Credit Suisse Urges Diversification Of Assets In 2009

by Ulrika Lomas, Tax-News.com, Brussels

15 January 2009

A new report by Credit Suisse on the outlook for the business environment in 2009 has suggested investment in several asset classes to reduce exposure to risk. However, the report warns that 2009 is once again likely to be characterized by serious economic concerns.

According to economists at Credit Suisse, economic data is still worsening, and some of the key indicators, such as the German IFO business climate index, are stuck at historically low levels. Recessionary trends seem set to shape the next few months in many industrialized countries. Credit Suisse believe a slight rally is likely only later in the year.

According to the report by Credit Suisse, investors should continue to expect a low-interest environment in 2009. The bank noted:

“By stepping up its measures to secure liquidity, the US Federal Reserve has taken a quantitative approach to loosening monetary policy that goes beyond merely cutting interest rates. The Fed and the US Administration have approved a package worth more than USD800bn to overcome the crisis. Parts of these measures involve the US Federal Reserve financing the purchase of securitized debt – including credit card debt – and buying mortgage-backed securities in order to reduce the financing costs. Further government action to crank up the economy is expected in 2009. Owing to their increased influence on global economic growth, government-sponsored stimulation programs in emerging markets will be the focus of the financial market's attention. Credit Suisse economists predict global growth to be driven wholly by emerging markets next year.”

According to the economists, the hedging of currencies to the dollar will be crucial to maintain value.

“Despite the pronounced deterioration of America's economic data and very low US interest rates, the dollar strongly appreciated since July 2008. Credit Suisse analysts attribute this to extraordinary capital flows in particular. Currency discrepancies at European banks as a result of high writedowns, deleveraging, capital repatriation to the US and less diversification of emerging markets' reserves of other reserve currencies are allowing the greenback to gain ground. The launching of a comprehensive package to stimulate the economy by the new US government or problems related to the refinancing of emerging market debt could prolong the US dollar's rally vis-à-vis European currencies. However, as US growth is likely to remain very weak and interest rates in the US will probably stay below those of other countries, the Credit Suisse currency specialists expect the dollar to depreciate in 2009, especially since current account and budget deficits will keep the financing requirements high. The euro is also likely to depreciate against the Swiss franc, particularly once the European Central Bank has implemented the interest rate cuts which are still outstanding.”

Credit Suisse anticipates gold to be the best store of wealth during 2009. The report states:

“Commodities are cyclical investments, so they are reacting sensitively to the weak growth outlook for next year. Only if the economy bottoms out will cautious advances on the commodity market be possible, although the Credit Suisse analysts do not believe that the historic peaks will be matched in the coming year. The gold price trend may be an exception. On the one hand, the expected depreciation of the dollar should take pressure off the price of gold, while on the other, the more relaxed monetary and fiscal policies mean that there is potential for renewed inflation fears. Low interest rates also lower the opportunity costs for holding gold. Thanks to its status as a safe haven, gold is likely to perform better than other investment classes in a scenario of persistent depression and deflation.”

Credit Suisse has however urged caution in investing into real estate during 2009, stating that the credit crisis and the beleaguered economy will probably drag down the returns on real estate investments again at a global level. Credit Suisse analysts are therefore recommending that investors continue to concentrate on defensive core real estate positions in 2009. In addition to cyclically induced risks, the specialists have also identified the possibility of less expensive investments with considerable upside potential – referred to as "deep value" – thanks to the pronounced correction of capital stock in certain regions. Selected investment themes such as sustainability, infrastructure and polarization in emerging markets also offer very promising investment opportunities, the bank noted.

Credit Suisse analysts predict that investors will return to the stock markets only gradually in 2009, despite attractive valuations: 2008 was the worst and most volatile year since 1932. Most of the losses arose in the last four months, when problems in the money and capital markets spilled over into other investment categories and the real economy – with dramatic consequences. As a result of the poor performance, valuations on global equity markets plummeted, reaching their lowest levels for 20 years. In order for this to happen, fears about the duration and scale of the current recession as well as the trend in corporate profits will first have to be allayed, the bank cautioned. Stock markets are therefore likely to remain volatile in the months ahead. Investors' risk appetite will probably only increase when they recognize signs of a sustainable stabilization, either in the form of better economic figures or if earnings estimates are revised upward. The analysts at Credit Suisse have therefore recommend the cautious purchase of defensive stocks which are capable of withstanding a prolonged recession but which should also turn in a positive performance in the event of a recovery.

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