Investing in December: Our Forecast in Brief
Credit Suisse's perspective on economic and financial market developments over the short to medium term and their implications for investors. Owing to economic growth and companies' earnings situation, we are raising global equities to overweight. With alternative investments, we now recommend being overweight in Swiss real estate, as this is benefiting from the positive economic environment.
Since the low point in March 2009, the US S&P 500 Index has almost quadrupled in value. The performance of the European equity markets and of the Swiss equity market was not quite as strong, but these too have rallied vigorously. Of course, it is impossible to say with certainty whether the upward trend will continue. But a look at the main drivers of share prices at least gives reason for cautious optimism.
First, as long as the world economy is expanding – and this seems highly likely to us – equity markets tend to rise. Second, as long as profit margins hold on the back of rising sales, share prices will be supported. Lower wage pressure and other cost pressures are indicative of this.
Overweight Equities despite Higher Valuations
Third, as long as central banks do not apply the brakes sharply and have to raise interest rates rapidly – moderate inflation is allowing them time – there will be limited headwind for equities. Fourth, as long as investor sentiment is good but not euphoric, which is what the indicators show, the risk of more major setbacks is limited.
However, most equity valuation measures are at high levels, which restricts the potential for price gains in the medium term.
Global Economy on Course for Strong End to the Year
The global economy is still in extremely robust shape. In the US, there is effectively full employment, and the economy is likely to receive further stimulus from an implementation of tax reform plans. Eurozone growth remains strong and should continue at a high level in 2018 too.
Growth in Switzerland Accelerating
The recovery in Swiss industry is continuing. In October, the Purchasing Managers' Index, which we compile in collaboration with procure.ch and which measures economic sentiment in industry, was at its highest level since the short burst of recovery in 2011.
Overflowing order books and virtually unchanged stocks of finished products despite booming production point to a continuation of the positive trend. Even headcounts went up in October, albeit still at a rather subdued pace.
Interest Rates: Further Base Rate Hikes in the US
In the US, we expect to see four base rate hikes of 0.25 percentage points each up to the end of 2018. This would take the Fed's base rate up to over two percent. In the eurozone, the European Central Bank (ECB) is likely to continue buying bonds until September 2018.
A few months later, probably at the start of 2019, a rate hike in the eurozone is also to be expected. The Swiss National Bank (SNB) will only raise its base rate before the ECB if the Swiss franc trades significantly above EUR/CHF 1.20 and inflation increases appreciably.
Currencies: US Dollar Could Rise above Parity against the Swiss Franc
If the positive mood in the financial markets continues, the US dollar should be able to appreciate somewhat against the Swiss franc. Further increases in US interest rates would also weigh on the Swiss franc, not least because the SNB will probably delay longer before raising the interest rate.
If the US makes rapid progress with its tax reform and the US economic outlook continues to brighten, the US dollar will probably rise above parity against the Swiss franc in the medium term. However, against the euro, the US dollar will fall in the medium term in our view.
Global Equities: Further Upside Potential
Despite quite high valuations – not least following the latest correction – we see further upside potential in equities. The main drivers are the acceleration in global economic growth and continuing strong earnings prospects, which were confirmed in the most recent reporting season.
Regionally, we continue to prefer cyclical markets such as the eurozone and Japan. We have aligned our sector strategy more closely with the economic upturn, by adding industrial stocks to our preferred sectors alongside healthcare, energy, and telecommunication services.
Commodities: OPEC Meeting in Focus
Commodities have carried the tailwind into the fourth quarter. But expectations for oil now seem overly optimistic. What is especially uncertain is whether the quantities extracted have really fallen, which is why we are maintaining a neutral view.
The OPEC meeting on November 30 is the next event risk, as the market is expecting a further extension of production cuts next year. We continue to see precious metals as vulnerable because demand from processors currently offers little support if US real interest rates rise somewhat, as expected.
Real Estate: Indirect Real Estate Investments Trailing behind Equities in 2017
In 2016, indirect Swiss real estate investments achieved an excess return compared to domestic equities (SPI) and the international real estate index FTSE EPRA/NAREIT.
However, in 2017, Swiss real estate securities (equities: +7.5 percent, funds: +3.1 percent) have performed significantly more weakly than the SPI (+18.6 percent) or the FTSE EPRA/NAREIT (+10.3 percent). Swiss real estate investments continue to be supported by low interest rates, which ensure that the direct yields from funds (2.7 percent) and equities (3.8%) remain relatively attractive.