more than USD 400 billion by 2023.
In our Technology Supertrend, we broaden our
“digitalization” subtheme to focus on 5G and
how it impacts big data.
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