Credit Suisse predicts moderate gains for investors in 2020

Credit Suisse forecasts the global economy will grow at a moderate rate of 2.5 per cent, suggesting recession is unlikely.
Amid softer growth, Credit Suisse expects modest single-digit returns in the equity markets.
A polarised US presidential campaign, margin pressure, high corporate debt, and fewer interest rate cuts by major central banks – not to mention unexpected political developments – are likely to test investor nerves in 2020, Credit Suisse said.
Even if the US-China trade war eases and Brexit uncertainty diminishes, investing throughout 2020 will require portfolio diversification tilted towards areas of extra return.
Credit Suisse expects moderate economic growth, accommodative liquidity conditions and easing geopolitical tensions. As the US-China trade war subsides, business sentiment should improve, lifting growth-oriented sectors and stocks, it predicted.
Ray Farris, chief investment officer, South Asia at Credit Suisse, said: “We believe that the global economy and markets will continue to show considerable resilience in the face of challenges. In the Asia Pacific, the outlook for the more advanced countries of North Asia remains subdued due to weakness in Chinese trade, with growth of just over 2 per cent. The outlook for Hong Kong will depend strongly on local political developments. Economic growth remains far stronger in much of Southeast Asia, which has more catch-up potential and is less integrated into China-based supply chains. Some countries, most prominently Vietnam, stand to benefit as production continues to shift in their direction.”
“In Thailand, we think the baht should soften to 30.50 over the next several months as relaxation of foreign exchange controls works to generate new outflows from the country. For equities, we have a neutral view as weak growth environment is being offset by low interest rates.”
The outlook for the major economies and currencies:
➤ United States: Credit Suisse expects slower GDP growth for the US economy in 2020 at 1.8 per cent, accompanied by rising core inflation. The US dollar should remain supported but weaken in the course of the year as its interest rate advantage over most G10 currencies wanes.
➤ Euro-zone: Monetary policy is unlikely to ease further, but resilient credit growth should support ongoing economic expansion, with GDP growth forecast at 1 per cent. Fiscal stimulus and diminishing Brexit uncertainty should support the EU.
➤ Asia: A US-China trade deal would likely push the yuan higher and exert some upward pressure on other Asian currencies. Asia is likely to benefit from an improvement in global industrial growth momentum in early 2020 and keep full year growth of 5.3 per cent close to 2019’s 5.4 per cent. We expect the current industrial production slump to bottom in December and begin to recover in the first quarter of 2020. This should work to boost regional exports, improve some countries’ trade balances, and encourage capital flows into the region.
➤ Thailand: The surge in Thailand’s current account surplus to $9.1 billion in the third quarter of this year from $3.8 billion in last year’s third quarter, is the core source of the baht’s strength and looks likely to continue.
However, Credit Suisse expects the Bank of Thailand’s liberalisation of its foreign exchange controls to offset much of this by creating new Thai outflows into foreign currencies.
The key risk Credit Suisse sees to its forecasts is that Thailand’s current account surplus remains large and these measures do not spur significant new outflows.
Outlook for financial markets:
➤ Equities outlook
Equities continue to offer an attractive return advantage over low-yielding bonds. On a sector level, IT is preferred as one of the few high-growth sectors. Financials are also attractive, as the expected improvement in the cyclical outlook will likely trigger a further rotation into that sector in the first half of 2020, Credit Suisse said.
“We believe that a turnaround in the performance of Asian equities is likely in the coming months. We prefer North Asian markets, in particular China, over South Asian ones to take exposure to potential cyclical recovery, Credit Suisse said.
➤ Thailand: Earnings for the third quarter contracted 14 per cent year on year, pushing the numbers for the first nine months to 20 per cent below 2018 for the same period.
"The main factor behind disappointing results has been the lagging economy. Although the government implemented a mini-stimulus package in August-September, the amounts involved were modest, and headwinds from the external sector remained intense," Credit Suisse said.
“We believe there is further downside risk to market’s expectations of 8.7 per cent EPS [earnings per share] growth for 2020. Though valuation is not cheap either with 2020 P/E [price to earnings] at 15.2 times, ample domestic liquidity and dividend yield of 3 per cent could provide support on the downside.”
➤ Fixed income
“We expect Asian high-yield corporates to be supported by more accommodative policies. Monetary policy is also likely to remain accommodative. The greater-than-7 per cent yield of Asian high-yield bonds remains attractive relative to developed markets and is not expensive compared to its 10-year average.
“We forecast Asia high-yield to deliver 6 per cent total return in the next 12 months,” Credit Suisse said.
➤ Commodities outlook
“Commodities have been on diverging paths this past year, with the industrial production slowdown weighing on cyclical commodities in particular. Going forward, this divergence is expected to diminish. While gold prices are likely to consolidate, oil prices may face a period of weakness before recovering eventually,” Credit Suisse said.
➤ Alternative investments
“In alternative investments, most real estate investments should continue to deliver moderately positive returns. Direct real estate is favoured, as lower interest rates do not yet appear to be fully reflected in the price,” Credit Suisse said.
John Woods, chief investment officer for Asia Pacfic at Credit Suisse, said: “In an environment of lower-for-longer yields, a multi-asset framework allows investors to take advantage of pockets of value in low-risk markets, while increasing expected returns by investing in equities and seeking out less conventional fixed-income investments. We believe such an approach will prove rewarding in 2020.”