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. Many factors indicate that the second wave of the coronavirus will have less of a negative impact on the economy than the first. For that reason, we are leaving our overall equity allocation unchanged, but we are adding more cyclical securities to the mix.
Cyclical orientation becoming heavier
On the markets, the hopes of a new stimulus package in the US outweigh concerns about virus mutations. We are also expecting this to drive the recovery along with the vaccination campaigns, and cyclical equities are mainly the ones likely to benefit. Credit Suisse is therefore now increasing its holdings in UK securities and financial services companies, in addition to German and emerging market equities, to an overweighted position. However, a further rise in case numbers remains a risk. So, we are leaving our overall equity allocation unchanged. We are eliminating our overweighting in investment-grade bonds following their strong performance.
The economy: Recovery in Switzerland being delayed
The US and Europe remain intractably mired in the second wave of the pandemic while more infectious mutations of the virus are cause for concern. In response, governments are persisting in efforts at containment or tightening the measures. At the same time, the collateral economic impact of the measures is less severe, and there is hope that things will get better thanks to vaccines. We assume that the economy in the West will pull itself up by its bootstraps over the course of the year, and the recovery could even have the potential to be extremely dynamic for brief periods.
In Switzerland, the federal government has imposed stricter measures once again in light of the second wave of the pandemic. Nevertheless, we are standing by our forecasts, which predict that the economic damage will be far less serious than that caused by the first wave and the Swiss economy will rebound overall during the course of this year. Thanks to the vaccine, the end of the pandemic is in sight, and the economy has learned how to deal with the restrictions. On top of that, previously deferred purchases ought to soften the blow of the latest restrictions on the heavily hit non-food retail sector.
Interest rates: Switzerland is a currency manipulator in the eyes of the US government
The US Treasury Department recently called Switzerland a "currency manipulator." There is hardly any risk of immediate sanctions, but, by the same token, there is little likelihood that the US will not demand action. The quickest way to be taken off the list would be for the Swiss National Bank (SNB) to significantly limit its intervention in foreign exchange markets. That should be possible if the demand for safe havens, like the Swiss franc, begins to wane as a result of the expected global economic recovery. A further interest rate cut to weaken the Swiss franc is highly unlikely.
Currencies: Euro and Swiss franc in tight trading range
During the first COVID-19 pandemic wave last March, the Swiss franc was under pressure to appreciate against the euro, as is often the case in times of crisis. However, the SNB managed to limit the appreciation through decisive foreign exchange purchases. Since then, the Swiss franc has again lost a little ground against the euro, and the volatility of the EUR-CHF exchange rate has recently been low. We expect the EUR-CHF exchange rate to continue moving in a narrow trading range, while the Swiss franc should continue appreciating against the US dollar.
Equities: Cyclical securities offer opportunities
Where equities are concerned, we see potential in those market segments that were clearly left behind last year. They include UK equities and financials. Both segments have attractive valuations. UK equities ought to benefit from less political uncertainty and from a boost in cyclical commodities thanks to the Brexit deal. Financials could be propped up by an improved economic outlook as well as a somewhat steeper yield curve.
Commodities: Prices ticking upward
The prices for most commodities have recently benefited from a rosier economic outlook. The uptick in prices seems a little premature to us. Nevertheless, we assume the environment for commodities will remain favorable overall. That will probably allow more cyclical segments like oil to perform slightly better than more defensive ones such as gold. However, we do see room for rising inflation expectations, which could prove beneficial to precious metals in particular.
Real estate: Sharp decline in planning applications for rental apartments
The negative interest rate environment has allowed significant capital to flow into the Swiss real estate market, triggering a rental apartment construction boom. The result has been excess supply and, with it, rising vacancies outside of downtown areas. Planning applications in 2020 fell 18 percent as a result. For that reason, slightly fewer apartments are expected to be completed in the next two years. However, we expect vacancies will increase this year as well and that there will continue to be downward pressure on rents.