Outlook for second half of 2018: upside potential for equities
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Outlook for second half of 2018: upside potential for equities

Global growth momentum is set to increase, creating upside potential for equity markets. However, continued political and policy risks create a need for diversification and active management.

Both sides of the Atlantic will continue to support solid consumer spending and business investment – even as monetary policy becomes less accommodative. In addition, they see the development of leading growth indicators such as the global manufacturing PMI (purchasing managers indices) as a sign that economic activity has stabilized. With a rebound in the US and China, the global economy remains on track for a reacceleration, with much of the new momentum expected from Europe, where growth slowed in the first half of the year.

Growth to boost earnings

After an exceptionally challenging first half for financial markets and investors, Credit Suisse believes that global equity markets have upside potential in the second half of the year. Strong economic growth is expected to boost earnings, while trade frictions are likely to have microeconomic rather than macroeconomic implications.

With its House View Credit Suisse continues to favor equities over fixed income but recommends active equity investment strategies to limit exposure in the event of renewed volatility spikes.

Credit Suisse's regional equity focus is on emerging markets, UK equities and now also on Swiss equities. Its sector preferences include energy, technology and financials.

Equity valuations: Better value post correction

Equity valuations: Better value post correction

MSCI AC World 12 months forward P/E

Source: Datastream, Credit Suisse/IDC

Last data point: May 23, 2018

Credit Suisse expects bond yields in most developed markets to rise moderately. However, in EUR and CHF in particular, even moderate yield increases could lead to performance losses on government bonds. Credit Suisse is therefore focusing on convertibles and emerging markets bonds in both hard and local currencies that offer the best risk rewards following the recent correction.

Commodities provide diversification

Commodities provide diversification while benefiting from growth – like equities. Industrial metals are the most preferred commodities, while precious metals could be challenged by higher yields. Spot oil prices are forecast, per barrel, at USD 65 for WTI and USD 70 for Brent in 12 months.

The tightening of the monetary reins by the US Fed is now fully priced, whereas the ECB is not expected to raise interest rates before 2020 according to market expectations. Credit Suisse forecasts that the first interest rate hikes will occur in September 2019, however, and therefore sees more upside than downside in EUR/USD.