The bank argues that investors would be ill advised to exit markets now because the pain of a transition to a more conventional interest rate environment will be relatively short. Even well diversified portfolios have taken a hit. However, investors should not lose faith, it says.
Central banks are pushing up interest rates urgently, spooking equity and bond markets, but this also suggests that the pain being inflicted will last shorter than could otherwise be the case, according to Credit Suisse.
Last week a number of central banks (US Federal Reserve, Swiss National Bank and Bank of England) raised rates as inflation numbers remained elevated at levels not seen for decades. Equities fell, adding to the pain endured this year. The MSCI World Index of developed countries’ indices is down 22.43 per cent this year (in dollars, measuring total returns).
“It is very easy to throw in the towel when market turbulences and perceived risks reach new peaks. Yet, I firmly believe that the situation is not as bleak as the market currently prices. One of our fundamental investment principles is that 'time in the market beats timing the markets.’ This, in my opinion, applies to the here and now,” Michael Strobaek, global chief investment officer, Credit Suisse, said in a note late last week. The article was entitled The Great Transition, Accelerated.
“For now, investors should continue to keep diversifying portfolios as broadly as they can, for instance by including alternative investments, which have fared much better this year than stocks and bonds. Staying active, for example, by selling volatility into uncertainty spikes like the current one, is also a strategy to generate yield in the current environment."
Strobaek, said the Zurich-listed bank recently closed its longstanding underweight stance in government bonds because higher yield levels are starting to compensate for elevated uncertainty. For instance, Strobaek said the yield on emerging market hard currency government bonds now exceeds 8 per cent.
In equities, the bank is remaining overweight of the asset class despite the current turbulence because Credit Suisse thinks markets will eventually rebound. Credit Suisse went overweight of equities in mid-March and split it between developed and emerging markets. Credit Suisse expresses its emerging market overweight view by being overweight in Chinese equities, whose positive momentum is accelerating.
“Investors do need to accept the market turbulence as we are in the midst of the interest rate reset. I believe it would be wrong to leave markets at this stage,” Strobaek continued. “Financial markets are forward looking and after the volatility of the last few days and weeks, they are pricing in an aggressive central bank rate hiking path already.
“Peak hawkishness, i.e. the peak in expectations repricing, might be close. Once we are there, it is not only possible but likely that we will see a rebound in both equities and bonds. However, this rebound will be very difficult to time. Beyond the immediate volatility, the accelerated great transition means that the painful reset of interest rates will probably be short,” he added.