Investment Outlook 2021 - Living forward - Credit Suisse
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Investment
Outlook 2021
Living forward.
Investment Outlook 2021
Living forward.
credit-suisse.com/investmentoutlook 3
Investment Outlook 2021
Content
06 Letter from the CEO
08 Dear reader
10 Review of 2020
60 Disclaimer
66 Imprint
12 Global economy
14
22
Pandenomics: After the shock
So long status quo
50 Supertrends
53 Infographic: Shifting media
consumption amid pandemic
24 Regional outlook
28 Main asset
54 Investment
strategy 2021
classes 56
58
Where to turn for yield
Forecasts
30 Fixed income
33 Equities
40 Currencies
42 Real estate
44 Hedge funds
46 Private equity
48 Commodities
4 credit-suisse.com/investmentoutlook 5
Letter from the CEO
From my
perspective
Thomas Gottstein
CEO Credit Suisse Group AG
It is my pleasure to present our Investment Outlook 2021.
This past year was unlike any other, with the COVID-19
pandemic leading to severe recessions, high unemployment
and volatile swings in financial markets.
So what is in store for 2021? Of course, the Our economists, financial analysts and
safety of our communities and citizens strategists have worked tirelessly across
remains the highest priority. It is clear that our regions to help investors and entrepreneurs
health and the performance of our economies navigate these rapidly evolving global
go hand in hand. Much will depend on challenges, while putting sustainability at the
progress toward a vaccine and other efforts core of our House View. It provides the
to mitigate the health crisis. analytic foundation for our role as a leading
wealth manager with strong global investment
We generally see conditions for a continued banking capabilities.
recovery in global activity in 2021 amid strong
fiscal and monetary stimulus, accelerated The fruits of these efforts are reflected in
technological innovation and investments in our Investment Outlook, fittingly titled “Living
carbon mitigation. forward.” It offers our key views on how
markets and economies will evolve in the year
However, uncertainties abound, from ahead. I am confident that you will find it
geopolitics and de-globalization to the effects a valuable resource as you seek opportunities
of lower-for-longer interest rates across in these uncertain times.
asset classes. The very narrow margins in the
recent US elections underscored hardening I extend to you my best wishes for a healthy
political divisions that may complicate the and prosperous 2021.
policy response to the pandemic.
Thomas Gottstein
6 credit-suisse.com/investmentoutlook 7
Dear reader
Living
forward.
Michael Strobaek
Global Chief Investment Officer
As human beings, we have a need to understand our
lives by looking back at the past. But the 19th
century Danish philosopher Soren Kierkegaard said
we should not forget about the future.
Once our world emerges from the shadow This publication is not about the past, Finally, while economic growth should We strive to be in a position to help our clients
of the COVID-19 pandemic, it will only be however, but looks ahead at what we expect normalize after the pandemic-induced shock accelerate these trends. Our major initiatives
natural for us to “live backwards” as we will shape investments and markets in the in 2020, there are risks that still need to be in this area include the Supertrends, our
examine how this challenging period affected new year. Investment conditions are tighter monitored carefully. In the following pages, long-term investment themes that focus on
our lives. As individuals, we can all recall and the search for yield and returns has we explore the outlook for the different asset societal change, such as Millennials’ values
how it felt to see our cities empty out as the become trickier. Now is the time when increa- classes and the global economy in 2021. and Climate change – Decarbonizing
world went into lockdown, as well as our sed discipline is needed to overcome our the economy. We have also launched funds
worries about what would happen to our natural bias to look to the past for guidance. Beyond all the unprecedented events of the targeting some of the United Nations’
families and friends. What is for sure is that Sound judgement grounded in a rigorous year we are leaving behind, a far greater Sustainable Development Goals.
none of us will ever forget that 2020 was analysis of the present combined with perse challenge awaits as capital shifts to address-
the year when we were all confronted with a verance in pursuing an investment thesis ing the environmental and societal trends that Enabling our clients to invest with sustainabili-
global pandemic of a deadly virus. can make investing highly rewarding, as we the pandemic has catalyzed. Over the past ty and impact in mind is among our bank’s
demonstrated during the height of the 18 years, Credit Suisse has been very active top priorities going forward, and you will
The crisis was also an extraordinary experi- crisis, when we decided to go against the tide in the area of sustainable and impact continue to hear more about our efforts on
ence for investors as it pushed the global and began buying equities in late March. investing. We believe investors have a clear this front as we put it at the heart of our
economy into its deepest recession since role to play in the transition to a more investment offering. I am sure that the year
World War II. Equity markets plunged in late As we move forward, the pandemic will balanced and sustainable world. This will 2020 will be a defining moment in our lives,
February and March, then rallied strongly continue to occupy us in 2021. Governments require a shift in mindset and approach, and I reflect upon a quote from the Danish
in the subsequent months thanks to unprece- will have new COVID-19 outbreaks to battle, which is already underway as investors call philosopher Soren Kierkegaard in which he
dented support from central banks and and will need to distribute a vaccine to for closer alignment of purpose and profit says life can only be understood backwards,
governments. their population once it becomes available. when deploying their investment capital. but it must be lived forwards.
Additionally, people and businesses will need
to adapt to what we believe will be permanent
changes in the way we work, learn and live.
8 credit-suisse.com/investmentoutlook 9
Review of 2020
2020: A year
MSCI AC World price index
03–09 November
like no other
US elections and vaccine news
US equities reacted positively to the
prospect of a Biden presidency and split
Congress, even though US President
21 July 01 October
Donald Trump had refused to concede. Equi-
EU recovery fund Tech stocks struggle
ty markets were given a further boost by an
European Union leaders reached a After a strong rally since March, announcement that one COVID-19 vaccine
deal on a EUR 750 bn support plan for megacap technology stocks in trials had more than 90% efficacy.
the economy involving the issuance of dropped 6%-11% in September.
EU debt for the first time.
10 December
29
ECB meeting
12 March 01 May May
Cor- Global manufacturing plunge po- rate
Black Thursday
bonds see record inflows
Greatest single-day percentage In April, global manufacturing was at
fall since the 1987 stock market the bottom of one of its deepest
0%
crash. slumps since World War II.
15 March
Federal Reserve intervention
21–22 November
-5%
31 January The US Federal Reserve cut the G20 leaders’ summit
Brexit benchmark interest rate to zero
and launched a USD 700 billion
After more than three years quantitative easing program. 10 August 13 September
of deliberation and political Market recovery completed Increasing numbers
turmoil, the United Kingdom
officially left the European Global equity markets recovered all of their Officials recorded the largest number of
-10%
27 March previous losses in less than five months – COVID-19 cases in 24 hours. The WHO 15–16 December
Union at the end of January.
Economic relief bill in the USA an unprecedented recovery in terms of announced that there were 307,930 cases Fed meeting
speed. within 24 hours, mainly in the USA, India
US President Donald Trump signed the and Brazil.
USD 2 trillion coronavirus economic
relief bill into law. The bill included
checks for Americans and business
-15%
loans.
19 February
Peak before the
crash
09 January
COVID-19 11 June 03 September
The Nasdaq Composite 29 May
and the S&P 500 Fears of a second Second peak
The World Health Corporate bonds see record wave of COVID-19
-20% finished at record highs. inflows 31 December
Organization announced that Markets reached another peak after the
a deadly coronavirus had The Dow Jones Brexit transition ends
Encouraged by the US Federal fastest recovery in history from 23 March to
emerged in Wuhan, China. Industrial Average plunged 3 September.
Reserve’s bond buying program and The UK is slated to leave the
1,861 points, around 7%.
amid rising optimism, investors European Union’s Single Market
pumped a record USD 32.5 billion into and Customs Union.
corporate bonds.
-25%
23 March
Market low
Markets tanked after the sharpest 28 October
08 March correction in history. The S&P 500 20 April 04 June Second wave
Oil price war touched a low of 2237.40 points. Negative oil prices ECB stimulus
Equity markets swooned
-30% The European Central Bank overnight as coronavirus case
Saudi Arabia kicked off an oil US oil prices turned negative
price war with Russia on 8 March for the first time in history. announced EUR 600 billion of new numbers in the USA and
in order to penalize Moscow for stimulus to fight the coronavirus, Europe continued to surge,
not agreeing to reduce oil prices bringing its total coronavirus package with some countries
during the early stages of the to EUR 1.35 trillion. implementing lockdowns.
coronavirus slump.
-35%
Jan. Feb. Mar. April May June July Aug. Sept. Oct. Nov. Dec.
10 credit-suisse.com/investmentoutlook 11
Global
economy
12 credit-suisse.com/investmentoutlook 13
Global economy “Shock and awe” the world used a “shock and awe” tactic
Due to the lockdown of the global economy, to deal with the economic fallout from this
Pandenomics:
2020 will go down as a historic year public health crisis.
with a truly unique economic trajectory. The
deepest quarterly global gross domestic What was different this time? In a “normal”
product (GDP) contraction on record in downturn, the cyclical parts of the economy
Q2 was followed by the sharpest quarterly like construction typically contract, while
After the shock
rebound on record the following quarter, the service part of the economy fares better.
as the lockdown restrictions were eased and But this time around, the shock affected
fiscal and monetary stimulus kicked in. Yet, cyclical manufacturing sectors and the service
when the COVID-19 pandemic threatened economy simultaneously, leading to extreme
to get out of control, policymakers around swings in economic activity. This is rare.
The year 2020 has been like no other.
The global lockdown during the first
wave of the COVID-19 pandemic
triggered the strongest economic
contraction in modern history.
Most economies recovered sharply
thereafter, but a second wave of
COVID-19 set the economy back again.
Yet growth should accelerate gradually
in 2021 without triggering a troubling
rise in inflation or interest rates,
despite much higher government debt.
14 credit-suisse.com/investmentoutlook 15
Global economy Pandenomics: After the shock Wages face headwinds At the time of writing, the labor market -20,787,000
The International Labor Organization (ILO) situation worldwide had improved significantly
estimates that during the Q2 lockdown, more from the trough in Q2, but unemployment
than 15% of all working hours worldwide remained significantly higher than before the
were lost, which corresponds to almost pandemic. Over the coming months, the
500 million jobs. In the USA alone, more rate of re-hiring is likely to slow as the initial
than 21 million people lost their jobs at the positive effect of the re-opening of business-
height of the crisis in March and April. es fades. As it will take time for the economy
The labor market in Europe also saw large to reach pre-pandemic activity levels,
declines in hours but fewer job losses, unemployment rates are likely to remain
as governments provided short-time work elevated over the next two years. However,
programs. In these schemes, companies can this need not be a permanent development.
apply to reduce their employees’ work hours, In regions with relatively flexible and free
with the government topping up the differ- labor markets such as the USA, unemploy-
ence in salaries, usually up to a cap of 80%. ment should head back toward equilibrium
Asian economies and emerging markets even if output stays below pre-pandemic
(EM) with high public sector employment also levels. While underemployment persists, it is
In the USA, the service sector has contract- Another unusual macroeconomic feature of maintained relatively stable employment likely that wage growth will face headwinds,
ed only three times in the past seventy the 2020 recession was the simultaneous throughout the crisis. However, countries although regulations will likely limit this
years: in 1973, 2008 and 2020. During the increase of savings ratios in the USA, Europe with low social security protection (the USA problem in Europe and Japan.
2020 recession, cyclical sectors slowed as and Asia. Fiscal and social support programs and some EM) experienced significant
14.7%
the economic closure of entire countries supported household income during the turmoil in labor markets, with a wave of
disrupted supply chains. In the service lockdowns, leading to much better consumer layoffs during the lockdown, followed
economy, several sectors came to a stand- spending than would otherwise have oc- by hiring during the recovery.
still during the quarantines, as “normal” curred. But because service spending (as
operations suddenly became unsafe for opposed to physical goods spending) was
clients and staff amid the pandemic constrained by social distancing, households
(e.g. running a hair salon or a restaurant). were able to save at high rates too. As a
This also explains the sharp rebound in result, household balance sheets improved,
economic activity once lockdown restrictions an unusual situation in a recession. Further
were lifted, as supply chains were restored spending improvement is likely if rising hours US unemployment
and previously closed businesses re-opened
with new COVID-19 safety restrictions.
and falling unemployment continues, and
a switch back to service spending will occur
peaked in April 2020,
Massive fiscal and monetary stimulus once the pandemic ends. with over 20 million
provided additional support for the recovery.
people losing their
jobs.
Return to “normal” Households are saving more Back to work
Global real GDP growth (QoQ in %) Household savings rate (in %) Monthly US unemployment and change in total number
of employees on nonfarm payrolls
6 40 in % Employees
16 -1,200,000
4 35
14 -800,000
30
2
25 12 -400,000
0
20 10 0
-2
15 8 400,000
-4 6 800,000
10
-6 5 4 1,200,000
2006 2008 2010 2012 2014 2016 2018 2020 Canada France Germany USA China UK 2 1,600,000
Estimate Q4 2019 Q2 2020 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Last data point 30/06/2020 Last data point 30/06/2020 Unemployment rate (lhs) Last data point 30/09/2020
Source Bloomberg, Credit Suisse Source Haver Analytics, Credit Suisse Change in nonfarm payrolls (rhs) Source Haver Analytics, Credit Suisse 4,781,000
16 credit-suisse.com/investmentoutlook 17
Global economy Pandenomics: After the shock Central banks could also simply respond too Central banks have thus become much more
late or weakly to accelerating inflation. Yet open and eager to adopt unorthodox mone-
the Fed’s shift toward average inflation tary policy measures such as quantitative
targeting does not limit its ability to respond easing, negative interest rates or yield curve
quickly to a rapid overshoot in inflation. control to avoid deflation than to tighten
In Europe, the constitution of the European monetary policy in the face of rising inflation
Central Bank (ECB) renders this especially when the economy is weak. This puts central
unlikely. In countries with high public debt, banks in a delicate position to fulfill their
fighting inflation becomes more difficult for mandates. For now, it is too early to assess
central banks than fighting deflation. This such tail risks, but investors should stay
is because inflation makes it easier to attentive to the sustainability of public
manage a high debt burden while deflation finances.
makes it more difficult to do so.
Creative destruction and productivity Central banks on hold
A shock like the COVID-19 pandemic also With wages under pressure and/or – depen-
influences productivity. One measure of this ding on the region – unemployment levels
Inflation holds the fate of financial assets
is the growth of labor productivity, i.e. real rising, inflation looks set to remain subdued.
GDP growth minus real growth in hours We expect global inflation of 2.3% in 2021
worked. During the pandemic, labor produc- – lower than the pre-pandemic level of 2.5%
tivity jumped as hours worked fell more than in 2019. In the USA, we expect inflation of
output. As employees return to their jobs, 2.0% in 2021 versus 1.0% for the Eurozone For financial assets and investors, Real bond and equity returns vs. inflation rates
however, this should reverse and productivity and 2.5% for China. These low inflation it is key to determine which Rate of return/inflation (in %, 1900–2019)
growth could slow. Still, productivity is always numbers mean that central banks will be in inflation regime will prevail in
very volatile over short time periods. In the no hurry to raise interest rates. During the coming years. For most developed
longer term, the pandemic could enhance lockdown, the US Federal Reserve (Fed) countries and emerging markets, Top 5%* 18
productivity, at least in a number of sectors. joined other major central banks in cutting 0%–4% headline inflation is a
rates to around zero, and they re-launched moderate inflation regime. In such
or extended major asset purchase programs. a regime, equities tend to outper- Next 15% 7.5
Central banks have Their objective was to depress real interest
rates further in order to support the econom-
form bonds. In high inflation
regimes (typically when headline
become much more ic recovery. We do not expect any of the inflation is above 7.5%), equities Next 15% 4.1
major central banks to hike interest rates in stop producing positive total
open to adopt 2021, and most likely well beyond. In fact,
we could even see an increase in asset
returns while bonds tend to
perform negatively. In deflation Next 15%
2.7
unorthodox monetary purchases if growth falters or if inflation fails
to rise.
regimes (negative headline
inflation), bonds outperform
policy measures.
Next 15%
stocks. 1.7
Fog over fiscal future
While the effects of the pandemic should help
Next 15%
keep inflation in check in 2021, the long-term 0.5
The lockdown has created plenty of disrup- consequences of the crisis on inflation are less
tion, which will likely boost new business clear. Over time, ballooning budget deficits and
Next 15%
models such as online medicine and new public debt are likely. This destabilization of -3.5
ways of working. There will be short-term public finances can lead to inflation, but only if
costs to these disruptions, but emerging central banks are ineffective or inactive in Low 5%
business models can generate efficiencies in responding to future inflation pressure. This
the long run, especially if companies and could happen, for example, if central banks -25 -20 -15 -10 -5 0 5 10 15
governments invest in the right areas, such succumb to outside pressures or if they begin
Real bond returns
as digital infrastructure. to allow concerns over government debt Real equity returns
service to influence their rate decisions. This Inflation 0%–4% (moderate inflation)
Inflation rate boundary
is a risk case for the post COVID-19 period.
We cannot exclude the possibility that central * Percentiles of inflation across 2516 country-years; bond and equity returns in same year
banks are pressured into financing overly
Last data point 31/12/2019
ambitious fiscal programs. Source Elroy Dimson, Paul Marsh, and Mike Staunton, DMS dataset. Not to be reproduced without
express written permission from the authors.
18 credit-suisse.com/investmentoutlook 19Global economy Pandenomics: After the shock Additional stimulus measures of the magni- deal between the USA and EU is in the
tude of 2020 are quite unlikely, however, making – tensions over technology and
given the expected recovery of the world investment are likely to remain in place or
US elections:
economy and the low probability of further may worsen. In response, China is currently
full COVID-19 lockdowns. Whatever the making significant investments in the
Limited leeway for
trajectory of the global economy, high semiconductor industry to reduce its depen-
government debt will remain a challenge for dence on other less friendly trading partners.
President-elect Biden
policymakers going forward. So long as This could lead to a duplication of supply
interest rates remain at or close to their chains. Protectionist tendencies may also
current lows, debt will remain sustainable. increase in the area of pharmaceuticals, with
However, governments will be constrained in lobby groups trying to suggest that the
fighting any future recession and, more COVID-19 crisis proves the need to produce
importantly, financing growth-enhancing strategic supplies nationally. A much better
expenditures. High debt is thus likely to approach would be to ensure, via multilateral
be one of the lasting burdensome legacies or bilateral treaties, that diversified global
of COVID-19. supplies are available in a future health crisis.
The debt legacy Protectionism to persist While Joe Biden won the US presidency, the
Many countries implemented fiscal stimulus Over the past 20 years, China has gone from Democrats’ room for maneuver will remain limited
measures amounting to 10% of GDP or producing roughly 5% of worldwide industrial given their failure to achieve decisive majorities
more during the crisis. By the end of 2020, output to 30%, while the USA’s share has in Congress. The USA is therefore unlikely to see
the ratio of government debt to GDP in the fallen from 25% to 18%, according to significant changes in tax policy, while added
USA will rise above 130%, according to our estimates. Many western politicians have expenditures in areas such as the "green" economy
International Monetary Fund (IMF) data, and pledged to boost local export and manufac- will also be limited. Changes in health care
to more than 160% for Italy and more than turing capacity and jobs, but doing this legislation or regulation will also remain limited.
260% for Japan. Although policymakers will on such a scale that could lead to a rapid However, the tone from the White House is
be increasingly concerned about rising debt, rebound in the US or European share of likely to shift markedly.
pressure to provide additional fiscal stimulus global production is highly unlikely. However,
will increase if economies fail to fully recover. trade barriers and frictions that have
In the USA, additional stimulus will be limited increased since 2016 are likely to persist.
in size given the Democrats’ failure to achieve While tariffs are unlikely to increase between
decisive majorities in Congress. Western economies – in fact, a trade
Price tag of a pandemic
General government debt (% GDP)
Japan 250
Italy
USA
France 200
Canada
UK
Germany 150
China
100
50
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Last data point 31/10/2019; forecasts as of October 2020
Estimates Source IMF, Credit Suisse
20 credit-suisse.com/investmentoutlook 21Global economy Pandenomics: After the shock
So long status quo Trends to watch
1 2
Inflation tail risks: The benign Multilateralism 2.0: Multilateral-
inflation regime of past decades ism is either reset and reformed
will persist in the medium term, or will cede to multi-polarism as a
but deflation and inflation tail risks result of US-China interactions.
have grown.
Crises often become a transformative force. While some
3 4
developments turn out to be temporary, others prevail long Democracy/Autocracy: Both Big state: Governments’ expand-
after the crisis is over. As we take stock of the COVID-19 can fail or thrive in a pandemic ed powers will outlast the crisis,
as crisis management, state initiating desirable changes but
pandemic, we identify several long-lasting consequences. capacity and citizens’ trust matter also increasing the risk of
more than political systems. undermining market dynamics
Both will continue to co-exist. and individual responsibility.
5 6
The rapid spread of COVID-19 in early 2020 The speed at which these trends are now
caught most of the world by surprise and progressing challenges human capacity to Nearshoring: Globalization will Surveillance: Surveillance and
turned the global economy upside down. keep pace. Legislation is lagging behind not reverse but slow further, personal data collection now
The pandemic made us aware that conta- in several areas, from data protection to labor with more emphasis on regional enable states and companies to
gious diseases can still threaten society as a laws, and governments, just like companies, diversification, nearshoring of become information empires.
whole and that such outbreaks are in fact have to strengthen their resilience by adop- production and resilience rather Comprehensive privacy protection
by-products of human progress. All along ting more sustainable economic paradigms. than cost efficiency. is crucial.
history, however, health crises have helped to
drive scientific and social innovation, shaping Acting now with a view to the world after
the paths of future economic development. COVID-19 can help minimize the likelihood
7 8
We believe that the current health crisis will of another pandemic-driven global crisis.
be no exception. It can also provide an opportunity to address Work: Remote work is here to Education: Lifelong learning will
issues that have undermined growth and stay, fostering an even broader become a key part of everyone’s
Yet, rather than being a complete game- prosperity in the last few decades. flexibilization and new standards life to create an adaptable work-
changer, COVID-19 has accelerated existing in the world of work. force and develop skills that stress
trends. The digitalization of everyday life, human advantage over machines.
the trend toward more flexible work arrange-
ments, the deceleration of globalization, the
weakening of multilateralism, the expansion
of the state or the vulnerability of cities – all
9 10
of these developments were already under-
way prior to the virus outbreak. Inequality: Inequality will remain Decentralization: Cities will
a great focus and possibly survive but adapt, leaving room
initiate more redistributive taxes, for more regional decentraliza-
triggering people and capital tion and a renaissance of small
flows in response. towns in the developed world.
22 credit-suisse.com/investmentoutlook 23Global economy Regional outlook Going into 2021, the growth picture differs across regions. As the world economy still struggles with the coronavirus pandemic, some countries are further ahead in the recovery process. On top of the COVID-19 crisis, some countries have additional political challenges to address in the year ahead. 24 credit-suisse.com/investmentoutlook 25
Global economy Regional outlook
UK China
Life after the EU Benefits from a head start
The UK’s departure from the China is ahead of most other travel and entertainment sectors
European Union’s Single Market countries when it comes to are still reluctant to hire). Further
and Customs Union is likely to recovery from the pandemic. It was out, we anticipate three key policy
impose long-term costs (e.g. for the first country to impose categories to be emphasized in the
trade barriers and bureaucracy) lockdowns and the first to lift them. next five-year plan: technology
USA
and slow the country’s recovery By now, Chinese industrial advancement, labor productivity
from the COVID-19 pandemic. The production has recuperated most and land reform. The authorities
A gradual recovery from the second wave
expiration of the transition period at of the lost ground, and China will aim to engineer a smooth decele-
the end of 2020 will thus be an be the only major economy to post ration to GDP growth as the
additional shock for the UK a positive growth rate for 2020 (we economy matures and the potential
economy – with or without a trade expect real GDP growth of 2.2%). comes down accordingly, and to
Growth is likely to be above COVID-19 crisis, may prove to be deal, in our view. Furthermore, The course of the recovery from proactively counteract any forces
potential (the growth rate that can destabilizing forces over time. In there is the potential for long-term here on will be more reliant on a that would decouple China from
be sustained over the long term) as terms of the quarterly growth damage if the UK government rebound in employment, which the global economy.
the USA stages a multi-year profile, we are likely to see a withdraws fiscal support prema- continues to face challenges (the
recovery from the pandemic. We gradual acceleration after a turely.
expect a similar level of inflation in renewed setback in Q4 2020.
2021 as in prior years, but both Even under the new Democratic
deflation and inflation tail risks administration, we are unlikely to
have grown. see much of an improvement in the
relationship with China. Changes in
Government and external debt, taxation will be limited, as will Switzerland
which have swelled due to policies increases in spending on “green”
to address the fallout from the infrastructure. Holding up
The coronavirus crisis also badly sectors (including commodities
hit the Swiss economy, which held trading, banking and insurance)
up better than others for three that were not directly affected
Eurozone reasons. First, lockdown measures by the restrictions or that even
were not as strict as for example saw demand increase due to
Pandemic in Italy or Spain, as construction or COVID-19. Going forward,
manufacturing sites, for example, however, the pace of recovery
strengthens ties were not closed nationwide. is likely to be similar to that of
Second, measures to mitigate the Switzerland’s main trading
fallout from the crisis were very partners.
European countries reopened their timely and effective: short-time
economies earlier than the USA working and COVID-19 loans
Latin America and were therefore a bit ahead in
terms of the economic recovery.
had a positive impact right from
the beginning of the crisis. Third,
Growth diverges As Europe is hit by a second wave
of COVID-19, we are seeing a
Switzerland has a relatively
advantageous industry sector
renewed setback. However, once breakdown, with a high proportion
Mexico’s long-term growth Pemex. In contrast to the the pandemic subsides the of value creation coming from
prospects appear to be worsening deteriorating growth outlook in Eurozone appears poised to grow pharma, chemicals and other
as President Andres Manuel Lopez Mexico, the decline of interest above potential, especially as fiscal
Obrador maintains an antagonistic rates in Brazil could allow the policies have successfully mitigated
stance toward the private sector. economy to grow faster and bolster much of the damage lockdowns Japan
Global risk appetite has driven the confidence in the sustainability of would have inflicted on businesses
stability of local financial markets, the public debt. For this to occur, and jobs. However, government Innovation to the rescue
but remains at risk given the however, President Jair Bolsonaro finances are stretched in several
financial fragility of heavily indebted will need to show strong political key countries like Italy, and
and state-owned oil company ability to carry out fiscal reforms. investment demand is soft. Marginally positive real GDP Nevertheless, persistent but mild
Challenging demographic trends growth should be achievable in disinflation, along with low nominal
(i.e. an aging population) pose an 2021, as demographic headwinds interest rates, is likely to continue
additional headwind to growth are offset by stable productivity to pose a threat to the banking
potential. A successful long-term gains thanks to continued industry, forcing it to undergo
recovery from the COVID-19 crisis technological innovation. major consolidation.
will depend on further effective
fiscal and political integration. The
creation of the EU recovery fund
was a step in the right direction, in
our view.
26 credit-suisse.com/investmentoutlook 27Main asset
classes
28 credit-suisse.com/investmentoutlook 29Main asset classes Fixed income Look for yield in emerging market bonds corporate bonds directly, which should support
Yields of emerging market hard currency further spread tightening in the new year. As
Credit continues
bonds (EM HC) have fallen markedly since the we expect long-term government bond yields
COVID-19 induced sell-off. Nevertheless, to only slowly normalize, IG credit should
spreads have remained above previous lows, continue to perform. With spreads for the
albeit in part due to the declining underlying high-grade segment having further room
to shine
US government bond yield. Record high to tighten, we expect global IG to deliver a
market positioning and a narrower scope for mid-single-digit return over the next 12 months.
policy support going forward is moderating In our view, investors should favor good
the return outlook. quality corporate bonds over nominal govern-
ment bonds due to continued strong central
Notwithstanding the more stable global bank support, not only in Europe but also
growth environment, many EM countries will in the USA. For diversification, we think that
still have to deal with the impact of the IG EM corporate bonds in USD offer an
lockdowns following the initial COVID-19 attractive yield pickup for investors looking for
shock, in particular the need to reverse some diversification.
of the monetary and fiscal stimulus deployed
In 2021, core government bonds’ gains will be meager, while in response to the crisis. On the other hand, We think that in the absence of additional
emerging market hard currency bonds remain appealing. the potential increase in cyclical revenues
after the rebound in economic activity this
shocks and in light of persistently low global
interest rates, EM HC debt remains an im-
In credit, investment grade offers a good risk/reward. In high year, together with some fiscal tightening and portant source for enhancing returns within
yield bonds, we see select opportunities to enhance returns stronger external balances, would suggest a
slower pace of debt supply going forward.
fixed income. For the overall EM HC index
that we track, we forecast a return of 4.4%
in the lower-rated credit segments. by end 2021. More defensive investors might
IG remains in demand prefer to invest only in IG government bonds,
Most investment grade (IG) corporate bond even though this lowers the return outlook.
segments delivered a positive return in 2020, After a large number of sovereign credit
supported by falling government bond yields downgrades in 2020, we foresee a more
With short-dated yields likely to remain deficits. With our expectation of a moderate as well as supportive monetary and fiscal stable environment in 2021 as we move
anchored at low levels by central bank policy, rise in long-term yields, we believe that policies. Nonetheless, credit spreads have further away from the initial COVID-19 shock
we do not expect long-term yields to rise nominal core government bond returns widened since the beginning of the year. and after several debt restructurings in high
strongly in 2021. Nevertheless, we see a should remain close to zero or negative in Against the backdrop of a gradual recovery of yield. Within major EM countries, the political
moderate steepening of government yield the next 12 months. the global economy, we expect central banks agenda in 2021 is not particularly busy and
curves as the most likely scenario in 2021, and governments globally to retain the very may help limit specific risks. There are
driven by the ongoing economic recovery and Inflation-linked bonds’ edge over supportive monetary and fiscal policies, legislative elections scheduled in Russia and
central banks’ objective to raise inflation nominal bonds especially the credit facility to purchase IG Mexico and municipal elections in South Africa.
expectations. In 2020, inflation numbers fell sharply in
response to the economic contraction and
The US Federal Reserve (Fed) made an the drop in commodity prices. In light of the
important change to its long-term strategy in ongoing economic recovery, major econo- Spreads have some tightening potential left
Q3 2020, introducing a policy approach of mies’ inflation rates are expected to show In basis points
average inflation targeting in which a poten- some normalization in 2021, though likely
tial inflation overshoot would be tolerated to only reaching 2.0% in the USA and 1.0% in
2000
make up for earlier below-target inflation the Eurozone, the latter being significantly
outcomes. The framework should allow the below the target of the European Central 1800
Fed greater flexibility in its policy choices in Bank (ECB). However, central banks’ 1600
order to lift inflation expectations, thereby potential tolerance for higher inflation should
1400
helping term premiums (the excess yield for help stabilize and lift long-term inflation
holding long-term vs. short-term bonds) to expectations, eventually exceeding recent 1200
rise from depressed levels. historical averages. Inflation-linked bonds 1000
(ILBs) – which provide compensation for
800
Moreover, while central banks’ accommoda- rising inflation – would benefit from such a
tive stance and ongoing bond purchases to rise in inflation expectations, unlike bonds. 600
support the recovery have kept fixed income When adjusted for duration differences, 400
volatility low in 2020, we think volatility could we therefore think that ILBs offer a better
200
see some normalization in 2021 together return prospect than respective nominal
with increased inflation tolerance by central government bonds. Feb 2002 Feb 2004 Feb 2006 Feb 2008 Feb 2010 Feb 2012 Feb 2014 Feb 2016 Feb 2018 Feb 2020
banks, along with higher debt and fiscal
Investment grade corporates Last data point 05/11/2020
High yield corporates Source Bloomberg, Credit Suisse
EM hard-currency sovereign bonds
30 credit-suisse.com/investmentoutlook 31Main asset classes Fixed income Main asset classes Equities
Equities still drive
returns
HY spreads: Room to tighten Benefits of ESG focus Equities offer attractive return prospects as we move into
At the time of writing, rating agency Moody’s
expects global high yield (HY) credit default
We believe investors can benefit from two
aspects when it comes to environmental,
2021. The broad political backdrop should remain supportive
rates to peak in Q1 2021. With risk sentiment social and governance (ESG) corporates in given very loose monetary policies globally and continued
improving alongside a projected economic
recovery in 2021, we expect that a further
2021. Firstly, a corporate bond portfolio that
takes into account ESG criteria might be
fiscal support. The earnings slump in 2020 due to the
moderate spread tightening in HY corporates less affected by corporate defaults and credit pandemic should prove to be transitory. Consensus forecasts
is likely. Within HY, single-B rated bonds
still offer attractive spread cushions compared
rating downgrades over a long-term horizon.
Secondly, with the benefits of ESG screening
for global equities imply that 2021 earnings will exceed
to more defensive segments. increasingly acknowledged by investors and, the 2019 level, which should support equities over the course
in turn, translated into higher ESG allocations
and inflows, we expect ESG bond prices
of the year.
ESG bonds are likely
to remain relatively well supported.
to remain relatively
well supported.
We anticipate that global HY should deliver
4.4% returns by the end of 2021. Given the
prospect of a COVID-19 vaccine, consumer
discretionary sectors such as airlines and
gaming are likely to recover. Even though
corporate leverage increased in the energy
and metals sectors throughout 2020, current
yields appear sufficient to compensate for
default risks as we go into 2021, especially
against the backdrop of ongoing central bank
support. Similarly, while European sub-
financials might face higher risks in terms of
rising non-performing loan provisions, the
strengthened bank balance sheets and fiscal
support have largely reduced European
banks’ funding stress. We expect European
sub-financial bonds’ performance to be in
line with HY bonds in 2021.
32 credit-suisse.com/investmentoutlook 33Main asset classes Equities Risk has its rewards
MSCI World – Earnings yield vs. real bond yield (in %)
12
10
8
6
4
2
0
Don’t be put off by high valuations further out due to the pandemic-induced
On traditional valuation metrics such as the recession and policy makers’ increased Nov 2000 Nov 2004 Nov 2008 Nov 2012 Nov 2016 Nov 2020
price-to-earnings ratio, equity market inflation tolerance. As central banks continue
valuation appears elevated compared to to curtail those tail risks, risk premia might
Earnings yield – consensus 12M forward
longer-term historical averages. On the one even decline further as the economic environ- Real bond yield Last data point 05/11/2020
hand, we believe this is driven by the ultra- ment continues to stabilize over the course of ERP Source Datastream, Bloomberg, Credit Suisse
low or even negative yield environment, 2021, which would underpin higher valuation
especially in inflation-adjusted terms. On the ratios compared to the historical record.
other hand, the fast and forceful interventions Currently the difference between the earnings Furthermore, online education is increasingly
by policy makers, most importantly the When comparing relative attractiveness yield and the real bond yield as a measure replacing traditional in-person training, while
US Federal Reserve (Fed), in response to the across asset classes, which ultimately steers for the equity risk premium (ERP) is higher telemedicine offers an affordable and quick
COVID-19 pandemic helped bring investors’ a substantial part of investment flows, equity than the long-term average, suggesting that alternative to doctor visits.
risk aversion down, allowing for the sharp markets continue to look quite attractive. equities offer an attractive excess return over
market recovery in late spring 2020. In 2021, Since the beginning of 2020, real bond yields bonds. We acknowledge that in an uncertain We continue to find attractive market seg-
policy support should remain in place to in the USA have declined by over 100 basis environment, the ERP should be elevated, ments that have the potential to disrupt and
curtail risk aversion. Besides the risk of a points, outpacing the decline in earnings as investors demand a higher premium for therefore have room to expand market share
credit crisis, we think that concerns over yields (inverse of the price-earnings ratio), holding risky assets. Nonetheless, as and profit margins, including technology-
a late-cycle overheating have been pushed thus supporting higher valuation multiples. economies recover and growth returns, these related industries and healthcare. We also
concerns should ease over time. see potential in materials, including construc-
tion materials, based on solid demand for
Catching the cyclical rebound commodities, a strong housing market and
On a regional level, the differences in sector potentially more construction activity,
Room to move lower composition will matter most, in our view. especially in residential housing.
CBOE S&P 500 Volatility Index expected market volatility as reflected by traded options Particularly the share of secular growth in-
dustries (e.g. technology-related companies) The disrupted parts of the economy, however,
versus cyclical industries (e.g. financials) is are likely to lose market share and their
80
expected to drive much of the regional return margins will come under pressure. Typical ex-
differential in 2021. amples are brick-and-mortar retailers or print
70
media. We also expect ongoing structural
60
The COVID-19 pandemic has accelerated headwinds in the traditional energy and
the trend of disruption, which will continue to financial sectors.
50 be a strong and powerful force. E-commerce
and online shopping will increasingly replace After some temporary cooling, we expect
40 traditional retail stores, favoring warehouses economic momentum to reaccelerate in
over malls. Remote working setups deploying 2021, which would then allow investors to
30 cloud computing, data security, wireless position themselves in cyclical sectors,
networks and video communication tools such as travel and hospitality or automotive.
20
should continue to make office space less
attractive, while increasing the appeal of
10
suburban housing.
Nov 2000 Nov 2004 Nov 2008 Nov 2012 Nov 2016 Nov 2020
Implied equity volatility Last data point 06/11/2020
Average Source Bloomberg, Credit Suisse
34 credit-suisse.com/investmentoutlook 35Main asset classes Equities ESG here to stay In addition, various regulatory measures
Sustainability has become increasingly regarding dividend payments, introduced
important for investors. So much so that it during the crisis to ensure sufficient capital
has become mainstream. For the first time in buffers in the insurance and financial
its 15-year history, the World Economic industries, are likely to be phased out in
Forum’s Global Risks Report 2020 exclusive- Europe as economic stability resumes. This
ly listed environmental concerns as the top would increase the attractiveness of high
global risks by likelihood, as well as for the dividend paying strategies, which tend to be
majority of risks by impact. Awareness of more relevant for European equity markets.
environmental, social and governance (ESG) We currently calculate a relative valuation
factors is rising, as illustrated by the increase advantage for the Eurozone of close to 10%,
Whatʼs in style for 2021? in online search engine queries. Assets under which we expect to close over time.
management adhering to ESG standards
are growing rapidly, putting greater pressure Swiss quality
on listed companies to align business models Swiss equities are of a defensive quality
and practices with ESG standards. Further- and therefore have a resilient earnings profile
more, fiduciary duties are gradually adapting due to the strong concentration in the
In 2020, we witnessed a strong The adverse shocks stemming The same is true for financials, to include sustainable investment principles, healthcare and consumer staples sectors,
divergence in returns between from the global COVID-19 with the lower-for-longer yield as regulators are increasingly demanding the which account for more than half of the
growth and value stocks. Going pandemic have nonetheless environment leading to margin consideration of ESG criteria. MSCI Switzerland index. During the pandem-
into 2021, we believe that value accelerated factors for which erosion, and for energy, where ic-driven downturn, the Swiss market bene-
stocks have the potential to catch growth is well positioned. decreasing appetite for fossil fuels fited from its defensive qualities. However,
Sustainability has
up, though the timing of such This includes the ability to meet and environmental issues are Swiss equities went on to lag the strong
a rebound is not quite clear. In a the shift in demand caused by headwinds for stock prices. rebound due to this defensiveness and
become increasingly
typical economic expansion where decreased mobility, social distanc- Heading into 2021, we prefer to a relatively low share of technology-related
gross domestic product (GDP) ing and remote working and maintain a small growth tilt, but businesses. Following the rally, we believe
important for investors.
grows above potential and mone- learning. At the same time, rele- expect to see periods when value that the substantial share of global market
tary policy is expansionary, an vant parts of value face structural stocks could outperform. leaders with high-quality products offers
investment tilt toward value and challenges, such as car companies attractive earnings prospects for the Swiss
small-cap stocks should eventually struggling with CO² emissions. market. Solid and, most importantly, stable
trump growth and large caps. dividends are another argument in favor of
Benefits for investors include more protection Swiss equities, especially at a time when
against prominent governance incidents, investors are searching for income generating
Note: Value stocks are stocks that stand out by their low valuation relative to their fundamentals (e.g. earnings, dividends or sales). They often have high
dividend yields and tend to be sensitive to the business cycle. Growth stocks are stocks of companies with substantial growth prospects that retain most of resilient ESG performance, along with the assets due to low bond yields. As an export-
their accrued earnings in order to finance growth. soft factor of doing good. We believe this oriented economy, the strength of the CHF
trend will continue, leading to further demand due to its safe-haven status has been a drag
and support for sustainable investments. on performance in the past. However, we
expect this drag to lessen for 2021, as the
A tale of two strategies Eurozone has the advantage continued global economic recovery should
Earnings volatility of growth and value (in %) The Eurozone could outperform the USA reduce the appeal of the CHF as a safe-
over the course of 2021, as earnings haven currency.
offer catch-up potential and should benefit
25 disproportionally from the economic
recovery due to their cyclical sensitivity. The
earnings cushion provided by the resilient
20 and stable growth-related industries
(e.g. technology) during the COVID-19 crisis
was less pronounced in Europe.
15
10
5
Oct 1995 Oct 2000 Oct 2005 Oct 2010 Oct 2015 Oct 2020
Earnings volatility: Growth Last data point 31/10/2020
Earnings volatility: Value Source Datastream, Credit Suisse
36 credit-suisse.com/investmentoutlook 37202
Main asset classes Equities
potential COVID-19
vaccines currently
being developed.
Vaccine: Some 202 potential COVID-19
vaccines were being developed
There are several questions linked
to a vaccine, including its duration
Nevertheless, any credible
confirmation that an effective
been most negatively affected by
COVID-19, including travel, leisure
such a scenario after a protracted
underperformance throughout
The X-factor and tested globally, with 47 in
human trials, according to the
of protection, but also its safety
and public acceptance. In addition,
vaccine is available for wider
distribution – and despite all the
and hospitality, could see a
recovery. We would also expect to
2020 (e.g. in the Eurozone).
World Health Organization’s 3 the availability of a vaccine and mentioned issues – would likely see a quick rotation within equities
November draft landscape of speed of production, along with be positive for broader equities from “stay-at-home” equities and
COVID-19 candidate vaccines. In the logistics in terms of global and overall risk sentiment. Indeed, growth stocks into value and
November 2020, one particular distribution are key in order to equity markets already appear to cyclical stocks, driven by positive
vaccine reported encouraging understand how quickly the world anticipate such positive news earnings revisions and the poten-
phase 3 study news, likely leading could return to “normal.” There is based on results from ongoing tial for a valuation re-rating.
to widespread vaccinations by also the issue of near-term vaccine trials and approval Regionally, we expect tourism
mid-2021. This is remarkable, as capacity, especially for poorer processes. In such a case, we dependent and cyclical equity
typical vaccine development takes regions. expect that the sectors that have markets to begin to catch up in
years, not months.
UK – Brexit the GBP due to the high share of earnings We expect Asian equities to deliver attractive However, equity prices have corrected due
uncertainty keeps us sidelined generated outside the country. We believe returns in 2021 given the current contain- to the pandemic, leading to the potential
Since the Brexit vote in 2016, UK equities that a weak GBP, in combination with the ment of COVID-19 in large parts of the region for outperformance should concerns related
have underperformed global equities mean- attractive equities valuation, could help offset and the ongoing robust economic recovery in to COVID-19 abate, for example through a
ingfully, leading to a significant de-rating and the hit to growth if Brexit uncertainty China. As valuations appear to have already globally distributed vaccine. Easy monetary
a historically low valuation multiple compared continues and there are additional COVID-19 largely priced in good economic prospects, a policy and a weaker USD should prove
to world equities. More recently, UK equities outbreaks in the UK. Additional fiscal continued recovery in earnings will be key to beneficial for EM equities. One key risk for
have experienced inferior earnings and and monetary stimulus could also support the drive the market higher. The broader eco- EM equities in 2021 remains the US-China
sharper dividend cuts than global equities economy and domestic stocks in the near nomic recovery and strong growth from the trade dispute and the potential for further
due to the UK market’s high exposure to the term. technology segment should prove supportive escalation.
financial and energy sectors, which were for earnings.
substantially affected by the COVID-19-related Emerging markets: Asia stands out
lockdown. Valuation ratios and high-dividend Emerging market (EM) equities are dominated Foreign investors are likely to focus on EM
yields indicate attractiveness, however the by Asia, which accounts for approximately Asia as they hunt for superior growth
economic outlook remains clouded due to 80% of the global EM market capitalization. opportunities. The COVID-19 pandemic more
uncertainties related to the UK’s pending Asia has significant exposure to the so-called severely affected the other two EM regions,
departure from the European Single Market “new economy” industries and we therefore Eastern Europe, Middle East and Africa
under Brexit. Nevertheless, currency devel- see a number of structural trends that (EEMEA), as well as Latin America. The
opments could help cushion the blow. UK support Asian equities, such as digitalization, fundamental backdrop is therefore weaker
equities have a strong inverse correlation to the cloud and artificial intelligence. for those two regions compared to EM Asia.
38 credit-suisse.com/investmentoutlook 39Main asset classes Currencies CHF likely to soften In Asia, China’s current account surpluses
Short-term uncertainties related to the should decline and eventually turn into a
USD set to lose
geopolitical situation and COVID-19 may deficit, with the economic rebalancing
keep the CHF supported up to the end of structurally favoring consumption and lower
2020. Still, the Swiss National Bank is likely savings over the longer term. However, net
to prevent the CHF from appreciating by portfolio flows should remain strong into
further ground
intervening in the foreign exchange market if 2021. China offers more attractive interest
needed. In 2021, we expect the CHF to rates compared to global core bond yields,
depreciate modestly against the EUR thanks while equity flows may also be positive given
to the improved outlook for the global the recovery of China’s economy and the
economy and the largely overvalued CHF. associated path of earnings growth. All in all,
we anticipate some CNY appreciation next
EM currencies should gain ground year and forecast USD/CNY at 6.32 in
With the USD likely to extend its weakness, 12 months. This should support most other
the fundamental outlook for emerging market Asian currencies against the USD. In
(EM) currencies should improve in 2021. particular, we expect the KRW to benefit as
While we believe that economic activity in EM South Korea has a strong current account
We expect further USD declines in 2021 on the back of should remain subdued in the short term surplus and has brought COVID-19 under
improving global growth, a deteriorating US real yield considering the residual effects of the
COVID-19 shock and uncertainty about the
control.
advantage and the widening of fiscal and external deficits. need for additional measures to deal with the
The EUR and JPY should benefit from this trend. We believe virus, we also expect the economic recovery
in EM to slightly outperform the US in 2021.
the CNY will also gain, supported by portfolio flows. We would expect a lower degree of policy
support as fiscal measures are partially
reversed and EM central banks become less
accommodative after inflation bottomed in
Q3. As global interest rates remain per-
So far this year, the USD has lost ground Rosier outlook for EUR sistently low, potential rate hikes in EM could
against other major developed market (DM) Political risks to the EUR have receded with give some support to EM currencies, as long
currencies. In the face of what we expect to the comprehensive European Union (EU) as such hikes are not seen as undermining
be an ongoing global recovery in 2021, we recovery fund. Despite some widening in the real activity. Against this backdrop, we would
think the USD should continue to lose fiscal deficit, the EU’s structural external expect some degree of differentiation across
ground. The very accommodative US Federal balances (3% surplus on average over the currencies.
Reserve (Fed) has erased the USD’s interest last five years) are sound and superior to
rate (or carry) advantage, and the prospect of those of the USA. Moreover, in a world of
poor US fiscal and external balances should worsening public finances, we think that the
further weigh on the USD. The Fed’s new EU-wide bond creates a tool to promote
adoption of a new policy framework, includ- EU convergence and should boost the
ing average-inflation targeting, increases the availability of attractive safe liquid assets. More than meets the eye
risks of higher long-term inflation expecta- This could also help the EUR. With EUR Relative real interest rates not fully reflected in EUR/USD
tions. With the Fed unlikely to raise policy valuations still attractive, we expect EUR/
rates for the next 2-3 years, hence prevent- USD to reach 1.25 at the end of 2021. EUR/USD %
ing sharp moves in nominal yields, US real 1.60 1.0
yields risk moving even lower. This should JPY, GBP undervalued vs. USD
further weigh on the USD. An extended The JPY has an improved outlook as US
1.50 0.4
second wave of COVID-19 infections over interest rates converged with those of Japan
the winter months could, however, create and, in fact, turned even lower on a real
some market volatility and enable the USD basis. The JPY remains undervalued against 1.40 -0.2
to gain ground temporarily due to its safe- the USD, while Japan’s structural current
haven status. account surplus and strong international 1.30 -0.8
investment positions support the currency.
We forecast a modest GBP appreciation next
1.20 -1.4
year, as uncertainty on the political and the
monetary policy side should diminish and
allow the market to refocus on the GBP’s 1.10 -2.0
cheap valuation, especially against the USD.
Jan 2005 Jan 2007 Jan 2009 Jan 2011 Jan 2013 Jan 2015 Jan 2017 Jan 2019
EUR/USD Last data point 05/11/2020
EMU-US 10Y real interest rate spread (rhs) Source Bloomberg, Credit Suisse/IDC
40 credit-suisse.com/investmentoutlook 41You can also read
