Credit Suisse’s big ideas for 2022

Inflation. Love it or hate it, you really have to hate it, right? Well - not so fast.

Wealth manager Credit Suisse points out that equities are historically the long-term beneficiaries of inflation – withstanding up to 4% - with the expectation that these will continue to deliver strong returns (if not as strong as during the pandemic) in certain sectors.

Indeed Credit Suisse’s head of investment consultancy, Stephen Cabot, has identified several areas within equities that could benefit from higher inflation – including energy and construction materials – as well as some compelling alternatives.

In this wire, Cabot outlines why he thinks inflation will peak in the first quarter of 2022, finally transitioning from a period of sub-trend growth and low inflation to post-pandemic above-trend growth for equities and private debt. He also delves into the Supertrends likely to hold long-term opportunities for investors, with climate change (and the feeding the planet thematic) likely to bring the biggest shift.

Note: This interview took place on Monday 29 November 2021. You can watch the video or read an edited transcript below.

Edited Transcript

What should investors be aware of in the year ahead?

Stephen Cabot: We see a continued evolution of the markets where we were sub-trend growth and low inflation pre-pandemic to one now where we are above trend growth and high inflation post-pandemic. 

We see inflation peaking in the first quarter of 2022. We think equities will continue to deliver strong earnings, which will support them. However, not as strong as we've had over the last 20 months or so. 

Sustainability is going to continue to be a big driver of what we're seeing in the markets, and we're looking at alternatives that add something different to the portfolio.

Where are you finding opportunities within fixed income?

If we start with fixed income, now it's going to be challenged by the monetary policy that we expect to see in global markets where we think rates will continue (higher), and there will be upward pressure on yields. So we're looking at the floating rate notes and senior loans as areas where we can benefit. Senior loans offer relatively attractive value in the market at the moment. We also think they'll be assisted by the fact that we'll see ratings upgrades. We'll see stronger recovery rates, should there be events of default. That combined with the fact that if rates go up, they will benefit as well, sees that as our favourite area in the fixed income space.

Where are you finding opportunities within equities?

So equities, the returns we still expect to be very strong, the earnings that they will generate. Mindful of inflation, now one of the long-term beneficiaries of inflation are equities. 

Evidence shows historically up to 4% inflation, equities are an area that can withstand the pressures that come with that. With that tailwind behind them, that's positive. We're looking at specific areas that'll benefit from inflation, and that includes sectors such as energy, capital goods, construction materials, diversified financials, and banks.

We're also looking at what we're terming the pricing power aristocrats, and these are securities that are going to benefit from their brand loyalty, their pricing power they have in the market, and the fact that some of them are operating in environments with tight supply demand dynamics. All of those combined mean that they're areas and specific stocks we're looking for. Some of the stocks we've got in our portfolios that display those characteristics include Diagio, LVMH and Richemont.

Which Supertrends is Credit Suisse excited about for 2022?

Credit Suisse has six global super trends, and these are areas that we see are going to be driving the economies over multiple decades, so have some very long societal trends behind them. 

In any year, there'll be particular areas and catalysts that'll support one trend over another, and in this year, we see that the silver economy, the ageing population is one that will benefit. We've seen over the last two years, the very rapid development in the healthcare area. The biopharmaceuticals have moved very rapidly with new technologies, and we think that's creating a virtuous cycle that will continue. 

We're going to continue to see them invest the windfall gains they've got from the pandemic and ultimately lead to new opportunities in that space.

What compelling thematics have you identified for 2022?

So within the alternatives, there's two main areas that we are looking at and considering. The first revolves around alternates and the delivery of yield. We are looking at opportunities in the private debt space, along with unlisted properties. We're looking at both the US and Europe as specific opportunities there, and unlisted infrastructure. Private infrastructure is another area that we're looking at, and the idea being we're looking for solutions that aren't driven by equity and credit beta. They've got different drivers, ultimately.

Within private equity, now that's another focus for us. We have some challenges given that there's a lot of dry powder out there, opportunities that a lot of people are looking for with a lot of cash. Also, the valuations that are being paid these days on a historic basis are elevated as well, and you've got the added influence that rising interest rates and inflation play. So within private equity, we're looking for specific opportunities that aren't highly leveraged and have some of those strong sectoral tailwinds behind them, and that says opportunities in the venture capital space and growth capital. So not as much leverage and some of those big tailwinds supporting them.

What is one final opportunity that has you excited for 2022?

We think the power of climate change is enormous, and we think there's going to be a whole array of opportunities there. One area that we're focused on this year is feeding the planet. 

We estimate that 26% of all greenhouse emissions can be attributed to feeding the planet. That includes land use, food production, distribution, and packaging, and that is just unsustainable. So we need to find a way of investing capital to get better at that. 

We're seeing a shift in some of the dynamics. We're seeing more plant-based foods being consumed. We're all seeing a lot more precision agriculture as well, focused on better land use, greater yields, and we're all seeing alternative packaging being used. So plastics that we'd see historically are changing, and that's all very positive for the environment. But that whole impact is one that's going to continue to draw a lot of attention and present a lot of investment opportunities. 

What is one piece of advice for investors so they can be successful in 2022?

The one advice that I would provide is that stick true to your strategic asset allocation. Absolutely, put some tactical tilts around the side, and think of opportunities, and measured allocations to different opportunities. But make sure you're keeping true to your long-term strategic goals.

Learn more

Credit Suisse Private Banking specialises in asset diversification, holistic wealth planning, next-generation training, succession planning, trust and estate advisory, philanthropy. To stay up to date with all of Stephen's thoughts, hit the follow button here.