Investment Outlook: How investors earn positive returns despite low interest rates

Investment Outlook: How investors earn positive returns despite low interest rates

Low interest rates could once more pose challenges for investors in 2020. Yet, by diversifying, positive returns can be generated even in this investment environment. In this year's Investment Outlook, Credit Suisse's investment experts share their recommendations for a successful investment strategy.

Low interest rate environment to persist in 2020

Low interest rates are expected to continue plaguing the investment environment worldwide in 2020. Central banks will most likely maintain their loose monetary policies, thus contributing to a further uptick in economic growth. Lingering recession worries are likely to recede, as a manufacturing recovery will likely kick in during the first half of 2020, leading to some steepening of the yield curve. However, the growth prospects still remain rather modest: Overall, we predict 2.5% worldwide growth for 2020.

GDP forecast for 2020

Real GDP growth, in % (YOY)

  2019E* 2020F**
Global 2,6 2,5
Switzerland 1,1 1,4
Euro zone 1,1 1,0
Germany 0,5 0,4
United States 2,3 1,8
China 6,1 5,9

* E: estimate ** F: forecast

Last data point: November 5, 2019

Source: Datastream, Haver Analytics, Credit Suisse

Note: Historical and/or projected performance indications and financial market scenarios are not reliable indicators of current or future performance.

Successful investing with diversification

In this environment, investors are likely to see very meager or even negative returns on low-risk assets. In fact, even traditional fixed-income investors risk suffering losses in real wealth due to inflation. The investment experts at Credit Suisse consider diversified portfolios to be more promising.

With a multi-asset strategy, investors can spread their capital across multiple asset classes, thereby taking a measured and diversified approach to risk mitigation. That way, they can take advantage of the remaining upside potential in low-risk markets while increasing expected returns by investing in equities and seeking out less conventional investments in fixed income.

high grade bonds hardly offer more yield in a low interest rate environment

High-grade bonds hardly offer more yield in a low interest rate environment

Source: Credit Suisse Capital Market Assumptions

Diversification with emerging market debt is attractive

While high-grade bonds still have an important role to play in terms of diversifying risk, investors need to look for a broader set of return drivers to achieve positive returns. For instance, the European covered bond segment, which has a high credit rating, is an interesting option. For investors who seek a buffer against the negative impact of rising bond yields (duration risk), senior and mezzanine tranches of collateralized loan obligations should be an attractive portfolio addition.

What's more, the potential returns offered by emerging market debt in hard currency are also attractive. EM local currency bonds could also be an option, though currency risk will require additional attention.

emerging market bond performance is positive even in a low interest rate environment

Emerging market bond performance is positive even in a low interest rate environment 

Last data point: 25/10/19

Source: Bloomberg, Credit Suisse

Equities provide attractive investment opportunities in a low interest rate environment

Equities and alternative investments offer more potential to drive returns. Equities offer an attractive expected return advantage over low-yielding bonds. Investors who are more income oriented should favor companies with stable dividends. With regard to industries, the Credit Suisse experts prefer information technology as one of the few sectors exhibiting strong growth. The same goes for the financial sector.

Within alternative investments, real estate enables further portfolio diversification and enhances return potential. For investors who are willing to commit money over a longer period of time, private equity offers an opportunity to enhance returns over the long term.

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