Credit Suisse recently published its Investment Outlook for 2019, a year it says will be characterized by continued global economic growth and contained inflation despite a number of risks. The focus will be on assets that benefit from the factors extending the economic cycle.
The past year saw a rebalancing in a number of areas. US interest rates rose, which mainly pressured emerging market assets, while developed-market equities adjusted to expectations for a flatter earnings trajectory. Additionally, a series of political risks put pressure on specific markets.
In 2019, global GDP growth is likely to soften somewhat to 3.1% from 3.3% in 2018, mainly due to fading policy stimulus in the USA and policy tightening in EM ex-China. China's growth is expected to remain resilient at about 6%, as policy stimulus offsets the impact of trade tensions. Credit Suisse expects inflation to remain moderate, which reduces the risk of excessive policy tightening by the US Federal Reserve. This also suggests that the USD will be more stable than in 2018, supporting EM rebalancing efforts.
“2019 looks set to be another year of growth, albeit at somewhat lower levels than in recent years,” stated Michael Strobaek, Global Chief Investment Officer of Credit Suisse. “Given ongoing economic growth and monetary policy normalization in developed markets with no immediate threat of contraction, we expect risk assets such as equities and EM hard currency bonds will likely recover their footing in 2019.”
This year’s Investment Outlook also focuses on the world of sustainable finance and impact investing, a market that is growing rapidly as investors seek initiatives that yield financial returns while making a positive environmental or social impact.
“Investors today are looking for fresh approaches to investing,” added Nannette Hechler-Fayd’herbe, Credit Suisse’s Global Head of Investment Strategy & Research. “In 2017 we launched our five Supertrends. These long-term equity investment themes seem to have struck a chord with investors, adding positive value since inception.”
Key forecasts in the Investment Outlook 2019 include:
– In the USA, robust corporate capital expenditure, employment and wage growth should ensure that growth remains above trend. Any increase in inflation should be limited, while a further surge in the USD is unlikely. (GDP 2019 YoY forecast +2.7%)
– With monetary policy still supportive and employment rising, domestic demand should continue to expand in the Eurozone. EUR appreciation should be moderate at best as the European Central Bank will only likely begin to raise rates in H2 2019. (GDP 2019 YoY forecast +1.8%)
– Switzerland should benefit from continued growth among its main trading partners. With the Swiss National Bank likely to remain on hold until the ECB starts to raise rates, CHF strength should abate. (GDP 2019 YoY forecast + 1.7%)
– Growth in China is likely to weaken somewhat in 2019 as high real estate-related debt constrains consumer spending. The government will probably do just enough to protect the economy from the impact of US trade tariffs. (GDP 2019 YoY forecast +6.2%)
– South America’s two largest economies – Brazil and Argentina – will likely remain weak in 2019, but with Brazil’s new government and Argentina’s loan from the International Monetary Fund, both countries have begun to address some deep-seated economic and fiscal weaknesses. (Brazil GDP 2019 forecast YoY +2.3%)
Financial markets outlook
– Unexpected political developments had a considerable impact on financial markets in 2018, and could also move them in 2019. Nevertheless, the economic cycle will be the predominant driver of markets.
– In an extended-cycle phase, equities typically continue to outperform most asset classes. For 2019, Credit Suisse's base scenario suggests EM equities should recover from their 2018 weakness, and innovation will likely continue to make the IT and healthcare sectors attractive.
– In fixed income, Credit Suisse believes that core government bond yields will rise moderately while corporate credit spreads will widen. At this stage of the cycle, US investment credits, for example, appear less attractive than a mix between USD Treasuries and high-yield bonds. As for the non-USD bond segment, EM hard and local currency bonds are likely to outperform if our base case materializes and pressure on the Fed to tighten policy eases. As for bonds in other hard currency regions (Japan, Eurozone, Switzerland), a short duration stance remains warranted as yields in most of these markets are still extremely low.
– In commodities, demand should stay robust as long as our fairly moderate scenario for interest rates and the USD remains intact and Chinese demand holds up.
– In currencies, the developments over the past year have produced a situation in which value and carry overlap for a number of currencies, particularly in EM. Investors may thus be able to generate excess returns by taking positions in selected EM currencies. As for the USD, the factors supporting and weakening the currency are likely to be more or less in balance in 2019. In contrast, risks for the CNY are biased toward further weakening.
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