Investment Outlook: Equities an attractive prospect in 2021

Investment Outlook: Good prospects for equity investments in 2021

The pandemic will have far-reaching consequences for the economy. Financial markets and economic structures are already changing as a result, but this disruption has its advantages too. Equities, for one, are likely to remain appealing in 2021. Read the analysis of Credit Suisse's experts in the Investment Outlook 2021.

Equities continue to look appealing

On traditional valuation metrics, equity market valuation appears elevated compared to longer-term historical averages. On the one hand, this can be attributed to the ultra-low or even negative yield environment. On the other hand, the fast and forceful interventions by policy makers – most importantly, the US Federal Reserve (Fed) – in response to the COVID-19 pandemic helped bring investors' risk aversion down, allowing for the sharp market recovery in late spring 2020. In 2021, policy support should remain in place to curtail risk aversion.

When comparing the different asset classes, equity markets continue to look attractive. Since the beginning of 2020, real bond yields in the US have declined by over 100 basis points, outpacing the decline in earnings yields. Currently, the difference between the earnings yield and the real bond yield as a measure for the equity risk premium (ERP) is higher than the long-term average, suggesting that equities offer an attractive excess return over bonds.

Disruption: Risk has its rewards

Disruption: Risk has its rewards

MSCI World – Earnings yield vs. real bond yield (in %)
Last data point: November 5, 2020
Sources: Datastream, Bloomberg, Credit Suisse

Pandemic accelerating disruption

The COVID-19 pandemic has propelled the trend of disruption, which will continue to be a strong and powerful force. For example, e-commerce and online shopping will increasingly replace traditional retail stores. Remote working setups should continue to make office space less attractive, while increasing the appeal of suburban housing.

Technology-related industries and healthcare are some of the attractive market segments that have the potential to disrupt and therefore have room to expand market share and profit margins. There is also potential in materials, including construction materials. The disrupted parts of the economy, however, such as brick-and-mortar retailers and print media, are likely to lose market share. There are also expected to be ongoing structural headwinds in the traditional energy and financial sectors.

Equities: A tale of two strategies

Equities: A tale of two strategies

Last data point: October 31, 2020
Sources: Datastream, Bloomberg
Note: Value stocks are stocks that stand out by their low valuation relative to their fundamentals (e.g. earnings, dividends, or sales). They often have high dividend yields and tend to be sensitive to the business cycle. Growth stocks are stocks of companies with substantial growth prospects that retain most of their accrued earnings in order to finance growth.

Investment Outlook: ESG here to stay

Sustainability has become increasingly important for investors. So much so that it has become mainstream. Assets under management adhering to ESG (environmental, social, and governance) standards are growing rapidly, putting greater pressure on listed companies to align their business models and practices with these standards. Some of the benefits for investors include more protection against prominent governance incidents and resilient ESG performance. This trend is expected to continue into 2021, ramping up the demand and support for sustainable investments.

Stable dividends a reason to invest in Swiss equities

The defensive Swiss equities market has a resilient earnings profile due to its strong concentration in the healthcare and consumer staples sectors. During the pandemic-driven downturn, the Swiss market benefited from these qualities. However, Swiss equities went on to lag the strong rebound due to this defensiveness and a relatively low share of technology-related businesses. Following the rally, the substantial share of global market leaders with high-quality products should offer attractive earnings prospects. Solid and, most importantly, stable dividends are another argument in favor of Swiss equities. Moreover, the strength of the Swiss franc is expected to wane in 2021 as the global economic recovery continues, and this has the potential to benefit the strongly export-oriented Swiss economy.

Emerging markets: Asian equities appealing

Emerging market (EM) equities are dominated by Asia, which accounts for approximately 80% of the global EM market capitalization. Asian equities are expected to deliver attractive returns in 2021 given the ongoing robust economic recovery in China and the widespread containment of the pandemic. The broader economic recovery and strong growth from the technology segment should prove supportive for earnings. Loose monetary policy and a weaker US dollar should also be beneficial for EM equities. One risk that remains is the possibility of a further escalation of the US-China trade dispute in 2021.

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