Outlook 2019

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Letter from the CEO
From my perspective
Tidjane Thiam
CEO Credit Suisse Group AG
Letter from the CEO
An extended cycle
A significant focus will be on the factors that can prolong the economic cycle.
Most years have a dominant theme that shapes financial markets. In 2017 it was the Goldilocks economy – not too hot, not too cold – and the return of politics as a market driver. Trade conflicts and interest rate concerns dominated 2018. Going into 2019, we believe that a significant focus will be on the factors that prolong the economic cycle.
  • Our Investment Outlook 2019
    Our Investment Outlook 2019

    Our Investment Outlook 2019 provides a roadmap to navigating the months ahead. For equities, we provide an overview of all sectors. We believe that technology will remain a strong driver. For fixed income, we examine the relatively rare phenomenon of a US yield curve inversion (when US short-term interest rates exceed long-term interest rates). And we discuss how to establish a successful currency strategy comprising carry, value and safe-haven currencies.

    From the point of view of macroeconomics, several factors may well prolong the economic cycle and speak against an imminent global slowdown. Productivity gains and benign inflation will be key for central banks’ monetary responses and hence financial markets.

    Last but not least, our special focus section is devoted to what has excited us most in the last two years: our longterm Supertrends, five investment themes that offer superior return prospects. Furthermore, we showcase education as part of our efforts in sustainable and impact investing, a market that has been seeing rapid growth as investors increasingly seek to combine financial returns with a social and environmental impact.

    We wish you a successful year ahead!

  • Interview with Michael Strobaek
  • Interview with Nannette Hechler-Fayd’herbe
Review of 2018

2018: The year when trade shifted

political developments
& global security
elections (presidential
& parliamentary)
industry &
monetary &
banking system
1240 Pts.
1220 Pts.
1200 Pts.
1180 Pts.
1160 Pts.
1140 Pts.
1120 Pts.
1100 Pts.
01 January
US tax reform
09 January
Tightening talk in Japan
22 January
Trade conflicts begin
02 February
Repricing Fed expectations
16 February
USA targets steel
16 March
Tech sell-off
22 March
Trade tensions continue
27 April
Peace hopes in Korea
08 May
Credit for Argentina
01 June
Shifting Italian politics
12 June
US/North Korea summit
13 June
Fed hikes rates
06 July
Trade spat deepens
09 July
Turkey in crisis
01 August
USA mulls more tariffs for China
02 August
Apple wins the race
30 August
Rates jump in Argentina
13 September
Turkish rates rise
24 September
News from the European Central Bank (ECB)
30 September
New trade agreement
17/18 October
EU Council meets
28 October
Brazilian elections
30 October
Shift in German politics
06 November
US mid-term elections
MSCI AC World total return index
30 November
G20 Summit in Buenos Aires
06 December
175th OPEC meeting
Key topics 2019
Drivers likely to extend the cycle
From technology and USD stability to emerging markets rebalancing, we review six key market drivers and risks in 2019.
The best of all worlds
is a fairly stable USD.
  • Keeping inflation under control
  • US dollar stability
  • China’s resilience
  • Calmer European politics
  • Emerging markets rebalancing
  • Tech and healthcare innovations

Global economy

  • Different growth tracks
    Different growth tracks
    The impact of US fiscal stimulus will likely peak in the course of 2019, but growth should remain above trend on the back of robust corporate capital expenditure, hiring and wage growth. In China, however, we are likely to see growth slow toward 6%. US tariffs, sluggish manufacturing investment and slowing consumption growth are likely to act as constraints. In Europe and Japan, still lax monetary conditions should help maintain moderate growth momentum. But in a number of emerging markets, growth looks set to remain subpar as policymakers focus on inflation and currency control.
  • Inflation on the move
    Inflation on the move
    Notwithstanding higher capital spending, capacity constraints are likely to tighten further in most advanced economies. Given declining unemployment and intensifying labor shortages, wage growth should continue to pick up. Despite a moderate recovery of productivity growth, core inflation is thus likely to gradually move higher, with commodity prices an upside risk. Central banks will continue to respond in varying degrees, depending on domestic and external constraints.
  • Eye on emerging markets
    Eye on emerging markets
    How high is the risk of renewed economic and financial instability? In many advanced economies, not least the USA, the unsustainable trajectory of government debt is the major longer-term risk. However, barring instability in Italy, a crisis seems unlikely because balance sheets of households and banks have improved since 2008, while corporate balance sheets have only modestly deteriorated. In China, high debt levels should slow growth rather than spark a crisis. Stress is more likely to resurface in financially fragile emerging markets.
Global economy
Stimulus fades, but growth remains
The impact of US fiscal stimulus is likely to fade, but “easy money,” healthy capital expenditure as well as continued employment and wage growth should extend the cycle in advanced economies. Growth in China is set to slow further as policy makers opt for stability rather than strong stimulus.
  • Fiscal stimulus reduced
    Fiscal stimulus reduced
    Our base case for 2019 sees a moderate slowdown in global GDP growth relative to 2018, chiefly due to fading policy stimulus in the USA and policy tightening in EM ex-China. While certain aspects of the US tax reform should continue to enhance household cash flows and remain supportive for companies, the impact of US fiscal stimulus is set to diminish. Across other advanced economies, we expect fiscal policy to be largely neutral apart from minor stimulus in Japan, and possibly the Eurozone. In contrast, many EM governments will likely be forced to tighten fiscal policy.
  • Companies keep investing
    Companies keep investing
    Barring a significant worsening of the global trade conflicts – or other triggers of greater uncertainty – we expect corporate capital expenditure (capex) to continue to expand in 2019. The need to adapt supply chains in response to tariffs may itself trigger some investment spending. Corporate investment is key to extending the cycle as government stimulus fades.
  • China in a holding pattern
    China in a holding pattern
    China’s strong foreign asset position and low inflation give its policymakers more leeway in their actions than in many EM. At the same time, given the high debt levels of state-owned companies and local governments, Chinese policymakers are likely to refrain from returning to aggressive credit stimulus. Instead, they are likely to do “just enough” to prevent US tariffs from significantly depressing growth.
  • Upside and downside risks
    Upside and downside risks
    Of course, there are both downside risks and upside risks to our base case. On the downside, country-specific issues such as Italy’s fiscal situation might weaken Europe’s growth outlook. A sharper-than-expected slowdown in China would most affect other Asian economies, but would also impact Europe.
  • What makes the business cycle go round
Global economy
World follows US Fed’s tightening path
Our base case foresees a gradual rise of inflation in advanced economies and fairly stable inflation in emerging markets, albeit with significant dispersion. We expect monetary policy to continue to tighten globally, but at a moderate pace.
  • More money in workers’ pockets
    More money in workers’ pockets
    According to our base case, core inflation will rise modestly in the USA, Eurozone and several other developed economies in 2019 as capacity constraints tighten. By late 2019, unemployment rates in the USA and Europe will likely approach 20-year lows.
  • Beware the inflation “jokers”
    Beware the inflation “jokers”
    Wage inflation does not translate directly into price inflation. Other costs, including interest expenses and input costs (especially for raw materials such as oil) are key drivers of headline inflation. The significant increases in oil prices in 2007 and 2008 as well as in 2011 were the main reason why headline inflation rose at the time. If our global growth scenario holds, the price of oil and other cyclical commodities could rise further in 2019. Interest costs are also likely to creep up.
  • Emerging markets take a different path
    Emerging markets take a different path
    In emerging markets (EM) inflation may take a different path than in advanced economies. After 2011, inflation in EM diverged from the advanced economies as growth remained robust in the former and weakened in the latter following the Eurozone crisis. Inflation in EM then declined on the heels of lower oil prices and weakening growth in China.
  • Interest rates to rise
    Interest rates to rise
    The base case of continued economic growth and moderately rising inflation suggests that monetary policy will tighten in most advanced and some emerging economies in 2019. At the time of writing, the futures market implied that the Fed funds rate would end up below 3% by the end of 2019. This would imply one to two further rate hikes in 2019, after a likely hike in December 2018, taking the real Fed funds rate to about 1%, broadly in line with our forecast.
  • Proclaiming the demise of globalization may be premature
Global economy
The global economy’s stress test
Economic downturns or financial crises typically occur when an economy exhibits significant imbalances. Compared to 2007, household imbalances are markedly lower in the USA but fiscal imbalances are greater. In the Eurozone, both the external and fiscal balances have improved. In emerging markets (EM), the picture is mixed.
  • US households in better shape
    US households in better shape
    The chart presents a “spider web” for a relatively broad range of US economic and financial indicators that allow for a differentiated risk assessment.
  • Eurozone juggles high debt, low growth
    Eurozone juggles high debt, low growth
    In the Eurozone, the key vulnerabilities – i.e. the fiscal balance and member countries’ external balance – have improved substantially compared to 2007. The key issue for the Eurozone is high government debt, especially in Italy, coupled with low economic growth.
  • Emerging markets: The strong outnumber the fragile
    Emerging markets: The strong outnumber the fragile
    The fragilities in EM as a group are fairly limited, in our view. However, the reliance on foreign savings was significant in selected countries, notably Argentina, Turkey and South Africa, and should have been seen as a warning sign. Yet the external imbalances are less serious in other key countries such as Brazil, Mexico or Indonesia. Compared to the 1990s, the situation has in fact improved dramatically.
  • China curbs appetite for debt
    China curbs appetite for debt
    China is in a special fiscal situation: central government debt is not very high, but debt of state-owned enterprises and local governments has increased sharply since the financial crisis. Household sector debt is also elevated compared to household incomes. As most of China’s debt is denominated in domestic currency and debts of strategic sectors are backed by the central government, we see the risk of a financial crisis as quite limited.
  • Crisis risks are still rare
    Crisis risks are still rare
    In conclusion, we believe that the potential for financial instability is lower in most countries and sectors than before the 2008 financial crisis. The exceptions are select EM where the corporate sector is more vulnerable due to fairly high levels of foreign currency debt. In the case of China and the USA, where corporate debt is also high, the exposure is largely in domestic currency and thus less risky. In the Eurozone we note a significant improvement in the financial stability metrics, but continued political risks.

Regions in focus

The ties that bind: Regional performance in an interconnected world

North America
One of the major risks to the region has subsided after the USA, Mexico and Canada agreed upon NAFTA treaty revisions. US growth should remain above trend in 2019 despite fading fiscal impulses and inflation should rise moderately. The US Federal Reserve is thus likely to continue to raise rates at a steady pace. Canada and Mexico should benefit from strong US growth. In the long term, the large US budget deficit could pose a risk if its trajectory becomes unsustainable.
South America
The region’s two largest economies – Brazil and Argentina – are likely to remain weak in 2019, but hopefully the latter should begin to tackle some of its deep-seated economic and fiscal weaknesses now that it is under an International Monetary Fund (IMF) program. With the pre-election deadlock over, chances are improving that Brazil may address some of its similar issues. In Colombia, Chile and Peru, the economic outlook continues to brighten, and they should benefit from higher commodity prices.
United Kingdom
We foresee somewhat stronger but still subdued growth. Uncertainty over the outcome of the Brexit process is likely to limit investment spending so long as the outlook for supply chains, e.g. in auto production and the financial industry, are not clarified. A soft Brexit would support the GBP. The Bank of England is likely to remain on hold.
With monetary policy still supportive and employment rising, domestic demand should continue to expand. Strong US growth and stabilization in China as well as emerging markets (EM) should support exports. With the European Central Bank only likely to begin raising rates in H2 2019, EUR appreciation should be moderate at best. Tail risks include a hard Brexit and a debt crisis in Italy.
Growth in South Africa is likely to pick up slightly in 2019 on the back of higher commodity prices, but persistent failure to implement reforms may continue to hamper the country’s performance. The same goes for the continent’s largest economy – Nigeria. Meanwhile, reforms implemented under the 2016 IMF program continue to bear fruit in Egypt, with strong growth and declining inflation projected for 2019.
The Swiss economy should benefit from continued healthy growth among its main trading partners. With the Swiss National Bank likely to remain on hold until the ECB starts to raise rates, CHF strength should abate. Meanwhile, domestic demand growth is likely to subside as immigration stabilizes at a lower level, while increasing overcapacity in rental units slows construction.
Middle East
The currency crisis of 2018 sharply raised inflation and undermined business confidence in Turkey. However, a recovery should begin in the course of 2019 in response to stabilization measures. Higher prices support Middle Eastern oil exporters, but Iran is in economic crisis, in part because of renewed sanctions. Growth in Israel is likely to remain strong.
Eastern Europe and Russia
Growth in Russia is likely to remain subdued even though higher energy prices support exports. Currency and bond risks are limited due to a strong external balance and credible economic policy. Meanwhile, growth in Central and Eastern Europe is likely to remain strong due to close economic ties with Western Europe.
While India is likely to remain the world’s fastest growing large economy in 2019, the tightening of global financial conditions in 2018 does pose downside risks. With the current account deficit widening, in part due to higher oil prices, along with the INR’s depreciation against the USD since January 2018, the central bank may need to tighten monetary policy more meaningfully.
China’s growth is likely to weaken somewhat in 2019. High real estate-related debt and debt service are likely to constrain consumer spending while the growth of investment spending is likely to remain subdued. The government will probably do just enough in terms of credit stimulus and RMB depreciation to protect the economy from the impact of US tariffs.
Emerging Asia (ex-China)
Growth in South Korea, Taiwan and Hong Kong is likely to slow slightly amid the growth slowdown in mainland China and, more specifically, in technology exports. In Southeast Asia, growth is likely to remain significantly higher on the back of solid investment and consumption. However, for economies with weaker external balances (Indonesia, Philippines), policy tightening to stabilize the currency poses downside risks.
The economic outlook for Australia remains robust. Elevated prices for iron ore and energy should bolster exports, though China’s expected growth slowdown poses a risk. Strong business confidence suggests that capex is likely to remain strong, however. Rising employment should support consumer spending, but higher interest rates suggest that the real estate sector may cool off.
Japan is likely to enjoy robust growth in 2019, as corporate investment continues to expand. Rising wages should support consumer spending, but the sales tax hike planned for late 2019 poses downside risks. Exports may be negatively affected by slower growth in China. The Bank of Japan may nudge its bond yield target up slightly, but is likely to continue to tread softly.
  • Supertrends: Investing in change
    In May 2017, we took a fresh approach to equity investing, launching our five Supertrends. These long-term investment themes seem to have struck a chord with investors, adding positive value since inception.
    Learn more
  • Why sustainable investing is smart
    Sustainable and impact investments have seen remarkable growth. The urgent need to unlock the positive power of capital for change is best captured by the United Nations Sustainable Development Goals (SDGs). Making these objectives investable is a key trend in sustainable and impact investing.
    Learn more
  • Pay it forward – Impact investing and education
    Impact investing has experienced explosive growth as people seek investments which generate a financial return while creating a measurable positive social and environmental impact. This area is being aligned with the UN’s 17 SDGs, which include gender equality, clean water, zero hunger and quality education at the primary, secondary and tertiary education.
    Learn more

Financial markets

  • Anticipating asset trends
    Anticipating asset trends
    US financial markets entered a late stage of the economic cycle in 2018, characterized by rising interest rates combined with a flattening yield curve. Our base case for 2019 foresees only a moderate further increase in US yields. This suggests that US fixed income investors should prepare to lengthen duration. In core bond markets outside the USA where yields are far lower, duration should remain short. In credit, the risk-return trade-off looks better for high yield than for investment grade bonds. Equities should continue to outperform on the back of robust earnings growth. Emerging market (EM) assets, which came under pressure due to tighter US monetary conditions, should regain ground as long as the risk of US rate hikes and USD strength abates.
  • Pockets of growth in certain sectors
    Pockets of growth in certain sectors
    Despite some wobbles, technology stocks continued to outperform in 2018. We expect economic growth to normalize in 2019. But in line with late cycle patterns, growth stocks should generally continue to outperform. This should include the healthcare sector, especially if companies achieve breakthroughs in areas such as gene therapy. Some cyclical sectors like capex-oriented industrials should be buoyed as well. In Europe, depressed financial stocks should benefit from rising yields, while in the USA, the flattening yield curve will likely weigh on the sector. Real estate stocks may also remain under pressure due to rising interest rates.
  • Where to for currencies?
    Where to for currencies?
    In 2018, the USD made moderate gains against the other major currencies, but appreciated significantly against a number of EM currencies. Going into 2019, we have a neutral view on EUR/USD. While the yield gap continues to support the USD, the start of monetary policy tightening outside the USA is likely to work against the currency. Valuation continues to speak in favor of the GBP as well as a number of EM currencies, some of which are also supported by a greater carry advantage. Among safe havens, we favor the undervalued JPY over the more expensive CHF.
Financial markets
Positioning for late cycle growth
As the US transitions from economic recovery and expansion to overheating, the return profile for a number of asset markets is likely to change, with key implications for investment strategy. We continue to believe that equities should outperform.
  • Why the US cycle matters most
    Why the US cycle matters most
    The US economic cycle still matters most for global financial markets. While the US economy now represents slightly more than 20% of the world economy (and less than 15% adjusted for differences in purchasing power), the US equity market still constitutes 54% of the global equity market (MSCI AC World). And while the US high grade bond market, at 41%, represents a smaller share of the global bond market, US bond yields are a key driver of global asset markets, as the USD remains the largely undisputed global reserve currency.
  • Brighter outlook for emerging market bonds
    Brighter outlook for emerging market bonds
    As for the non-USD bond segment, emerging markets (EM) are likely to be most affected by US interest rate developments. Indeed, 2018 provided a stark reminder that tighter USD liquidity can put severe strain on EM assets. Yet if our base case materializes and pressure on the Fed to tighten policy eases, EM hard currency bonds should outperform. Insofar as a less aggressive Fed reduces pressure on EM currencies, EM local currency bonds should also do well.
  • Equities still offer potential
    Equities still offer potential
    In a late cycle phase, equities typically continue to outperform most asset classes. Thus, equities should still be favored unless valuations become too stretched or a contraction takes shape. That being said, the performance of different sectors may diverge substantially depending on their sensitivity to interest rates. As for investment styles, momentum stocks tend to do well late in the cycle. This should benefit large leading sectors such as IT, one of our preferred sectors at the time of writing.
  • Chinese demand should support commodities
    Chinese demand should support commodities
    Most commodities, except for precious metals, tend to be highly cyclical assets. In most cases, they continue to do reasonably well in late cycle periods. But a significant rise in interest rates and a stronger USD tend to slow the ascent of commodity prices. Given our fairly moderate scenario for interest rates and the USD, this factor should not play a dominant role in 2019. As long as China’s all-important demand for commodities holds up, cyclical commodities should remain supported.
  • US yield curve inversion: Do we need to worry?
Financial markets
The sector standpoint
The outlook for most sectors around the world depends on global or regional business cycles. Where leverage is high, interest rate movements will have a significant impact. Moreover, rapid technological progress continues to boost innovators and disrupt many established companies.
  • Consumer: E-commerce is the new normal
    Consumer: E-commerce is the new normal
    The consumer sector should benefit in our base scenario of continued robust growth and tight labor markets, though China and the trade dispute are key risks. In China, big ticket items such as autos are likely to remain under pressure, while structural growth trends, such as the expanding middle class, should support luxury goods including cosmetics and high-end alcoholic beverages.
  • Financials: Structural challenges remain
    Financials: Structural challenges remain
    Growing demand for loans in most advanced economies should prove beneficial for financial stocks. In Europe, a further steepening of the yield curve in anticipation of the European Central Bank’s rate hikes should also be beneficial, while further curve flattening in the USA could act as a drag. However, national regulations, weak balance sheets and inadequate provisioning are slowing the much needed consolidation of the European banking sector.
  • Industrials: Set for late cycle growth
    Industrials: Set for late cycle growth
    Valuations of the industrials sector are at a cycle high, but growth in EPS and revenues should benefit if economic growth remains robust, as we expect. The capital goods subsector should be lifted by the recovery in the mining, oil and gas and industrial construction industries. The sector should also benefit from innovation in the automotive sector and further investment in robotics across industries.
  • Materials: Shifting production and product trends
    Materials: Shifting production and product trends
    In steel, we expect production to keep improving on the back of strong demand. Environmental concerns in China should boost demand for higher-quality iron ore to reduce pollution. As China takes capacity out of the market and shifts to higher-quality iron ore, the global supply for steel should remain balanced in 2019. In the chemicals sector, China is shifting from coal to gas as a raw material input.
  • Utilities: The evolution towards greener and cleaner
    Utilities: The evolution towards greener and cleaner
    Rising interest rates could put further pressure on the valuations of regulated utility companies, especially in Europe. Regulated utilities also have to digest new tariffs for regulated returns in Spain and the UK. In addition, investors will focus on the ongoing shift towards renewables in electricity generation portfolios as costs are falling to competitive levels. Thermal power producers are benefiting from nuclear power plant closures in Germany and Belgium as well as expected coal plant closures across several countries.
Financial markets
The state of play for currencies
Investing in foreign currencies does not usually generate excess returns compared with holding domestic cash. When currencies are clearly undervalued, however, it can be worth taking such positions. Conversely, holding low yielding safe-haven currencies pays off when risks spike significantly.
  • Political twists in the road
    Political twists in the road
    In 2018, political events also impacted certain currencies. The escalating trade tensions between the USA and China depressed the RMB, while the close economic links of Japan and China may have prevented the attractively valued JPY from appreciating. In Europe, worries over Italian fiscal policy temporarily boosted the CHF, while the GBP swung back and forth with every twist in the road leading to Brexit. Looking to 2019, we do not think that the US-China trade conflict will be resolved quickly. As a result, the RMB may remain under pressure. Insofar as the Chinese authorities continue to ease monetary policy, this trend is set to persist. Yet we believe that China will proceed cautiously to avoid triggering investor uncertainty and capital outflows.
  • EM currencies look more attractive
    EM currencies look more attractive
    The developments of the past year appear to have produced a situation in which value and carry overlap for a number of currencies. Investors may thus be able to generate excess returns after a disappointing 2018. Among the advanced economy currencies, the GBP, NOK and SEK looked clearly attractive based on our valuation screen as we went to press. Among EM currencies, the TRY and MXN seemed attractive. The NZD and CHF appeared expensive, while the only EM currency that looked expensive was the THB.
  • The twin deficit boon or bane for the USD?
Financial markets
themes 2019
Every year we determine our top investment themes. This time around we focus on: Interest rate normalization; Regional economic divergence; and New geopolitical regimes. We will continue to update these themes throughout the year to reflect changes in the Credit Suisse House View.
Learn more
  • Theme 1:
    Interest rate normalization
    The cycle is at an advanced stage, but recession is still not imminent and central banks continue to normalize interest rates. Against this backdrop, investors inevitably wonder how to invest. We favor keeping a growth tilt in portfolios.
    Learn more
  • Theme 2:
    Regional economic divergence
    Differences in the relative strength of labor markets and economic growth between countries have led to large divergences in global monetary policy, driving growing interest rate differentials and large currency moves. This has incentivized capital to flow into the USA, pushing the USD higher, but has also exposed weaknesses in emerging markets (EM) with large imbalances, like Argentina and Turkey.
    Learn more
  • Theme 3:
    New geopolitical regimes
    The last 40 years have seen increasing globalization and free trade, deregulation and a focus on reducing the role of the state in society. These policies created three decades of strong global growth, which was accompanied by moderate inflation, low macroeconomic volatility and ever more integrated global markets.
    Learn more
Calendar 2019

Milestones 2019

summits & meetings
elections (presidential & parliamentary)
  • January

  • February

  • March

  • April

  • May

  • June

  • July

  • August

  • September

  • October

  • November

  • December

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