Where Credit Suisse is investing in 2022

Wealth manager Credit Suisse has dubbed 2022 the "great transition", as the world begins to see a future beyond COVID-19, and as global growth and inflation continue to tick up. 

In fact, the wealth manager believes that the global economy will produce GDP growth of around 4.3% in real terms in 2022 - above-trend historically, but below levels seen in 2021 (the International Monetary Fund projects the global economy will grow by 5.9% in 2021). Similarly, Credit Suisse expects inflation to clock above trend but below 2021 levels at 3.7%. 

With this in mind, Credit Suisse's Australian Private Bank chief investment officer, Andrew McAuley, has identified several areas of interest for the wealth manager's investors over the coming 12 months - including inflation-linked bonds, equities, and alternative strategies like long/short equity funds. 

He also believes two thematics are likely to benefit during the year, including the "silver economy" - with Credit Suisse banking on the world's senior citizens spending on health, lifestyles - and "infrastructure" - particularly those investments that could enable the electrification of the world economy. 

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

Edited Transcript

What is your outlook for markets in 2022? 

Andrew McAuley: We are calling next year the great transition - the transition from low inflation and sub-trend growth to reflation and above-trend growth. We think that as the world continues to open up post-COVID, and post-COVID comes with an asterisk because of course, we're not past COVID, but as that opening up continues with a few road bumps, the global economy will produce GDP growth of something like 4.3% in real terms. And that's above trend, above history, but it's below what the world produced in 2021. Associated with that will be inflation. So again, we're expecting inflation to be above trend, at 3.7%, but below what it was this year. So we think inflation will peak this year and as a result of that, with above-trend growth and the re-emergence of inflation, although lower than this year, that monetary policy will normalise. And that means rising interest rates.

With that in mind, where are you finding opportunities? 

So that global, economic view informs us on the sectors or the asset allocation that we are favouring for 2022. 

With the normalisation in monetary policy and interest rates rising, we expect bonds to probably have unfavourable returns. 

The yields on government bonds are low, although they're higher than what they were a year ago, they are low historically. The spread between corporate bonds, high yield and government bonds is low. And so not particularly attractive returns there. Also if we look at emerging markets, government debt in emerging markets and corporate debt, it's a similar scenario - spreads aren't what we would like in the corporate area, and government balance sheets aren't as strong as they used to be because of COVID spending. And as a result, we're not that keen on the bonds space.

Bonds still have a place in portfolios. They will still protect portfolios in a crisis, but looking purely at return, we're not seeing exciting returns there. 

The two areas we do like in fixed income are senior loans, and that's because senior loans have a floating rate element to them and also inflation-linked bonds. Now with inflation-linked bonds, there are no free lunches. So the whole world is expecting a certain amount of inflation for next year. But where we see expectations a little bit too low is in Europe. So we like European inflation-linked bonds. 

Equities we do like. We think investors should be overweight equities and have a full allocation to equities; keep cash to a minimum. Interestingly, a lot of people say, "Well, after the fantastic returns we have seen over the past 20 months, surely there's no value there." 

Well, it might interest you to know that the PE multiple for MSCI World, the global index is actually lower than what it was 12 months ago. And that's because earnings have outpaced price increases. 

Having said that, we need real bond yields to stay where they are so that equities on a real basis look as attractive as they are now. And that is predicated on inflation being moderate. So that's the key. Moderate inflation should translate to good equities returns. 

We're expecting earnings to grow about 7.5%, 7.6% over the coming 12 months. And that translates to an equities return of something similar sort of mid-single-digit to high single-digit (growth). 

Apart from equities and bonds, we are attracted to alternatives. Certainly, we think alternatives will have a better return than bonds, but perhaps not as much as equities. In the hedge fund space because there are some clouds on the horizon for bonds and equity returns, although reasonable, are probably less than what we've had historically. The trend-following hedge funds are not the place to be. 

We are looking for hedge funds that provide a return independent of the market. So what does that mean? Long/short equity funds are an example, diversified macro, and also corporate arbitrage. 

So they're the type of funds that are playing some sort of corporate event, a takeover. And for example, buying the company getting taken over and selling the company doing the taking over, because the first bid is never the last bid. That's pretty well established.

Which of Credit Suisse's Supertrends are you excited about for 2022? 

So we have this view for next year, but overlaying that is our Supertrends. So we think that portfolios should have exposure to those themes that reflect societal change, and we call them Supertrends. So there's six of them: 

1. Anxious Societies - deglobalisation, supply chain strength, personal security. 
2. Millennials' Values - how young people spend their money.
3. Technology - digitisation, AI, virtual reality.
4. Infrastructure - transport, energy, smart cities. 
5. Silver Economy - ageing populations and how they spend their money. 
6. Climate Change - decarbonising the economy. 

But the two Supertrends we're really emphasising for next year are the silver economy and infrastructure. So the silver economy is spending more on health needs. There are some novel treatments and therapeutics coming out and a clear example is mRNA and the ability to use that for other things than COVID-19, like cancer, for instance. So our senior citizens want to be healthy. They want a good lifestyle, but they'll also be spending on leisure. So post-COVID, travel, airfares, that type of thing.

And then infrastructure is really a story about decarbonization and sustainable infrastructure - infrastructure that will enable the electrification of the world economy, that will enable the delivery and production of hydrogen to act as an alternative energy source, and be able to facilitate decarbonization. And we are very excited in 2022, we're teaming up with IFM Investors, the investing arm of the Australian industry super funds that invests in infrastructure to offer our clients some opportunities in infrastructure.

Infrastructure investments that look attractive include airports, with COVID-19, some value has opened up there. Also, pipelines, enabling the energy transition and the transport of natural gas, LNG, to ensure that that transition happens as effectively or as carbon neutral as possible. And roads - the world will be bouncing back from COVID-19 and traffic will pick up. 

And finally, I think the real key is, as mentioned earlier, infrastructure that enables decarbonization. And we all know what that is. That's renewable energy, it's wind turbines, it's hydro, it's tide, geothermal, solar farms. Not only do you need to generate it, but you need to transport it to where it needs to go. So there are all those different ways to play infrastructure, but that idea of facilitating decarbonization is front and centre.

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Credit Suisse Private Banking specialises in asset diversification, holistic wealth planning, next-generation training, succession planning, trust and estate advisory, philanthropy. 

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