Credit Suisse’s Investment Outlook Expects Sustained Growth in 2018; Further Upside Potential in Equities
In the Investment Outlook 2018 published today, Credit Suisse outlines that the global economy is likely to see sustained solid growth even as monetary policy becomes less accommodative. Global GDP growth should accelerate slightly to a pace of 3.8%, while global inflation is forecast to reach a benign 2.7%. In addition, corporate capital expenditure, having been restrained in recent years, will become a key growth driver going forward. Given this favorable backdrop, investors can expect still robust returns for risk assets in 2018, albeit more limited after the exceptionally good investment year in 2017.
According to the Credit Suisse Investment Outlook 2018, economic growth is expected to remain robust in the months ahead, supported by both advanced and emerging markets. This continued strength implies a very low risk of a global recession.
- In the US stronger corporate capital spending, a recovery in productivity and a likely fiscal boost should extend the strong business cycle for another year. (2018 Forecast YoY GDP + 2.5%)
- The Eurozone is likely to see a continuation of the newfound cyclical strength barring an unlikely political crisis or a sharp appreciation of the euro. (2018F YoY GDP + 2.0%)
- Switzerland is expected to benefit from a favorable export outlook given stronger global growth and a weaker CHF. The two main domestic growth drivers of recent years – immigration and the property cycle – are seen as ebbing. (2018F YoY GDP + 1.7%)
- The emerging economies are expected to remain a growth pillar to the global economy, with limited upside risks to inflation and interest rates as long as their currencies remain stable.
- China is going to continue to play a vital role, with its growth contribution to the world economy seen as rising further given the country’s increasing weight. As China’s leaders remain strongly focused on stability, Credit Suisse expects a fairly smooth adjustment process with currency stability. In the longer term, high corporate debt levels remain a concern. (2018F YoY GDP + 6.5%)
“Corporate capital spending, merger and acquisition activity and, in turn, increasing corporate debt look set to become big topics in 2018,” notes Michael Strobaek, Global Chief Investment Officer of Credit Suisse. “We expect 2018 to be a relatively good year for economic growth, which should help growth-sensitive assets continue to do well. However, we are mindful of the potential risks, whether they are of a political, economic, geopolitical or regulatory nature.”
This year’s Investment Outlook also takes a special look at the next generation of investors, the Millennials, and their priorities. With 50% of the world’s population under the age of 30, this generation is becoming an influential force in the world. The Investment Outlook highlights energy efficiency, sustainable consumables and blockchain as three key priorities for the Millennials. “Our focus is on the impact of the next generation of investors, the Millennials. Our sense is that 2018 will be remembered as the year in which they take important strides to becoming the decisive force in key realms of life,” says Nannette Hechler-Fayd’herbe, Head of Investment Strategy & Research at Credit Suisse.
Financial markets outlook
- Even after a year of exceptionally good returns in risk assets, Credit Suisse investment strategists believe that global equity markets have further upside potential in 2018, as strong economic growth boosts earnings and increases confidence. This should encourage further inflows into equities. The withdrawal of liquidity from central banks is the main challenge, particularly in the latter months of 2018.
- Credit Suisse tends to favor equities over credit. Emerging market equities are expected to generate low double-digit total returns in 2018, with good prospects for small caps in particular. In developed markets, Japanese and Swiss equities are seen as offering the best potential. Sector-wise, preferences include healthcare, telecoms, industrials and financials. Eurozone real estate equities also offer attractive opportunities for investors given still high yields.
- In fixed income, Credit Suisse expects bond yields in most developed markets to rise moderately, while they should plateau in the US, at around 2.7%. In emerging markets, a particular preference is for local currency debt given the still high carry and potential for further local interest rate cuts.
- In currencies, the Federal Reserve’s tightening steps may stabilize the US dollar, but the likely upward adjustment in European yields suggests that the euro could extend its gains.
- In commodities, robust economic growth should continue to support commodity demand and prices, with oil seen trading in a range.
What matters in 2018
The Investment Outlook identifies a number of key drivers that Credit Suisse believes will shape the financial market environment in the year ahead.
- Capital expenditure: Companies across sectors are seen as increasingly deploying their ample cash, joining already strong trends in manufacturing, transport and utilities. As a result, capital expenditure (capex) is forecast to become an important driver of overall economic growth in 2018.
- Quantitative exit: 2017 saw the US Federal Reserve make further steps towards exiting its still accommodative monetary policy. A number of other developed market central banks are set to join the normalization bandwagon in 2018. Though Credit Suisse expects policymakers to proceed with caution and thus support the favorable trend in financial markets, the removal of stimulus could create pockets of volatility in currencies as well as equity and credit markets.
- Eye on China: The Chinese economy has benefited from the global recovery thanks to higher exports and the devaluation of the renminbi. However, high corporate debt levels have been a growing concern. Efforts to restrain credit and a policy bias towards stability are encouraging, but not without risks for asset prices. Nevertheless, a steady adjustment process as well as currency stability are expected.
- Next generation’s footprint: The so-called Millennials are coming of age and beginning to make their influence felt in all realms of life, be it as investors, consumers or trendsetters. The trends they shape will open up new opportunities for investors, while their preferences as consumers are expected to keep pressure on the traditional sectors.
Investment themes 2018
Based on these views and considerations, the Investment Outlook carves out the following five investment themes for clients. Their investment implementation is ensured with single securities and investment products.
1) Emerging market winners: With a supportive growth environment, 2018 is expected to be another good year for emerging markets. Opportunities will likely be best approached through actively managed solutions and focused investments.
2) Eurozone revival: After a first wave of Eurozone revival in 2017, a second wave is expected to benefit specific European assets and currencies.
3) Corporate investment: Corporate investment is expected to finally pick up in 2018, with companies deploying their large amounts of cash to invest in areas like security or to engage in mergers and acquisitions.
4) Supertrends equities: Supertrends are Credit Suisse’s five high-conviction equity themes based on profound and long-term social trends. Despite their long-term nature, numerous catalysts should benefit the related stocks in 2018.
5) Fixed income rainbow: A variety of “colors” (fixed or floating, duration, credit risk, etc.) will in Credit Suisse’s view be required to successfully invest in bonds in 2018.
Middle East: On the cusp of a paradigm change
The collapse of oil prices in 2014 led to an unprecedented process of reform across the region as governments grappled to bring the resulting fiscal deficits under control. Many of the changes being undertaken now – reducing subsidies, introducing taxes, and economic liberalization – have been long overdue and their introduction will weigh on growth for some time. Prices may also rise temporarily as a result of tax hikes or price liberalization. However, the negative impact should have no bearing on oil policy or the region’s currency pegs, which have immense political importance. Overall, Credit Suisse is encouraged by governments’ willingness to embrace change and believes the reforms will be positive for growth over a medium to long-term horizon.
At the same time, the region’s larger economies are on the verge of a step change in their integration with global financial markets. Saudi Arabia is on track to joining both the FTSE and MSCI Emerging Market (EM) indices in 2018 and should be a top 10 market in the EM universe. Kuwait is likely to be added to MSCI’s watch list for an upgrade to EM in 2018 after having secured an upgrade by FTSE recently. Plans to part-privatize state assets and increase foreign ownership limits should further add to the region’s weight. Indeed, in a blue sky scenario, Credit Suisse believes the Middle East could account for 7-8% of the EM equity space – a considerable achievement given its zero weight just a few years ago. In turn this should trigger billions in portfolio inflows as both passive and active investors adjust their exposure.
Looking ahead, two key areas of risk and uncertainty stand out. First, a failure of the reforms to lift the non-oil economy would present a challenge to the region’s growth outlook and raise questions over the course of government policy. Second, further increases in intra-regional tensions could weigh on both business and consumer spending, which in turn would act as a headwind to economic recovery and raise the risk of capital outflows.
Credit Suisse Investment Outlook 2018: Next generation’s footsteps
The Investment Outlook 2018 and videos are available at: www.credit-suisse.com/investmentoutlook.
For a hard copy, please contact your local media relations spokesperson.
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