5 highlights from Credit Suisse’s Investment Outlook report

2020. From an investment perspective, it’ll be a bit like 2019 with a little less oomph as far as equity and bond markets go. That's the key message from the recently published Credit Suisse Investment Outlook 2020 report.

The global bank predicts that while economic growth will remain subdued in the year ahead, a serious market downturn or financial crisis is unlikely considering ongoing monetary policy support, ample credit, some fiscal easing and low oil prices.

For investors the key challenge will be building resilient portfolios to mitigate against potential risks and finding pockets of value and growth opportunities.

In this wire, I summarise Credit Suisse’s house view relevant to Australian investors and call out some of their investment ideas.

Highlight #1 - Australia: the (economic) place to be

After a relatively subdued 2019, Credit Suisse expects Australia’s economy to pick up with an estimated growth rate of 2.8%. However, there are growing risks to this scenario with recent retail sales and September quarter GDP growth putting this expectation in doubt. If achieved, that would make us the fastest growing among major developed countries in 2020 and incidentally mark the 29th consecutive year of expansion. The improvement to GDP growth will not be evident until the back half of 2020.

• Where growth will come from - While low growth in household income, weaker housing market conditions and elevated household debt weighed on consumption in 2019, an increase in public spending supported economic growth. Infrastructure investment should continue to provide support in 2020.
• What to watch – The RBA lowered interest rates in several increments in 2019 to support the economy and could continue to do so in 2020. At the same time, financial supervision will remain in focus given the stability risks related to real estate.

Meanwhile, global growth next year will be 2.5% while the US will slow to 1.8%, with a 20-30% chance of recession amid a backdrop of moderating job growth and rising labour costs weighing on corporate America. The Fed is likely to remain on hold (or cut very little) after three rate reductions in 2019 and could increase asset purchases if required to support the economy.

“Good news could come from a recovery in manufacturing activity if the USA and China reduced tariffs. However, their full elimination appears unlikely and the trade war could potentially escalate in other areas,” Credit Suisse says.

Highlight #2 – This is good news for equities

Based on that economic backdrop, Credit Suisse is positive on stocks. Just don’t expect this year’s stellar performance to be repeated (see their return forecasts in the table below) but do consider targeting some of the sweet spots outlined by the bank.

• Target sustainable dividends - Stocks of companies that offer sustainable dividend payouts should be well supported. Based on today’s equity prices, Credit Suisse expects a dividend yield for the MSCI World aggregate of roughly 2.5%. Some sectors such as financials, energy or utilities should continue to pay above-average dividends.
• US to outperform – Credit Suisse’s base case presumes continued strong performance of the US market due to superior economic growth and the strong weighting of the IT sector. But its potential is limited by growing margin pressure as a result of rising wages, the waning effects of the 2018 corporate tax cuts, a less supportive Fed and, possibly, uncertainty surrounding the presidential election. In particular, Credit Suisse calls out educational technology as a bright spot for growth investors (more detail on that later).
• Value in Europe and Japan - Looking into 2020, the bank believes European equities should be supported, among other factors, by the European Central Bank’s accommodative monetary policy, a likely resolution of Brexit, and their undemanding valuation. Japanese equities, which are relatively more cyclical, are also attractively valued (at a P/E of just above 13x) and should see fortunes improve due to a pick-up in the global industrial production cycle and a recovery of capex spending.

Highlight #3 – But bad news for most government bonds

As a result of the global economy improving investment grade and government bond yields are likely to rise. This would generate capital losses. As yield curves are still rather flat, the setback would be more severe for bonds with long maturities. Many high-quality bonds will therefore likely produce negative returns in 2020.

Though Australian investors can consider themselves lucky: “If starting yields are very low or even negative, avoiding negative returns will be close to impossible. We expect returns to be positive in only a few high-grade markets, such as US Treasuries or Australian government bonds,” Credit Suisse says.

Highlight #4 – After growth? Get educated on EdTech

Back to the equity story, Credit Suisse suggests growth-oriented investors may consider doing their research on emerging sectors likely to see strong earnings growth.

“One such area is education technology, which is on the cusp of high growth as education is becoming increasingly digital and therefore more cost-effective and impactful. Marketers Media expects the digital education market in North America to grow to more than US$400 billion by 2023,” Credit Suisse says.

Within the technology supertrend, Credit Suisse broadens what it defines to be part of the drivers of this theme to include a focus on 5G and how it impacts big data.

In addition, environmental, social and governance (ESG) criteria remain a key topic and investment focus particularly for the Millennials, whose voices as responsible consumers are increasingly being heard.

Highlight #5 - The X-Factor

The run-up to the 2020 US presidential and congressional elections in November 2020 could also have a meaningful impact on equity markets, though there is no hard and fast statistical evidence that equity performance in an election year differs from other years, Credit Suisse says.

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. Moreover, 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.

An alternative view

For a different view on 2020, see Rudi Filapek-Vandyck's recent column here.