Credit Suisse Investment Outlook 2021: Attractive equity markets amid economic recovery

After an unprecedented year, the COVID-19 pandemic will continue to occupy the economy and financial markets in the months ahead. Importantly, as demand continues to recover following the recession in 2020, the global economy is expected to grow by 5.0% in 2021, according to the Credit Suisse Investment Outlook 2021. With interest rates set to remain at or below zero in all major developed economies, equities should continue to provide attractive returns.

 

The ongoing COVID-19 pandemic and its impact on rising government debt levels, central banks’ loose monetary policy, as well as political developments including the recent US presidential elections will influence the way investors allocate their assets in 2021. We continue to regard equities as offering the most compelling return prospects. The Credit Suisse Supertrends, whose relevance the pandemic has strengthened further, reach across sectors and regions to allow investors to benefit from deep societal changes that lead to business and investment opportunities globally. Credit Suisse also expects emerging market assets, both bonds and stocks, to outperform and the USD to continue to weaken.

 

Credit Suisse believes that the stimulus measures we have seen since the start of the pandemic together with the economic recovery will support financial assets, equities in particular, in the year ahead. But there are risks that still need to be monitored carefully. To preserve wealth and meet long-term obligations, investors should invest in well-diversified multi-asset strategies with a significant share of portfolios invested in equities.

 

For many of us, the COVID-19 crisis has altered the way we live, work and learn. Credit Suisse believes that many of the economic and societal challenges that have arisen from this pandemic have underscored the relevance of our long-term thematic framework Supertrends, bringing the “future” that much closer. For instance, our newest Climate Change Supertrend explains how to invest in order to benefit from the accelerating trend toward decarbonizing economic growth.

John Woods, Chief Investment Officer Asia Pacific at Credit Suisse, said: “Non-Japan Asia is expected to rebound and grow 6.7% in 2021, after a bruising 2020. Southeast Asia is projected to grow faster, partly due to a deeper contraction in 2020 and a later start to its recovery, but also because of a greater capacity to benefit from any vaccine treatment and a subsequent gradual recovery in tourism. For Asia Pacific equities, the aftermath of the US elections has turned out favorably for Asian risk markets as uncertainty faded. A combination of reduced trade tensions, a weaker USD, higher tech exposure, and better COVID-19 containment should see North Asian equity markets continue to dominate the regional investment narrative.

 

 

Edwin Tan, Head of Wealth Management Onshore and Head of Investment & Advisory Solutions in Thailand, Credit Suisse said: “Asia’s currencies are likely to benefit from both the weak USD and a stronger CNY. This is especially true for North Asia, where the local COVID-19 infections are better contained, and there is a greater exposure to the booming hardware tech sector. On fixed income, we are constructive on Asian USD credit, particularly in the high yield sector. The US election outcome suggests the search for yield will intensify, and Asia is where it will be best sated. Chinese RMB bonds are a particular highlight. They offer a wide yield premium over global equivalents, and have a low correlation with global assets, thereby offering hedging properties to balanced portfolios. Our positive outlook on the currency also adds an attractive overlay.”

 

Outlook for the major economies and currencies

 

• United States. Credit Suisse expects the US to grow at an above-potential rate of 4.4% in 2021 as the economy recovers from the pandemic-induced recession. Inflation is expected to rise to slightly above the US Federal Reserve’s target but remain moderate. We expect the USD to resume its downward trend, as it has lost its interest rate advantage over other currencies.
• Eurozone. The Eurozone is expected to grow by 5.2% in 2021, as economies learn to live with the virus and eventually emerge from the pandemic, but the deep recession of 2020 will delay a full recovery of GDP to pre-pandemic levels until 2022. A successful long-term recovery from the COVID-19 crisis will depend on further effective fiscal and political integration, with the European recovery fund a first milestone. We expect the EUR to strengthen as political tail risks have receded.
• China. After being the first country to be hit by the pandemic, China was also first to successfully lift restrictions and return to normal economic activity. China will not only be among the very few economies to actually grow in 2020, but accelerated GDP expansion of 7.1% in 2021 will likely mean that China will lead the global economic recovery. We expect the CNY to appreciate against the USD. We expect that the reduction in both foreign policy uncertainty and the use of tariffs should give Beijing enough comfort to let the existing positive Balance of Payments fundamentals drive the pair lower. We expect appreciation in the CNY against both the USD and its trade partner currencies over the coming 12 months.
• Japan. The Japanese economy is expected to grow by 1.7% as demographic headwinds are offset by stable productivity gains thanks to continued technological innovation. The undervalued JPY is likely to gain against the USD.  

 

Outlook for the main asset classes

 

• Equities continue to offer attractive return prospects, particularly compared with low-yielding bonds. We expect emerging market equities to catch up and see upside in German stocks. Our preferred sectors include healthcare and materials, with additional opportunities gradually emerging in cyclical sectors as the recovery broadens.
• China. This is our key preferred market in Asia. Improving employment and disposable income underpin a demand recovery in China. A robust current account surplus set to be abetted by portfolio inflows tilt towards CNY appreciation, which should be positive for local assets.
• Thailand. Thai equities remain weighed down by the economy’s heavy reliance on tourism; this is likely to persist for some time given the difficulties with reopening air travel. The recent political tensions also threaten to impede upcoming attempts to revive leisure travel to Thailand. Thai equities stand to be one of the key beneficiaries of the widespread availability of a vaccine that allows a recovery of global tourism, but this is likely to be a realistic prospect only in 2H 2021.     

 

• In fixed income, returns on core government bonds will be meager at best, while emerging market hard currency bonds remain appealing. Investment grade credit should continue to offer a good risk/reward. Within high-yield bonds, we favor the high-quality segments.

 

• In alternative investments, real estate should benefit from the economic recovery and low interest-rate environment. We favor sectors underpinned by structural growth such as industrial and logistics real estate.