Investments in March: Our forecast in brief
Credit Suisse gives its perspective on economic and financial market developments over the short to medium term and looks at the implications for investors. The end of the pandemic is barely in sight, and new clouds are already appearing over the financial landscape. Given the current geopolitical unrest, market volatility will remain high for the time being.
Risk of a new market correction continues to loom
Equity markets had partially recovered from their January setback. However, the conflict between Russia and Ukraine has recently been causing renewed volatility, and further corrections are to be expected. Central banks could also deliver some negative surprises at any time in light of the extremely uncertain outlook on inflation that persists. For these reasons, Credit Suisse is leaving its equity allocation neutral. Our underweighting of government bonds will also remain in place. To compensate for that, it is advisable for investors to hold more liquidity so they can quickly take advantage of opportunities to snap up equities.
Economy: Swiss consumers not worried about inflation
The economic impact of the waves of infection caused by the Omicron variant of COVID-19 is rapidly subsiding in industrialized nations. The economic recovery is not expected to be slowed down significantly by the considerable increase in energy costs that has recently taken place. After all, households have above-average financial reserves.
By contrast, consumer sentiment in Switzerland weakened in January. First, the outlook for the overall economy is being viewed as less rosy. Second, households are seeing prices rise, and they are holding off on major purchases. There is a positive aspect to the latter because it means the all-clear can be sounded when it comes to the risks of inflation. If households did actually expect inflation to spiral out of control, they would be spending as much money as possible right now in order to take advantage of prices while they are still low.
Interest rates and bonds: Fed and ECB react to inflation risk
Inflation was again higher than expected in January in the US and the euro zone. Under these conditions, central banks are expected to respond more forcefully. Specifically, Credit Suisse anticipates that the US Federal Reserve (Fed) will raise its key interest rate this year by a total of 175 basis points (bp), with the first rate hike of 50 bp likely to occur in March. The European Central Bank (ECB) will probably raise its key interest rate by 25 bp for the first time in December 2022, followed by a further three 25 bp increases in 2023.
Currencies: EUR/CHF in narrow trading range
The differences in interest rates between government bonds in Switzerland and the euro zone remain small. That ought to limit extreme price fluctuations in the respective currency pairs. Inflation in the euro zone is significantly higher than in Switzerland, suggesting that the European Central Bank will raise its key interest rate sooner than its Swiss counterpart. That rate hike is expected towards the end of the year. However, geopolitical and pandemic-related risks could weaken the euro versus the Swiss franc in the near term.
Equities: Neutral assessment of Swiss equities
The reporting season in Switzerland is in full swing and nearly half of the companies in the MSCI Switzerland have reported their profits for the fourth quarter of 2021. Switzerland continues to lag behind its European competitors in terms of profit growth. Earnings prospects also remain somewhat weak relative to global equities. This is in contrast to relatively attractive valuations, which is why Credit Suisse is standing by its neutral assessment of Swiss equities versus the global market.
Commodities: Focus on geopolitical risks
The volatility on commodity markets remains high considering the geopolitical tensions and low inventories in most sectors. Oil and gas prices are proving to be especially volatile, with geopolitical risks having an impact on both sectors. That is putting pressure on the risk-reward profile of commodity investments. Nevertheless, exposure to commodities is still important as a hedge against inflation. Recently, gold has been benefiting from the flight to safe havens, with US monetary policy posing a medium-term – albeit ever-increasing – risk.
Real estate: Rental apartment construction trailing behind demand
Since 2016, the annual volume of rental apartments approved for construction has fallen by 17.7%. Actual construction activity is likely to have recently declined even further than building permits suggest, however. As a result of the coronavirus restrictions, construction site productivity has partially sunk, and a wide variety of building materials were (and still are) difficult to procure. The decreased building activity has been reflected in lower vacancy rates over the past year, the first such drop in 12 years.