Investment Outlook 2017: Harnessing Market Drivers
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Investment Outlook 2017: Harnessing Market Drivers

Top themes promising growth and yield in the new year.

Thematic investing goes beyond the traditional investment approach focused on regions or sectors. The aim is to identify themes and trends that will be future market drivers. Three general investment themes are likely to dominate 2017: finding growth, looking for sources of yield, and risk diversification.

Growth Opportunities despite Stagnation

Economic growth is likely to remain modest in Europe and the US in the new year. Nevertheless, there are some themes that promise to have considerable growth.

  • Infrastructure has been neglected over the past ten years, in both the US and Europe. As a result, the Western world is facing a shortfall in infrastructure spending. In the US alone, this shortfall is estimated to total USD 1.7 trillion by 2025.
  • Economic growth in the emerging markets is still far outperforming continue to outpace that of the developed markets. Although China's new economic model is leading to lower growth rates than in the past, consumption is still rapidly accelerating. As such, we We thus prefer consumer goods stocks in China and other emerging markets.
  • Digitalization is changing consumer behavior around the world. It is disrupting traditional consumption patterns and production processes. "Disruptive digitizers" – i.e. companies that revolutionize traditional markets with new digital forms ways of production and distribution – are likely to achieve above-average profit growth.

    New technology solutions are spreading across many sectors such as healthcare (e.g. medical device manufacturers), media (e.g. digital advertisers), entertainment (e.g. gaming), and industrials (e.g. agricultural technology manufacturers).
Online Penetration Has Increased Significantly

Online Penetration Has Increased Significantly

Consumer goods markets are shifting toward online service

Source: A.T. Kearney, Credit Suisse

Yield despite Low Interest Rate Environment

Even if the US Federal Reserve tries to gradually normalize interest rates, they are likely to remain extremely low or even negative in many developed regions. 

Nevertheless, investors can still capture yield by investing in bonds with a longer maturity, and taking on duration risk, or by assuming credit risks. Our recommendation is clearly in favor of credit risk. Investment opportunities with attractive risk and- return characteristics can be found in two main areas:

  • Emerging market hard currency bonds still offer a significant yield pick-up compared to their peers counterparts in developed countries. Since growth is likely to accelerate further in key emerging markets, their sovereign and quasi-sovereign bonds should offer the best opportunities for investors, as can be seen in the capital flows.

    The projected returns for emerging market securities in local currencies are also promising, since their yields tend to be higher. Many currencies are also undervalued, meaning there is additional upside potential as compared to the major currencies.
  • Additional opportunities for yield can be found in the financial sector. Subordinated financial bonds still offer some of the most attractive returns, both in the developed and the emerging markets. 

    With characteristics of both bonds and equities, hybrid bonds can also be attractive yield enhancers. In all of these cases, however, the key to good performance is a thorough analysis of issuer quality and the features of the bond.

Risk Diversification Is Important

Given the increasingly challenging outlook for equities and typical bond investments, good diversification of risk remains indispensable.

  • Sustainability is becoming increasingly attractive among investors. For instance, based on the increased use of batteries in electric vehicles and electric storage systems, we believe investing along the value chain of battery production is one of the most promising themes for this year. It taps into a fast-growing market and offers some benefits of diversification for traditional stock portfolios.
  • Microfinance investments, thanks to its low correlation with other asset classes, also provide portfolios with diversification benefits. In an environment of persistently low interest rates, they also have low volatility and decent returns. Microfinance investments are based on short-term loans issued in some of the poorest countries in the world to help local families earn a living by setting up a business or expanding their farming activities.
Total return of microfinance vs cash and short-term bonds

Total return of microfinance vs cash and short-term bonds

Source: Symbiotics, Datastream, Credit Suisse / IDCS

Last data point: 12.10.2016

These examples show that investors looking for good investment opportunities can find what they are searching for. Although we anticipate the performance of the core asset classes to be moderate in 2017, thematic investments can compensate for this. Broad portfolio diversification is the key to successful investment.

For the complete 2017 outlook, visit the Investment Outlook 2017 website.