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. The industrial sector can relax a little as it looks toward the future. Commodity investments are also looking attractive.
Equity portfolios should maintain their cyclical orientation
We see attractive return potential when it comes to equities. However, certain equity markets, especially in the US, could suffer temporary setbacks in the short term. In view of that, our Investment Committee has reduced its equity weighting to a strategic level.
Our specific recommendation is for investors to take the profits from US equities and reduce their weighting in their portfolios. At the same time, the Investment Committee is maintaining its confidence in the cyclical orientation of portfolios by advising investors to overweight commodities. We are expecting a recovery in industrial production, and those stocks should benefit from that.
Economy: Swiss economic growth remains modest
Global economic growth is expected to remain modest once more this year. However, we are not seeing any risk of recession in the major economies. On the contrary, given a certain easing of tensions in the trade conflict, greater clarity regarding Brexit, and central banks' expansionary policy, the business climate has recently stabilized. Consequently, worldwide industrial production ought to pick up again following a year-long slump.
Swiss economic growth is expected to be 1.4% in 2020, higher than in 2019. However, the acceleration due to the Summer Olympic Games and the European Football Championship is being exaggerated by roughly 0.3 percentage points. That is because the royalties paid to the IOC and UEFA will be counted towards Switzerland's economic output even though the events will be taking place outside the country. Nevertheless, industrial output ought to stabilize.
Interest rates: SNB to keep interest rates negative a while longer
The US Federal Reserve (Fed) and European Central Bank (ECB) lowered their prime rates last year, loosening monetary policy. Although the Swiss National Bank (SNB) chose not to cut interest rates, it opened the door to that option a little wider. Furthermore, it intervened in the foreign exchange market as needed to mitigate the effects of overvaluation of the Swiss franc against the euro. The Fed and ECB are expected to hold off at the start of this year. That makes it highly likely that the SNB will also leave its prime rate at its current – negative – level.
Currencies: appreciation of the US dollar stopped
Stabilization of the global economy could limit future gains in the US dollar following its rise in value over a basket of six currencies (USD Index) over the past two years. The euro in particular should benefit from a recovery in industrial production and the resulting stronger economic environment. The argument of the positive interest rate differential for the US dollar remains nonetheless intact. For that reason, we predict a sideways movement against both the euro and the Swiss franc.
Equities: Energy sector offers attractive opportunities
Cyclical markets have not been favored by investors for a long time, but that could change now that the economic environment is more stable. We have therefore adjusted our equity allocation and are being more cautious for the time being in our assessment of the defensive markets of Switzerland and the US. We now see potential in UK and German equities or in the energy sector. The latter not only has an attractive valuation, but it also offers a dividend yield around 4.5%.
Commodities: a boost from the economy
Commodities ended 2019 in positive territory, and the nascent economic recovery ought to provide additional momentum, at least over the short term. Further production cuts on the part of OPEC and its allies will help to dispel previous concerns about oversupply on the oil market. However, a flare-up in geopolitical risks is leading to increased volatility. Gold still offers benefits of diversification in the continuing low interest rate environment.
Real estate: mortgage interest rates expected to remain low in 2020
Without inflationary pressure, the SNB can continue to make developments in the Swiss franc the focus of its monetary policy. We are not expecting the prime rate to rise in the next 12 months, which means interest rates for LIBOR mortgages will remain at their persistently low levels. As for Fix mortgages, we do expect to see a slight increase of 0.1 to 0.3 percentage points on medium and long-term maturities. However, this development is likely to be accompanied – as before – by upward and downward fluctuations.