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Acceleration of growth during the second half of 2005

Global Economic and Financial Market Perspectives 2005The experts at Credit Suisse anticipate that investors are preparing for a favorable growth scenario in the first quarter. This should lead to a strengthening of the stock market and the US dollar, as well as to a weakening of bond prices. In the second quarter, growing concerns regarding inflation and anticipation of higher US prime rates could arise. For the long- term, investors should therefore shift their positions to low-risk segments within the respective asset classes. In the pharmaceutical sector, the analysts believe that new methods in cancer therapy could constitute the most important wave of innovation in the industry this decade.

Global economic growth has been slowing since spring 2004, reflecting higher oil prices, the fading stimulus from US tax cuts, a slight cooling of the overheated Chinese economy, and the initial effects of rising central bank interest rates in Anglo-Saxon countries. The latest data, however, indicate that this slowdown should give way to a re-acceleration during the second half of this year. Accordingly, the experts at Credit Suisse believe that investors are anticipating a favorable growth scenario for the first quarter.

Forex: US dollar not expected to dip below recent lows
In the currency sector, the analysts expect the US dollar to continue its rebound during the first quarter, as markets gradually price in more monetary tightening by the Federal Reserve. The target-range is around 1.25 against both the euro and the Swiss franc. In the second quarter, this rebound is likely to taper off and give way to a slightly weaker dollar, although this year, the greenback is not expected to sink below the lows (around 1.13 to the Swiss franc, 1.36 to the euro) seen a few weeks ago, for any sustained period of time.

Resolute interest rate hikes in the USA - Switzerland: No increase in interest rates until after the summer break
The Fed is likely to be more resolute this year than previously assumed in tightening interest rates. Particularly on a 12-month horizon, the extent of the interest rate hikes that the markets have already priced in is probably insufficient. Accordingly, the experts at Credit Suisse have raised their LIBOR forecast by roughly 30 basis points. As of year-end 2005, the US federal funds rate will likely reach a level of 4%.

Against the backdrop of a slowdown in economic growth in the first half of 2005, the Swiss National Bank (SNB) has signaled that its interest rate strategy is likely to be dominated by the need to avoid rapid appreciation of the Swiss franc relative to the euro. The SNB is likely to continue to pursue a cautious strategy until the beginning of 2006, but aim for a three-month LIBOR of roughly 1.3%. Swiss long-term investment rates are likely to disconnect slightly from the rise in US interest rates.

2005: a turning point for bonds?
At the beginning of 2005, the Credit Suisse experts forecast long-term yields to edge slightly upward. They expect the bond markets to focus more on the positive leading indicators than on the prevailing weaker economic data, such as GDP growth. Later, as the expected upturn draws closer, long-term yields are likely to increase decisively, although the high level of demand for fixed income papers relative to supply in the USA should ensure that they do not rise as much as those at the short end of the curve - in other words, the curve should continue to flatten. With central banks raising interest rates and spreads at tight levels, some overall underperformance of corporate bonds compared with government papers is likely in 2005.

Equity markets: moderate upside potential
As long as capital market yields do not rise too much and the Federal Reserve tightens interest rates at a moderate pace, the equity strategists at Credit Suisse see scope for the bull market to continue into the first quarter of 2005 and perhaps into the early second quarter as well. Europe and Japan offer the most upside potential. The stock markets are likely to peak in spring 2005, and a subsequent correction could extend into the third quarter.

The analysts recommend a series of themes within equity markets. One possibility is purchasing stocks with already good dividends that are expected to increase payout rates this year: for example, selected European insurers. Another is to overweight large caps against small caps, and growth against value stocks. In addition, they are suggesting several longer-term themes, notably those concentrating on potential Chinese global brand leaders of the future, and specialized themes such as alternative energies.

Pharma sector: new rays of hope thanks to promising cancer therapies
Although a cure for cancer is still distant on the horizon, the latest therapies have brought real progress. The pharmaceutical companies involved in these therapies should reap considerable rewards therefrom. The recent introduction of new cancer therapies could be the most important wave of innovation in the pharmaceutical industry this decade. However, in the opinion of the Credit Suisse experts, the market consensus remains cautious in forecasting sales in this sector. Historically, the financial markets have tended to underestimate the sales potential of innovative classes of medicines.