Equities and other risk assets to regain footing in 2019, says Credit Suisse

Global equity markets are set to recover in 2019 after a turbulent year, driven by ongoing economic growth and contained inflation, according to a report by Credit Suisse.

Stock markets have experienced volatility this year, with the three major US indices falling into the red over the past few months.

However, from next year, financial markets will enter an “extended cycle phase”, where macroeconomic factors and ongoing monetary tightening prevent a global slowdown, Switzerland’s second largest lender said in its 2019 Investment Outlook.

“2019 looks set to be another year of growth, albeit at somewhat lower levels than in recent years,” said Michael Strobaek, global chief investment officer at Credit Suisse.

“Given ongoing economic growth and monetary policy normalisation in developed markets with no immediate threat of contraction, we expect risk assets such as equities and emerging market hard currency bonds will likely recover their footing in 2019.”

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The past year saw a rebalancing in a number of areas, the report said. US interest rates rose, while developed-market equities adjusted to a flatter earnings trajectory and political and trade risks put pressure on specific markets.

In October, the International Monetary Fund revised downwards its global gross domestic product forecasts to 3.7 per cent in 2018 and 2019, down from its July forecast of 3.9 per cent for both years.

However, Credit Suisse said it expects inflation to remain moderate in 2019, reducing the risk of excessive policy tightening by the US Federal Reserve, while inflation will be relatively contained, serving to extend the current economic cycle.

Equities typically outperform most asset classes in an extended cycle phase, the report added, so 2019 should see a recovering of EM equities from their 2018 weakness, with the technology and healthcare sectors particularly attractive.

The commodities markets should stay robust – so long as the bank’s moderate forecast for interest rates persists. In fixed income, core government bond yields are set to rise moderately, while corporate credit spreads will widen.

In non-US dollar markets, EM hard and local currency bonds are likely to outperform other segments, while in currency markets, investors could generate excess returns by taking positions in selected EM currencies, Credit Suisse said.

Growth in China could weaken in 2019 as high real estate-related debt constrains consumer spending. Meanwhile, South America’s two largest economies – Brazil and Argentina – will likely remain weak in 2019 after a tumultuous year. However, with Brazil’s new government and Argentina’s IMF bailout, both countries have begun to address some deep-seated economic and fiscal weaknesses, the report added.

In the Middle East, the currency crisis in Turkey raised inflation and undermined business confidence, but a recovery should follow stabilisation measures in 2019, according to Credit Suisse. Higher oil prices support Middle Eastern energy exporters, but Iran is in economic crisis, in part due to renewed US sanctions.

Globally, unexpected political developments had a considerable impact on financial markets in 2018 and could also move them in 2019. “Nevertheless, the economic cycle will be the predominant driver of markets," the report said.