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Risk assets to be flavour of the season in 2021, says Credit Suisse

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Equity markets in Asia should fare better than expected in 2021, thanks to the fading of risks and a strong rebound, according to Credit Suisse’s Investment Outlook 2021.

“For Asia Pacific equities, the aftermath of the US elections has turned out favourably for Asian risk markets as uncertainty faded,” said John Woods, chief investment officer Asia Pacific at Credit Suisse, in a press release.

“A combination of reduced trade tensions, a weaker USD, higher tech exposure, and better COVID-19 containment should see North Asian equity markets continue to dominate the regional investment narrative,” he said.

Growth in the Asian region outside of Japan Asia is expected to rebound and grow 4.4% in 2021, after “a bruising 2020,” said Woods. He expects Southeast Asia to grow faster, partly from a “deeper contraction” in 2020 and “a later start to its recovery”. The region will grow too from a “greater capacity to benefit from any vaccine treatment and a subsequent gradual recovery in tourism”, added Woods.

Source: Credit Suisse • Click on image for PDF file

The global economy is expected to grow by 4.2% in 2021, according to Investment Outlook 2021 as “demand continues to recover” from the COVID-19 led recession in 2020, the Swiss firm said. That would favour equities as “interest rates set to remain at or below zero in all major developed economies”, it added. “We continue to regard equities as offering the most compelling return prospects.”

However it cautioned that risks ought to be carefully monitored as well. “To preserve wealth and meet long-term obligations, investors should invest in well diversified multi-asset strategies with a significant share of portfolios invested in equities,” argued Credit Suisse.

But the overarching message from the bank is to remain invested rather than holding too much cash. “The economic background will be one that rewards taking risk both in equities and in fixed income, and one that will probably penalise investors who remain heavily in cash,” said Ray Farris, Chief Investment Officer South Asia, Credit Suisse in a call with reporters.

Source: Credit Suisse • Click on image for PDF file

Building on that theme, Woods told reporters that the bank’s house view is that investment-grade corporate bonds will outperform high yield bonds — with emerging market, hard-currency bonds faring well. “In global equities, very clearly, we are overweight both developed markets and emerging markets in a growth environment,” even as commodities will do well, Woods explained. In currencies, a weaker US dollar will have a positive effect on risk assets around the world in general, particularly in Asia, he said.

Source: Credit Suisse • Click on image for PDF file

Woods tried to assuage concerns over stretched valuations, in light of the unprecedented level of monetary easing around the world.

“A lot of us will have perhaps been concerned about stretched valuations when measured by metrics such as price earnings ratios and or price to book ratios, and there’s no doubt that in certain sectors valuations are looking stretched,” said Woods.

Source: Credit Suisse • Click on image for PDF file

Valuations “have remained pretty consistent”, from a 10-year perspective when comparing equity earnings yields with real bond yields, said Woods. “At around 6%, the equity risk premium for global markets has been pretty consistent over the last 10 years or so,” and compared to bonds, equities represent reasonable value, he added.

Credit Suisse continues to favour Chinese and Asian equities.

Source: Credit Suisse • Click on image for PDF file

Comparing 12-month forward earnings, a benchmark of Chinese shares shows they continue to be favourably valued compared to the S&P 500, Woods said. “What is very clear here is a strong outperformance or superior earnings trajectory for the China index,” he said. That is despite the rebound of the market in China to nearly pre COVID-19 levels.

This is particularly true for Chinese tech majors. “Interestingly,” said Woods, China tech appears to be pulling ahead of US tech, perhaps better taking into account the impact — or all the different impacts — of the virus.

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