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Outlook for 2009: Invest in Several Asset Classes and Diversify Risk


Supplement portfolio with selected equity, gold and inflation-indexed bonds in order to weather future economic trends
Zurich.-According to economists at Credit Suisse, the global business environment in 2009 will again be characterized by serious economic concerns. Global economic growth is likely to be only modest, with emerging markets as the sole drivers. The state of the G3 economies - the US, Europe and Japan - will not improve until the second half of next year, according to Credit Suisse forecasts. In the past year, global stock markets posted their worst performance since 1932. Prices have fallen to attractive levels, although a certain degree of uncertainty remains. With a view to 2009, the Credit Suisse experts advise spreading risk across several asset classes that have little correlation to each other. Safe investments, such as bonds of borrowers with a state guarantee and good credit ratings, remain attractive. For shares and corporate bonds, investors can exploit existing upside potential by selectively buying stocks in defensive sectors and shares of companies with good sales prospects in emerging markets. For investors with a long-term horizon, investments that retain their purchasing power such as gold or inflation-protected bonds offer attractive entry options. As far as currencies are concerned, hedging of the US dollar - for which experts were forecasting devaluation - is likely to be decisive.

The business environment in 2009 is once again likely to be characterized by serious economic concerns, according to Credit Suisse economists. The economic data is still declining, 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. A slight rally is likely only later in the year.

Investors should continue to expect a low-interest environment in 2009. 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 USD 8 bn 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.

Currencies: Hedging of the Dollar Will Be Crucial
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-ŕ-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.

Commodities: Gold Has the Best Prospects
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.

Real Estate: Economic Outlook Impacts Total Returns
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.

Equity Markets: Shored Up by Attractive Valuations Despite High Volatility Continuing in the Near Term
As for stocks, 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. Credit Suisse analysts predict that investors will return to the stock markets only gradually in 2009, despite attractive valuations. 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. 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 recommend 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. Here, the equity strategists are focusing on deep value stocks, i.e. shares with a high intrinsic value, high cash flows and solid balance sheets, and in the ideal case exposure to emerging markets. These include stocks in the following sectors: healthcare, non-cyclical consumer goods with exposure in the mass market, and utilities. In addition to markets with a defensive profile, such as Switzerland, Credit Suisse also recommends overweighting markets with specific drivers. Chinese stocks listed in Hong Kong should benefit in 2009 from China’s monetary expansion and stimulation program, particularly in the infrastructure segment.

Bonds: Focus on New Issues from Borrowers with Solid Credit Ratings
Owing to high refinancing requirements, issuing activity in the bond markets is expected to rise significantly in 2009 in both the public and the corporate sectors. Investors’ limited risk tolerance and the demand for safe investments should continue favoring borrowers with high credit ratings. Experts at Credit Suisse recommend bonds of near-government borrowers and selected bank bonds with a state guarantee which - given a similar credit rating - offer a yield premium over government bonds. Newly issued corporate bonds can be expected to exhibit such premiums, making them an attractive entry option for investors looking for borrowers with solid credit ratings. They should also contribute to boosting the returns in a diversified bond portfolio. The experts recommend bonds of companies that operate in defensive sectors such as utilities, food and beverage manufacturers, and the pharmaceutical industry. The specialists are skeptical about bonds with a low credit rating as these remain susceptible to high default rates. With generally low interest rates and high maturity premiums, the analysts favor bonds with average maturities and an attractive risk/return profile. For investors with a long-term horizon, inflation-protected bonds - which in the US are particularly conspicuous on account of their high real returns - offer an attractive opportunity to diversify. Although a possible temporary underperformance is expected due to falling inflation rates, these bonds could once again feature among the better performers in the longer term. A number of countries are currently embarking on a highly expansionary fiscal policy, which will greatly increase public debt and will push up interest rates in the longer term.


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