Investment strategy 2020 Opportunities in a low-rate world
- Every year we update our Capital Market Assumptions to provide a basis for the strategic orientation of portfolios. The key message this year is that interest rates are likely to stay low, or even negative, for longer.
- Equities offer attractive compensation for taking risk compared to low yielding government and investment grade bonds. Investors still find pockets of value in fixed income, though they need to be selective and consider less conventional markets.
Credit Suisse's Capital Market Assumptions (CMAs) are the outcome of a proprietary research process in which the input from our quantitative framework is combined with qualitative and theory-informed assessments of our market specialists. It provides a coherent set of long-term return forecasts as the basis for decisions on the strategic asset allocations of client portfolios.
Low money market rates for longer
A key finding of this year’s process is that, over the next five years, interest rates are likely to remain depressed, with central banks keen to provide support and ensure that inflation moves higher. The USA is more advanced in the cycle in that inflation is already close to the US Federal Reserve’s target. US money market returns over five years are forecast at close to average inflation, implying a real return of near zero.
In Europe, the European Central Bank is likely to uphold negative rates for longer. The nominal rate is forecast to be only slightly above zero on average, meaning that investors who stay in cash are expected to suffer a loss in purchasing power from inflation. Swiss investors face the prospect of negative money market returns in nominal as well as real terms.
Weak to negative government bond returns
The relentless decline in bond yields is expected to end. Even only gradually rising bond yields imply that investors in government and investment grade bonds are likely to be left with a very meager return outlook. For long-dated sovereign bonds and inflation-linked bonds in Switzerland, Japan but also the Eurozone, we forecast negative total returns over five years. The US market, Australia, Canada and the UK offer the highest government bond returns in the developed world. In all regions except the USA, government bonds are forecast to underperform already low cash returns.
Emerging market debt to enhance portfolio returns
US high yield is forecast to provide relatively high returns in our developed market fixed income universe (4.8%), whereas EUR high yield is forecast to deliver only a 2.6% five-year return. Both markets entail an elevated risk of default in case of an economic downturn. In contrast, higher quality corporate bonds, i.e. investment grade, in the USA are expected to deliver a return of 2.6%, implying a real return of just about 0.2%. US senior loans, which are not affected by rising bond yields, are instead forecast to deliver a 5% return.
Investors in Swiss and Eurozone investment grade bonds are confronted with a negative return outlook. They might therefore increasingly seek return potential in emerging market bonds, also to diversify portfolios. Both local currency and hard currency bond indices are expected to deliver similar returns as US high yield, but are higher rated and exposed to a different set of risk factors.
Equities offer attractive excess returns
A low rate world implies that equities offer attractive excess returns (risk premia) over both cash and government bonds. Expected returns are in the high single-digit range. They are lowest in Switzerland and the USA at 6.8% and highest in the UK at 9%. The strong performance of the US market in recent years has reduced its attractiveness. However, considering differences in risk, measured by volatility, US as well as Swiss equities still rank similarly as developed market equities as a whole. Emerging market equities show the highest forecasted return, but this also comes with a considerably higher projected volatility, as the risk adjusted ranking illustrates.
Real estate with solid returns
Real estate is set to continue to benefit from the low interest rate environment. Within alternative investments, private equity stands out with a five-year total return outlook of 8.6%. This is higher than US equities, for example, but comes at reduced liquidity, as the funds invested are generally locked up for long periods.
USD trending lower but not against CNY
We expect the USD to depreciate against all other major currencies over our five-year forecast horizon, correcting its overvaluation over time. However, we forecast a continued appreciation versus the CNY, which is overvalued.
Global economyWe expect only sluggish global growth in 2020 of 2.5%, almost unchanged from 2019, but a recession continues to look unlikely given supportive macro policies. De-escalation on the trade war front will be key.
Main asset classesMost asset classes showed a strong performance in 2019. Investors should not expect to see this feat repeated in 2020 although financial assets will likely continue to benefit from generally low yields.
Alternative investmentsAlternative investments have become increasingly established as a building block of portfolios, particularly in today’s world of low-for-longer interest rates and yields.