Investment Outlook: Will the stock market rally continue?
Equity markets are likely to develop positively again in 2020. However, the Credit Suisse Investment Outlook shows why they are unlikely to perform as well as they did last year.
Outlook for equity markets remains positive
Despite numerous headwinds, 2019 was an extremely successful year for the stock market. The MSCI World Index provided investors with a total return of more than 20% in the first ten months of the year. Equity markets are likely to deliver a more muted performance in 2020, although economic growth should stabilize. Despite only limited support from the central banks, liquidity conditions are likely to remain accommodative. Even so, margin pressures are expected to increase. This suggests that equity returns will likely be more in line with an average year.
Nevertheless, the base case for equities is positive. As geopolitical tensions moderate and the trade war subsides, at least to some extent, business sentiment should improve and contribute to a recovery in industrial production (IP). Growth-oriented sectors and stocks that benefit from sustained long-term societal changes should continue to outperform. Stocks that provide stable dividends offer good opportunities.
Rising labor costs may put a brake on equity markets
Since the financial crisis, corporate profits have generally been boosted by subdued costs. Interest costs will remain very low for the foreseeable future and may even decline. Wages, however, have been growing faster in developed countries, particularly the USA. While productivity growth has increased as well, it is unlikely to fully offset these additional costs. Rising labor costs could lead to reduced cash flows. When combined with already extended financial leverage, this could limit stock buybacks.
Higher wages are likely to weigh on stock markets going forward
Share of after-tax profits and wages in US gross domestic product in %; four-quarter moving average
Last data point: Q2 2019
Source: Datastream, Credit Suisse
Equity markets offer better returns than bonds in 2020
Although Credit Suisse experts forecast only modest equity returns in the mid single digits, the returns are likely to be significantly higher than for investment-grade bonds. Stocks of companies that offer sustainable dividend payouts should be well supported. Based on today’s equity prices, a dividend yield for the MSCI World aggregate of roughly 2.5 percent is to be expected. In particular, sectors such as financials, energy, and utilities should continue to pay above-average dividends.
More growth-oriented investors may consider high-conviction sectors or themes that are likely to experience strong earnings growth. One such area is education technology. Separately, sustainability is becoming more important not only for consumers and companies, but also for investors. While some companies and sectors may come under pressure, significant new opportunities should arise.
Equity markets: outlook for 2020
Which sectors have positive prospects for equities in 2020 and where do they face headwinds.
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Valuable opportunities for IT securities
New technologies and software solutions afford the IT sector good growth potential in 2020 as well.
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Financial sector can look forward to a good year
Favorable fundamentals and attractive valuations will likely contribute to the positive development of financial securities in 2020.
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Communications sector equities face challenges
Increasing regulation brings higher costs and casts doubt on entire business models.
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Tough times for industrial securities
Equities of industrial companies could come under pressure due to economic uncertainties and disappointing earnings growth.
US equities poised for good performance in 2020
Another good performance is expected for the US market in particular in 2020 due to superior economic growth and the strong weighting of the IT sector. But its potential is limited by growing margin pressure as a result of rising wages, the waning effects of the 2018 corporate tax cuts, a less supportive Fed and, possibly, uncertainty surrounding the presidential election.
Prospects in Switzerland are slightly less rosy. After a very strong showing in 2019, Swiss equities are expected to remain on a steady if unspectacular course. If successful, efforts by the Swiss National Bank to prevent Swiss Franc appreciation would be supportive. A weaker Swiss Franc in combination with a steeper yield curve would in particular support financials.
