Credit Suisse 2H 2020 Investment Outlook: Navigating the recovery

A tumultuous 1H 2020 ends on a positive note with the market demonstrating its resilience. Having overweighed equities since March, the Credit Suisse investment committee has decided to prudently take profit and move equities back to strategic weight. Nonetheless, we believe that the substantial fiscal and monetary stimulus, amongst other factors, should unlock further upside in the medium term.  

 

John Woods, Chief Investment Officer, Asia Pacific, at Credit Suisse, said: “Although we recognize that uncertainty surrounding COVID-19 remains high, we believe that secondary outbreaks are likely to be contained more rapidly with less economic damage. The general public has become more cautious; testing and tracing regimes are better established; and healthcare systems are better prepared. Against this backdrop, recent USD weakness should prove to be a positive factor for Asian equity and credit.”

 

Promising developments

 

Market volatility has recently jumped in response to concerns about a second wave of COVID-19 infections in China and the US, and slightly softer-than-expected Chinese economic data in May. Nonetheless, we remain overweight in credit and commodities, and expect markets to continue climbing walls of worry in the coming months. We are now neutral on equities in a portfolio context.

 

Strong policy support from central banks and governments globally is key to our optimism, and the on-going provisions of liquidity further adds to our confidence.

 

Global economy: Rapid rebound, long recovery

 

The COVID-19 shock has led to an extreme downturn in global GDP.  Economic activities troughed in May and will increase sharply as developed economies reopen. However, the level of activity will remain below trend for the remainder of the year, and annual global GDP should contract by 3.7% this year, followed by a 4.6% rebound in 2021.

 

As employees return to work, Europe and the US should be leading the recovery. Temporary job losses may have already peaked in the US, and furlough schemes in Europe have prevented sharp rises in unemployment. Extended unemployment benefits and cash transfers have also helped households build substantial cash balances. As such, an imminent rebound in consumer spending is very likely.

 

Recent medical studies suggest that contagion risks can be managed without complete economic shutdowns, consistent with the experience of many Asian economies.

 

China has continued normalizing since its infection rate hits its peak in February and it continues to enforce strict social distancing rules and occasional local shutdowns to control small outbreaks. We expect China to deliver 3.3% GDP growth in 2020, followed by a 5.6% growth in 2021.

 

However, the risk of new outbreaks remains high, and individual countries face challenges from demographics, medical infrastructure, policy efficacy, and culture issues. Strict disease control protocols also prevent businesses from fully normalizing activities and cause lasting damages to corporate balance sheets and earnings outlook.

 

Despite a slowing COVID-19 contagion spread in Europe, it has accelerated in emerging economies such as Brazil, Russia, Mexico and India. The situation in the US is also mixed: states that reopened early now lead the rise in new cases, despite New York having long passed its peak infection rate.

 

Policies will remain supportive. The European Central Bank has extended its asset purchases, and the Fed has committed a floor of its unlimited quantitative easing. Explicit forward guidance or yield curve control from the Fed is also possible. In addition to a sizable fiscal stimulus announced by Germany, we also expect the EU recovery fund, fiscal help for US states, and further extensions to unemployment benefits to go through. Emerging market economies are also likely to ease their financial conditions further.

 

Key investment views for the remainder of 2020

 

Global equities outlook

 

One of the strongest rallies in equity market history has started to see its momentum slowing down. The recent acceleration in the number of COVID-19 infections is clouding the broad expectation that the global economy will be back to normalcy quickly. We are approaching the Q2 earnings season, which will reflect the main impact of lockdowns, and come closer to the US election. We assume that these events may be headwinds at times, potentially adding to volatility. This may be exacerbated by seasonality, as the market experiences typically lower market liquidity during the summer months. We continue to believe, however, that equity markets offer an attractive return potential.

 

• In terms of regions, we are outperform on Germany, Australia and Switzerland, and underperform on Japan.
• In terms of global equity sectors, we are outperform on IT, healthcare and energy, and underperform on consumer staples and communication services.

 

Asia equities: FIFO (first-in, first-out) to FOMO (fear of missing out)

 

The economies of North Asia were the first to be impacted by the global COVID-19 crisis and, after going through a mix of quarantines, lockdowns, testing and treatment, were the first to emerge from the crisis. We had previously described them as “Asia FIFO.” Despite Asia’s economic outperformance, its equity markets have underperformed that of developed markets. We think this contradiction should give way to a strong performance for Asian equities in the coming months. A confluence of improving economic data, reasonable valuation on cyclical adjusted price-to-earnings (P/E) ratios and USD weakness should also drive foreign capital inflows into Asian equities.

 

China equities: New economy sectors to benefit from domestic recovery 

 

We expect Chinese equities to outperform emerging market peers as domestic economic recovery, superior earnings outlook and reasonable valuation support the market’s performance.

 

China’s economy is showing signs of recovery and is front running the global economy, particularly into the second half of 2020. This also suggests the downward revisions in corporate earnings will bottom out earlier and will be one of the handful markets globally to escape an earnings contraction in FY2020.

 

However, the recent escalation of US-China tensions remains a key risk for the market. We think as long as there are no new tariff hikes, investors will come to accept such tensions and focus on the strong fundamentals.

 

Thailand and Asia Equities

 

Edwin Tan, Head of Wealth Management Thailand, Head of Advisory and Sales Thailand and Ultra High Net Worth Coverage South Asia, Credit Suisse Private Banking Asia Pacific said, “Thailand equities has rebounded by 30% from the March lows, driven by domestic liquidity as the country began progressively easing its containment measures through four phases from early May. As the government further reduces curfew hours, allows inter-provincial travel, and reopens schools, domestic demand will begin to recover. However, tourism, directly accounting for 12% of GDP (the largest in Asia) remains key to the sustainable economic recovery.  

 

We maintain our neutral view on Thailand equities and expect them to perform in line with emerging market peers. Beyond the near-term headwinds, we like healthcare and retail sectors as they are likely to benefit from higher public spending.

 

Thai Baht (THB) Forex: Likely to be reined in

 

Mr Tan added, “We maintain our neutral stance on USD/THB while adjusting our 3-month and 12-month forecasts lower to 30.5 and 30.0 respectively, in line with our projection of a trend decline. However, as realities of Thailand’s lost tourism revenues start to hit home, further NEER appreciation appears to be off the table for policymakers. In the near term, during which tourism revival remains almost non-existent, the THB is likely at best to keep pace with Asian peers. Further, much will depend on the strength of the global recovery and the revival of international tourism, especially in China.”