Investing in July: Our forecast in brief
Credit Suisse gives its perspective on economic and financial market developments over the short to medium term and looks at the implications for investors. The financial markets are pointing to economic recovery. Global GDP growth is expected to reach 5.9% this year. In Switzerland, private consumption is likely to return to normal by early fall for many sectors.
Profit-taking from overweighted commodities
Credit Suisse is no longer overweighting commodities following a strong performance. While prices could still increase somewhat as the global economy improves, greater supply, lower demand from China, and the shift from an industrial to a service sector recovery indicate that the inflection point is near. In the case of equities, the risk of corrections remains high. As a result, we do not currently recommend overweighting. With a preference for German, Spanish, or British equities and the underweighting of government bonds, however, Credit Suisse still has a cyclical alignment in its portfolios.
Economy: Swiss economic recovery is booming
The global economy continues to recover from the coronavirus pandemic. Credit Suisse anticipates growth in the global gross domestic product (GDP) of 5.9%. Inflation has also picked up the pace, and US core inflation is at its highest in nearly 30 years. High demand in the recovery phase and supply shortages mean price pressure. Meanwhile, the price comparison with the lockdown months of 2020 is exacerbating inflation momentum. Accordingly, inflation rates are likely to drop somewhat towards the end of the year.
Now that much of the economy has reopened, recovery is essentially automatic; especially as most households set aside a savings surplus during the second COVID wave that they are now spending by and large. In specific terms, private consumption looks set to get back to normal by early fall but for some exceptions, such as the event industry or some hospitality segments. Industry is taking longer to recover. Overall, GDP is likely to grow by 3.5% this year.
Interest rates and bonds: The Fed is tolerating higher inflation for now
High inflation in the US is stoking fears about runaway inflationary pressure. That said, the Fed is not likely to raise the prime rate until at least the end of 2022. This is because it is willing to accept a temporary excess in inflation. In fact, inflation rates are expected to drop again this year, but price growth will likely remain above average. This is why the Fed is likely to at least start reducing its bond purchases around year-end.
Currencies: Limited potential for the euro to appreciate vs. the Swiss franc
While the Swiss franc is moving sideways vs. the US dollar, it recently appreciated slightly vs. the euro. However, we still expect the franc to lose some value vs. the euro by year-end. Safe haven currencies are likely to be less popular than they were during the 2020 crisis, and the European economic recovery is gaining momentum. The minor interest rate difference between the Swiss franc and euro, as well as the risk of renewed political uncertainties, are currently keeping the euro's appreciation potential limited.
Equities: Swiss equities at record levels
The Swiss equity market is trading at record levels. Stocks from the pharmaceuticals industry have spiked recently after the cyclical stocks had driven the market at the start of the year. Given the pending global economic momentum, in general Credit Suisse prefers cyclical and attractively priced market segments. These include financials and basic materials, but also British, German, and Spanish stocks. Small caps also have potential.
Commodities: Profit-taking from commodities segment
The rise in commodity prices has continued. We expect that price growth will start to dwindle and setbacks are more likely. As a result, Credit Suisse will take profits in this investment segment. Economic growth will rely less heavily on commodities, while production gradually responds to the higher prices. Only the oil market is expected to remain firm over the summer months, thanks to the price-supportive production strategy of the Organization of Petroleum Exporting Countries (OPEC).
Real estate: Lower prices in advertised rental apartments
Advertised rents in Switzerland have declined significantly, dropping 2.4% in the first quarter. At the same time, the rental price index, which reflects the price trends in the general housing stock, was up by a mere 0.4%. This is likely due to the economic uncertainty that many households perceive. Given the pending recovery, robust immigration, and normalization of construction activity, we could expect rents to stabilize this year.