In the annual Investment Outlook, published today, Credit Suisse experts analyze the outlook for financial markets, announcing that the situation will most likely remain difficult also in 2017.
The general economic forecast for next year is oriented towards a slight acceleration in global GDP growth (from 3,1% to 3,4%), albeit with marked regional differences.
Over the course of 2017, given the moderate rise in inflation and moderate monetary tightening, most asset classes are expected to generate modest returns. Economic and social tensions – summarized by Credit Suisse in the concept of generational conflicts – create a context of uncertainty for investors.
Michael Strobaek, Global Chief Investment Officer at Credit Suisse, comments: “The investment environment remains challenging and political events could trigger some market turmoil again in 2017. However, market corrections could present opportunities that investors should seize selectively”.
Global economic forecasts
Global growth is expected to improve moderately in 2017, albeit with large differences across countries and regions. Overall, investors can expect a slight recovery in business investment accompanied by still solid consumer demand, but overall growth is likely to remain well below pre-crisis levels. The more expansionary fiscal policy in place in the US should support the cyclical recovery, while the climate of uncertainty about global trade could represent a deterrent.
Inflation is likely to rise, but remain well below the targets set by the central banks of many developed countries, with the exception of the United States. While the Federal Reserve appears poised to continue its gradual interest rate normalization, other central banks are likely to maintain a more accommodative stance.
Oliver Adler, Head of Economic Research at Credit Suisse, says: “Political uncertainty and risks will certainly still play a major role as Brexit talks have started, major European countries grapple with upcoming elections and the new US administration is shaping immigration, security and trade relations policies”. Credit Suisse investment experts consider European risk assets (bond and equity) particularly exposed to increased political risks.
Global market prospects
The increase in yields and the rise in the yield curve favor the profitability of the financial sector. European political events are a source of potential volatility for EU institutions, but US financials (including junior subordinated debt) are still favored as a yield generator. The Trump administration appears to be oriented towards deregulation of the sector rather than regulatory tightening in the financial sector.
Emerging market (EM) hard currency bonds are attractive from a yield potential and diversification perspective. However, following the strong rally in emerging market bonds in 2016, country and sector selection will be a key driver of performance next year.
On the equity front, investors should favor the health care and technology sectors due to strong fundamentals. Healthcare offers some of the strongest earnings trends. At the same time, the technological sphere continues to mark strong growth in areas such as information security, robotics and virtual reality. Both sectors also have everything to gain from likely tax breaks for repatriation of capital to the US.
Credit Suisse experts also favor shares of infrastructure-related companies, especially industrial stocks in the construction sector and related industries. The combined effect of greater political will to expand government spending and growing infrastructure needs is set to produce significant stimulus in several major economies over the next few years, including the United States.
The outlook for the US dollar is to gain ground ahead of a rate hike, government spending expansion and the potential deferred repatriation of overseas-generated earnings by US firms. While the euro could suffer from a focus on political risks in 2017, the Japanese yen should be recovering from current levels of undervaluation.
Nannette Hechler-Fayd'herbe, Global Head of Investment Strategy at Credit Suisse, continues: “The biggest challenge investors will face in 2017 is to find returns at reasonable risk. In our view, emerging market bonds are the most attractive sources of yield, but issuer risk selectivity remains of paramount importance.
Switzerland
For Switzerland, Credit Suisse investment experts expect steady and moderate growth, with a continued recovery in exports and weak domestic demand. While inflation is expected to remain below target, deflation risks have eased.
However, the Swiss franc is on course to weaken against a general appreciation of the greenback. Credit Suisse currency experts predict that any depreciation of the Swiss franc against the euro is likely to be very limited, as interest rates will remain low in the euro area amid possible political risks in Europe.
Anja Hochberg, Chief Investment Officer Switzerland at Credit Suisse, reiterates: “We recommend holding broadly diversified emerging market bonds in the portfolio and favoring equities over Swiss bonds with an overweight in pharmaceuticals and IT. For investors who can tolerate some illiquidity, private equity continues to be an attractive asset class."
Europe & EMEA
Brexit uncertainties, political risks and intermittent concerns over the health of European banks are likely to cause volatility spikes in European risk asset markets, making risk-adjusted returns on equities less attractive.
However, Credit Suisse economists believe Brexit is unlikely to be followed by the exit of other EU member states. Peripheral countries' sovereign issues and bank bonds should therefore be resilient. The risks in Italy and Portugal still need to be closely monitored.
The eurozone is expected to record moderate growth. However, given the slightly more restrictive stance of the Fed and the still very accommodative one of the ECB, an appreciation of the euro against the dollar appears unlikely. After falling below fair value in 2016, the pound is expected to stabilise.
Michael O'Sullivan, Chief Investment Officer of Credit Suisse's International Wealth Management division, explains: “What is certain right now is that Brexit will cause economic and political uncertainty not only in the UK, but also in neighboring European countries”.
Pacific Asia
Asia can count on stable growth in 2017, supported by a structural transition from manufacturing exports to service-led consumption.
China remains on its way to a soft landing, as the government successfully manages a two-speed economy: the industrial sector is decelerating, while domestic services are steadily expanding. In this context, the real estate sector is bordering on overvaluation in first-tier cities.
A favorable mix of solid economic growth, reasonable valuations and improving profitability suggests emerging Asian equities will perform well in 2017, perhaps even better than their counterparts in the rest of the world.
John Woods, Chief Investment Officer Asia Pacific at Credit Suisse, concludes: “Our more favorable view on Asia reflects our improved view on China, where we believe the domestic economy, particularly the services sector, should surprise to the upside. ”.
