Investment Outlook 2021

Living forward.

Michael Strobaek
Global Chief Investment Officer

As human beings, we have a need to understand our lives by looking back at the past. But the 19th century Danish philosopher Soren Kierkegaard said we should not forget about the future.

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Once our world emerges from the shadow of the COVID-19 pandemic, it will only be natural for us to “live backwards” as we examine how this challenging period affected our lives. As individuals, we can all recall how it felt to see our cities empty out as the world went into lockdown, as well as our worries about what would happen to our families and friends. What is for sure is that none of us will ever forget that 2020 was the year when we were all confronted with a global pandemic of a deadly virus.

The crisis was also an extraordinary experience for investors as it pushed the global economy into its deepest recession since World War II. Equity markets plunged in late February and March, then rallied strongly in the subsequent months thanks to unprecedented support from central banks and governments.

This publication is not about the past, however, but looks ahead at what we expect will shape investments and markets in the new year. Investment conditions are tighter and the search for yield and returns has become trickier. Now is the time when increased discipline is needed to overcome our natural bias to look to the past for guidance. Sound judgement grounded in a rigorous analysis of the present combined with perseverance in pursuing an investment thesis can make investing highly rewarding, as we demonstrated during the height of the crisis, when we decided to go against the tide and began buying equities in late March.

As we move forward, the pandemic will continue to occupy us in 2021. Governments will have new COVID-19 outbreaks to battle, and will need to distribute a vaccine to their population once it becomes available. Additionally, people and businesses will need to adapt to what we believe will be permanent changes in the way we work, learn and live.

Finally, while economic growth should normalize after the pandemic-induced shock in 2020, there are risks that still need to be monitored carefully. In the following pages, we explore the outlook for the different asset classes and the global economy in 2021.

Beyond all the unprecedented events of the year we are leaving behind, a far greater challenge awaits as capital shifts to addressing the environmental and societal trends that the pandemic has catalyzed. Over the past 18 years, Credit Suisse has been very active in the area of sustainable and impact investing. We believe investors have a clear role to play in the transition to a more balanced and sustainable world. This will require a shift in mindset and approach, which is already underway as investors call for closer alignment of purpose and profit when deploying their investment capital.

We strive to be in a position to help our clients accelerate these trends. Our major initiatives in this area include the Supertrends, our long-term investment themes that focus on societal change, such as Millennials’ values and Climate change – Decarbonizing the economy. We have also launched funds targeting some of the United Nations’ Sustainable Development Goals.

Enabling our clients to invest with sustainability and impact in mind is among our bank’s top priorities going forward, and you will continue to hear more about our efforts on this front as we put it at the heart of our investment offering. I am sure that the year 2020 will be a defining moment in our lives, and I reflect upon a quote from the Danish philosopher Soren Kierkegaard in which he says life can only be understood backwards, but it must be lived forwards.

Global economy

The year 2020 has been like no other. The global lockdown during the first wave of the COVID-19 pandemic triggered the strongest economic contraction in modern history. Most economies recovered sharply thereafter, but a second wave of COVID-19 set the economy back again. Yet growth should accelerate gradually in 2021 without triggering a rise in inflation or interest rates, despite much higher government debt.

Pandenomics: After the shock

So long status quo

Regional outlook

Main asset classes

Fixed income

In 2021, core government bonds’ gains will be meager, while emerging market hard currency bonds remain appealing. In credit, investment grade offers a good risk/reward. In high yield bonds, we see select opportunities to enhance returns in the lower-rated credit segments.

Equities

Equities offer attractive return prospects as we move into 2021. The broad political backdrop should remain supportive given very loose monetary policies globally and continued fiscal support. The earnings slump in 2020 due to the pandemic should prove to be transitory. Consensus forecasts for global equities imply that 2021 earnings will exceed the 2019 level, which should support equities over the course of the year.

Currencies

We expect further USD declines in 2021 on the back of improving global growth, a deteriorating US real yield advantage and the widening of fiscal and external deficits. The EUR and JPY should benefit from this trend. We believe the CNY will also gain, supported by portfolio flows.

Real estate

The economic recovery and low interest-rate environment should be favorable for real estate investments in 2021, even though COVID-19 represents an ongoing challenge for certain market segments. We favor sectors underpinned by structural growth such as industrial and logistics real estate.

Hedge funds

We expect hedge funds (HFs) to deliver low single-digit returns, with volatility comparable to that of investment grade (IG) bonds in the USA and UK. As such, we believe that HFs are viable alternatives to stabilize portfolios. Although trading conditions for HFs are set to improve going into 2021, due diligence remains critical.

Private equity

Patient private equity (PE) investors with access to bestin class managers should be able to achieve an attractive excess return over public markets. As PE requires a longterm commitment, we note the importance of a measured approach with well-diversified investments over the cycle. Sound due diligence and access to top managers with proven track records are key success factors.

Commodities

Commodities witnessed a turbulent 2020. Gold reached new all-time highs while cyclical markets hit deep crisis troughs from which they were still recovering at the time of writing. Going into 2021, we think the backdrop should stay conducive for real assets and commodities in particular.

For many of us, the COVID-19 pandemic brought our lives almost to a standstill, and in doing so has altered the way we live, work and learn. This poses a significant challenge for governments in terms of how they manage these evolving economic and societal trends.

The U-turn of the US Federal Reserve (Fed), from trying to normalize interest rates to guiding for zero rates for years to come, best illustrates the new policy paradigm that is relevant when devising investment strategies. What should investors consider? We take a look.

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