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Investing in February: 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. Strong growth should support equity markets in the coming months, not least because the interest rates will initially rise only slightly.

Due to the strong global economic growth, we continue to recommend overweighting equities, particularly those from the euro zone and Japan. We are neutralizing our overweight in Switzerland and Australia, as well as our underweight in the UK. At the sector level, we are neutralizing our negative assessment of consumer discretionary equities and continue to favor industrials, healthcare, telecommunications and energy equities.

Overall, we are neutral on bonds with a recommendation for investment-grade corporate bonds, bonds issued by financial institutions, emerging market (EM) local currency bonds, and now also convertible bonds and inflation-linked bonds. In alternative investments, we have downgraded hedge funds to neutral and are focusing on (Swiss) real estate.

Economic Situation: Robust World Economy at the Start of the Year

The global economy is in excellent shape at the start of the new year. The latest business surveys show a further increase in economic activity, increasingly driven by corporate investments. In addition, the good employment situation in many countries supports private consumption. At the same time, core inflation remains relatively low and should increase only slightly during the year.

global-economy-growing-strongly

Continued strong growth expected

Source: Credit Suisse

Interest Rates: New Round on the Road to Normalization

The US Federal Reserve and the central banks of Canada and the United Kingdom are likely to raise rates this year. No interest rate increases are yet to be expected from the European Central Bank (ECB) and the Swiss National Bank (SNB).

However, the ECB is reducing the scope of its bond purchases and the SNB has stopped its foreign-exchange interventions. Both are "testing" the markets by giving signal of a faster monetary tightening. Accordingly, surprises are entirely possible.

central-bank-gradually-increasing-interest

Central banks have started to raise interest

Source: Datastream, Credit Suisse

Currencies in Switzerland: Temporary Break in the Rise of EUR/CHF

After the latest increase of EUR/CHF to our three-month forecast of 1.18, the tailwind could weaken somewhat in the short term. The euro now appears approximately neutral in accordance with our expanded purchasing power parity model.

Furthermore, risk appetite will likely weaken in the run-up to the Italian parliamentary elections in March. Economic activity in the euro area remains strong, however, and the ECB may adjust its monetary policy earlier than currently expected. We would therefore see any potential euro weakness more as a buying opportunity.

development-of-euro-franc

EUR/CHF no longer clearly overvalued

Source: Bloomberg, Credit Suisse

Swiss Equities: Further Upside Potential, But No Outperformance

At the start of this year, the SMI has exceeded the high of 2007, thereby reaching a new all-time high. In the current equity environment, we also see further upside potential for Swiss equities. In particular, the cyclical sectors should benefit from the upswing in Switzerland, the euro zone, and the emerging markets.

Since we now only see limited potential for further devaluation of the franc, however, we consider it rather unlikely that our rather defensive market will be more profitable than global equities.

development-of-equities-and-franc

The franc drives the relative performance of Swiss equities

Source: Thomson Reuters, Credit Suisse

Commodities: Prices and Expectations Continue to Rise

Commodity prices showed further gains in the fourth quarter and had a positive start to the new year. Energy and metals prices increased the most. While the economic environment remains supportive, we expect a consolidation.

The implicit price expectations have become very high, and the increase in prices could trigger a supply response. We currently do not have a sector preference within the commodity market and maintain a neutral view.

development-of-commodity-prices

Commodity prices have risen since mid-2017

Source: Bloomberg, Credit Suisse. *Bloomberg Commodity Index

Real Estate: Mortgage Interest Rates Likely to Remain Low in 2018 as Well

Mortgage interest rates have barely changed since the spring of 2017. The interest rates for Fix mortgages up to five years and of LIBOR Mortgages are likely to trend sideways in 2018 as well, as an interest rate increase by the SNB is highly unlikely.

In contrast, the interest rates for Fix mortgages with long terms should increase slightly over the next twelve months. We expect an increase from 15 to 40 bps. As last year, however, upward and downward spikes for all maturities cannot be excluded.

development-of-mortgage-rates

Slight increase in long-term mortgage rates expected

Source: Credit Suisse