Amid the revival in economic activity on the back of the vaccine program, organisations moving from business continuity plans to stable working environments, and a slight improvement in unemployment numbers, the world continues to adjust to new realities. Coming to terms with the “new normal”, global investors are on the look-out for attractive and stable investment opportunities. In our bid to help our readers and investors understand what to expect from 2021, we interviewed John Woods, Chief Investment Officer Asia Pacific at Credit Suisse.
Macro-economic indicators: A dovish stand by central banks, anchored inflation and vaccination roll-out could shape 2021
Mass vaccination drives, measures to contain the spread of Covid-19 and economies rebuilding themselves are pointing toward global growth. Leading the global growth will be two main markets, USA and China. The latest job numbers in US point to economic recovery moderating and this has further strengthened the case for a sizeable stimulus package in country, which will boost the growth outlook for US. Additionally, we expect inflation to remain anchored – notwithstanding a transitory near term rise – as unemployment in US is still high and unlikely to dip back to pre Covid-19 levels anytime soon. We expect major central banks to remain dovish in the foreseeable future – both the Fed and ECB have reiterated their accommodative stance as uncertainty continues to loom over the global health crisis. From an investment perspective, Covid-impacted cyclical sectors will offer higher potential especially in materials and financials with UK and Germany being our preferred choices. Also with major economies like US, China and Europe committed to moving towards carbon neutrality, greener technologies and sustainable investments, ESG is clearly a multi decade investment theme.
Geopolitics: US-China tensions to persist in the short-term
We anticipate a more structured and multilateral foreign policy from the new US government. While there are positive signs on the US-China front, we still expect US-China tensions to persist in the short-term. On multilateralism, US President Joe Biden’s foreign policy nominations point to a shift in this space. With appointees such as Kurt Campbell in-charge of Indo-Pacific policy and Katherine Tai as U.S. Trade Representative, there are signs that Mr. Biden may pursue a more active trade policy than expected. With new-found stability, and acceptance of the new administration on a global level, Asia-Pacific countries are also working actively to foster partnerships. There is reasonable chance that the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) could be revived in some form or other. Overall, a more structured and stable involvement of the USA, and relationship with China, should contribute to a more predictable geopolitical environment, thus lending support to global investors.
Asset Allocation: Equities and commodities have a favourable outlook
Given the economic and geopolitical climate mentioned above, our tactical asset allocation remains overweight on global equities. This is primarily driven by our overweight in Emerging Markets, predominantly in China. We are also remain overweight on commodities as we expect a strong rebound in economic activities this year. Coming to fixed income, we are underweight on government bonds as yields are expected to rise, however we remain neutral in IG and HY credit. Further, we are overweight EM USD bonds. As for USD, we expect it to weaken on strong monetary fiscal stimulus in the US. Considering a diversified portfolio, we recommend adequate exposure to hedge funds and private equity for their risk-reward and diversification benefits.
Investments: Chinese equities, gold and private market will unlock value for global investors
Markets: In an environment of increased uncertainty over the vaccine rollout, lingering opposition to the US fiscal stimulus, or even a potential surge in infections from the Covid mutations, we are cautious of the fact that temporary setbacks may occur. Nevertheless, we also believe that any such market corrections ultimately offer attractive investment opportunities. Hence, we remain overweight on global equities as the fundamentals are still broadly positive.
Where the yield lies: Chinese equities are an attractive investment opportunity on the back of strong economic recovery and resilient earnings. Additionally, Chinese equities are available at relatively attractive valuations and USD weakness should encourage steady foreign inflows. China high yield bonds are also at attractive valuations. With lower default rates and credit fundamentals more resilient than in US, 8% returns can be expected in the next 12 months. Another attractive opportunity lies in gold. As yield is expected to remain lower for longer on dovish central bank policies coupled with USD weakness, a 12 month target of $2200/Oz implying a 20% upside is reasonable
Private Equity and Hedge Funds should also deliver stable returns: In an environment of uncertainty, several alternative investment opportunities have attracted our attention. Should our clients and other investors look to diversify, we recommend Private Markets as an avenue for alternative investment. They are increasingly becoming mainstream, with smaller asset managers, family offices and even retail investors increasingly investing in this asset class. Further, US regulators allowed US retirement plans to invest in buyout firms, and banks to take stakes in venture capital funds in an attempt to roll back post-crisis constraints. On a 5 year time frame, we expect PE investments to deliver the highest expected returns in our asset universe. As a word of caution, due diligence and good fund manager selection are paramount to achieve these high return prospects.
Hedge Funds returns have been on a declining trend but we do not expect this to continue as central bank rates are unlikely to fall much further. Our projected 5-year return for hedge funds remains in the low to mid-single digits. Notably, hedge fund returns have witnessed low volatility in recent years, making them a viable alternative to traditional portfolio hedges.
Investing for a better future: Integrating ESG in day-to-day practice is key
As regulations and investor engagement are creating impetus for sustainable investing, the majority of studies have found evidence that link solid sustainability practices to positive impacts on share price performance. Also, the largest of asset managers are planning to make their portfolios ESG-ready. Consumer concern over climate change is on the rise globally, with young consumers more worried about climate change. To align with this change in mind-set, Credit Suisse has integrated ESG considerations into its investment processes and financial analysis. Furthermore, Credit Suisse has allocated more capital towards sustainable thematic and impact investing strategies which focus on mobilizing capital for activities that are in line with the United Nations Sustainable Development Goals (SDGs). As part of our ESG initiative, a provision of at least CHF 300bn towards sustainable financing over the next 10 years has been made.
Private Banking for a technology drive future: Creating value through the use of data analytics
As a leading provider of private banking solutions and services, technology and innovation are enduring areas of focus at Credit Suisse. COVID-19 has intensified technology adoption, which has proven to be crucial for business continuity and growth during the pandemic. In this vein, Credit Suisse maintains its pioneering tradition of embracing digital innovation in the private banking space. A prime example of this is how we augmented insights, personalized and timely content tailored to the investment appetite of each client through the extensive use of data analytics. This was achieved through our platform SPARK, which delivers targeted investment ideas and data-driven recommendations, supported by integrated automated investment suitability controls. As validation of this approach, in 2020 alone there was a 3.5x increase in the number of views on our product pages and 5x increase in the number of product searches.