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Investing in February: Our forecast in brief

Credit Suisse's perspective on economic and financial market trends over the short to medium term and their implications for investors. A combination of equities from the energy, financial, IT and healthcare sectors is a promising approach.

Upbeat forecast for global equities

A slowdown in global economic activity is expected in 2019. Recession fears – a major cause of December's market correction – are nevertheless unfounded. We therefore retain our positive view on global equities, which we continue to overweight.

We are also moving to a neutral stance on global bond markets, where we continue to have a preference for emerging markets. Our expectations for commodity price trends are subdued due to the slowing momentum in industrial production. However, an increase in crude oil prices is likely – at least in the short haul – due to the likelihood of supply shortages.

Economy: Swiss exports are losing momentum

World economic growth has slowed recently, although we do not expect a recession. Fact is, central banks are continuing to support consumer spending and investment through persistently low interest rates, while China – as well as some European countries – is increasing expenditure or reducing taxes.

Switzerland earns over half of its income abroad and is therefore unable to escape the global slowdown in growth. The Credit Suisse export barometer, which shows the demand for Swiss products on export markets, has recently fallen significantly: At 1 point, the barometer stands exactly in line with the long-term average. Exports as well as investments are therefore likely to grow at a less dynamic rate than in 2018.

export-barometer-shows-significant-fall

Export barometer has fallen significantly

Source: PMIPremium, FCA, Credit Suisse 

Long-term interest rates have fallen sharply 

In Switzerland and most other European countries, interest rates on government and other bonds have fallen again significantly in the last two months. Prices of long-term fixed-income securities have therefore returned to unattractively high levels.

If recession fears ease, and therefore the likelihood of central banks raising interest rates increases again, a setback can be expected for these investments. By contrast, emerging market bonds continue to offer attractive additional returns.

interest-rates-on-government-and-other-bonds-have-fallen

Interest rates on government bonds are back in negative territory 

Source: Bloomberg, Credit Suisse 

Currencies: Euro likely to make gains against the Swiss franc

The Swiss franc has not appreciated any further recently despite the many economic and political uncertainties, including Brexit, the situation in Italy and France, as well as the US government shutdown. Moreover, the franc is still overvalued against the euro.

Provided we see some easing of political risk and the scenario of a stabilization in global and European growth becomes a reality, the euro is likely to strengthen again. Our three-month forecast for the EUR/CHF exchange rate is 1.14.

currency-stabilization-on-financial-markets-would-strengthen-euro

Better economic data would give the euro a boost 

Source: Datastream, Credit Suisse 

Equities: High-dividend Swiss small and mid caps offer opportunities

The defensive characteristics of the Swiss heavyweights have once again been on display during the correction phase. At the same time, shares in some medium-sized companies have undergone considerable price corrections.

However, such companies are often very well positioned and over the years have learned to respond to challenges with speed and agility. Following the recent price setbacks, now is a good time to buy high-dividend small and mid-cap companies on a selective basis.

shares-in-small-and-mid-cap-companies-as-an-investment-alternative

High-dividend small and mid-cap companies as an investment alternative 

Source: Bloomberg, Credit Suisse 

Commodities: Outlook remains challenging

Whereas precious metals outperformed, cyclical commodities suffered a sharp drop at the end of 2018. Although the pressure seems to have faded recently, worries about growth have not yet been dispelled. In addition, the expected stabilization of growth will probably provide only minimal support to prices; accordingly, we have downgraded our view on commodities to neutral. We nevertheless remain positive on the price of oil, since the end-of-year correction seems overdone and the production cuts announced by OPEC should support prices.

weak-industrial-production-hitting-commodity-prices

Weak industrial production hitting commodity prices 

Source: Bloomberg, Credit Suisse 

Real estate: Mortgage interest rates to remain low in 2019

The LIBOR interest rate will remain in negative territory for now, even after a possible interest rate hike by the Swiss National Bank (SNB). Interest rates on LIBOR mortgages are therefore likely to persist at a record low. By contrast, medium and long-term Fix mortgage interest rates are likely to edge up by 30 to 50 basis points by year-end. Interest rates are nevertheless expected to remain volatile, thus offering further, attractive buying opportunities.

mortgage-interest-rates-remain-at-low-levels

Mortgage interest rates remain at low levels 

Source: Credit Suisse