Investing in June: Selected cyclical market segments look interesting

Investing in June: 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 ongoing return to economic normality is cheering investors; however, there also some potential pitfalls for financial markets. As protection against heightened volatility, Credit Suisse is keeping its equity allocation neutral for now.

Cautious approach gives protection against rising volatility

Delivery bottlenecks and baseline effects are currently leading to higher inflation rates, causing investors to worry about an unexpectedly imminent tightening of monetary policy. Although Credit Suisse experts believe these factors are temporary and central banks are ignoring them, stretched equity valuations do increase the risk of corrections in some cases. Credit Suisse is therefore retaining its neutral equity allocation in order to protect portfolios from greater volatility in the near term. In order to nevertheless benefit from the recovery, government bonds are underweight and commodities overweight. At the same time, we favor cyclical equity markets such as Spain, Germany, and the UK.

The economy: Swiss industry enjoying a recovery boom

Measures to contain the spread of COVID-19 are being relaxed in most industrialized countries thanks to the progress being made on the vaccination front, with the result that consumer spending is bouncing back almost automatically. At the same time, industrial production continues to gain traction. The situation nevertheless appears mixed. What's more, economic indicators comparing the current situation with the position a year ago need to be interpreted with caution: Fact is, record figures are easily achieved given the severity of the downturn back then.

Due to the bounce back in the global economy as well as disproportionately strong demand for goods, the recovery in Swiss industry is proceeding so rapidly that shortages are occurring on a widespread basis – which is causing prices to rise. The Purchasing Managers Index (PMI) for manufacturing is likewise at a historically high level, as measured by the price trend and delivery times sub-components. At the same time, capacity expansion is proceeding at a sluggish pace – suggesting the corporate sector is somewhat skeptical about the durability of the boom.

New record for manufacturing PMI

Last data point: April 2021
Source:, Credit Suisse 

Interest rates and bonds: No reduction in bond purchases expected until 2022

The economic recovery is fueling expectations that central banks will reduce their bond purchases. In fact, the central banks of Canada (BoC), the UK (BoE), and Japan (BoJ) have already done so. However, this is of little significance in global terms given that the US Fed and the European Central Bank (ECB) are responsible for 80% of purchases. Indeed the latter ramped up its purchases recently and the Fed is likely to tolerate the currently higher rate of inflation. A substantial reduction in bond purchases – also known as tapering – is not expected until 2022, and interest-rate hikes even later.

Still no reduction in bond purchases by ECB or Fed

Last data point: April 2021, thereafter Credit Suisse forecasts
Source: Haver Analytics, Credit Suisse

Currencies: Limited potential for euro appreciation vs. Swiss franc

Last month saw the Swiss franc recoup some of its first-quarter losses against the euro. The franc is likely to weaken only slightly in overall terms between now and the end of the year. Demand for "safe havens" is less than it was in the crisis year of 2020; in addition, the euro is likely to be supported by Europe's economic recovery. With ECB monetary policy remaining very loose, coupled with the possibility of a flare-up in political uncertainty, the euro's potential to appreciate nevertheless remains fairly limited.

Swiss franc likely to weaken slightly against euro between now and end of 2021 

Last data point: May 17, 2021
Source: Bloomberg, Credit Suisse

Equities: Companies are beating expectations

The Q1 reporting season was impressive, with a majority of firms managing to beat revenue and profit expectations. Guidance was actually revised up in many instances. Selected cyclical segments, as well as attractively priced market segments in general, look interesting in the current environment. These continue to include financials and the materials sector, as well as UK, German, and Spanish stocks. Credit Suisse experts also see further potential for small caps as well as certain energy stocks.

Corporate earnings are recovering

Last data point: May 10, 2021
Source: Factset, Credit Suisse

Commodities: Recovery continues – potential returns are declining

Commodity prices have continued to rise recently, as the economy remains in a commodity-intensive growth phase. From an investor's point of view, commodity exposure continues to offer diversification benefits as well as a degree of protection against inflation. At the same time, the marked recovery in prices reduces potential returns in the future. The price of gold has leapt again thanks to lower US real interest rates. But with real interest rates expected to increase in the medium term, the potential for gold would appear to be very limited.

Increase in commodity prices has continued

Last data point: May 14, 2021
Source: Bloomberg, Credit Suisse

Real estate: Mortgage interest rates rising tentatively

The Swiss economy is expected to stage a marked recovery thanks to the progress on vaccinations and easing of COVID-19 measures. Even so, the Swiss National Bank (SNB) is not expected to hike rates for the time being. However, interest rates for longer-term Fix mortgages have risen noticeably since the start of the year on account of higher inflation expectations. A further, slight increase of 5 to 20 basis points is anticipated over the next 12 months.

Slightly higher interest rates for Fix mortgages

Last data point: May 17, 2021
Source: Credit Suisse

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