Investing in March: 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. Robust economic and profit growth should prop up equities, even if interest rates continue to gradually increase. We are now overweight in emerging market equities.

Given the solid growth in the economy and in corporate profits, we believe the latest equity market correction does not signal the start of a bear market, so we are remaining overweight in equities. In addition to equities from Japan and the euro zone, we also consider emerging market equities to be particularly attractive; we are underweight in US and Canadian equities. In terms of sectors, we prefer energy, industrials, financials, and telecom stock.

We have a generally neutral assessment of bonds, although we have a positive view of investment-grade corporate bonds, bonds issued by financial institutions, local-currency emerging market debt, convertible bonds, and inflation-linked bonds. Our focus in alternative investments is now on global real estate, whereas we are underweight in Swiss real estate.

Global Economy Is on Solid Footing

The euro zone economy remains dynamic. Employment is rising steadily in most countries and is thus reinforcing the sustainability of the economic upturn. Japan and the US are already virtually at full employment. If anything, the tax cuts and spending increases by the US government will overstimulate demand.

In China, growth has settled above 6%. The robust global recovery is reflected in a gradual rise in inflation that is by no means a cause of concern.

Swiss Economy Currently in Good Shape

Consumer sentiment is above average, the figures for tourism are rising, and retail sales have stabilized. At the same time, capacity utilization rates are high, and the Purchasing Managers' Index (PMI) – a leading indicator of industrial activity – now stands at close to a record high.

In view of the favorable economic development in purchasing countries and a somewhat weaker Swiss franc, the recovery is likely to continue. The higher foreign revenues are having a particularly positive impact on margins, which in turn means we can expect increased investment activity.


Swiss indicators currently in the green zone

Source: Datastream, gfK, Credit Suisse

Interest: Still No Rate Hikes in Continental Europe

Whereas the US Federal Reserve, the Bank of England, and the Canadian central bank are likely to turn the interest screw several notches in 2018, interest rate hikes are not anticipated in the euro zone until 2019. The European Central Bank (ECB) has at least tapered off its bond purchases, however, and will likely end the purchase program in September 2018.

In turn, the Swiss National Bank (SNB) will likely not raise its base rate before the ECB, unless the Swiss franc trades significantly above EUR/CHF 1.20 and inflation increases appreciably.


Gradual interest rate reversal in progress

Source: Bloomberg, Credit Suisse

Forex: Political Uncertainty Temporarily Shoring up the Swiss Franc

EUR/CHF has fallen to around CHF 1.16 in the context of the equity market correction among major tech brands. Political uncertainty regarding the Italian elections in early March may also shore up the Swiss franc for the time being.

Over the medium term, however, good economic momentum in the euro zone and adjustments to the ECB's monetary policy should ensure that the currency pair heads back towards 1.18. Still, a more pronounced devaluation of the Swiss franc is rather unlikely since the Swiss export economy appears to be coping well with the current CHF rate.


EUR/CHF assessment favorable again after correction

Source: Bloomberg, Credit Suisse

Global Equities: Profit Growth Reinforces Positive Outlook for Equities

Concern over rising inflation and more restrictive central bank rates resulted in the sharpest decline in stock prices since the Brexit referendum. We presume that the normalization of monetary policy will continue to produce volatile markets. Profit growth remains solid, however, which was also clearly shown by the Q4 reporting season.

As such, we are retaining our positive outlook and diversifying our strategy in segments with good fundamentals such as emerging markets and financials, which we now project will outperform.


First major correction in equities in months

Sources: Datastream, Credit Suisse

Commodities: Energy Prices Affected by Seasonal Lull

After a good start to the year, commodity prices came under pressure in early January. Energy prices dropped the most. Contributing factors to this were seasonally weaker demand due to upcoming refinery maintenance and the overextended position.

Gold was not entirely immune either, although it was impacted less than other commodities. Rising real interest rates continue to pose a threat to gold, but a weak US dollar provides some support. Industrial metals are currently calm. Increasing construction activity in China this spring should create more momentum, however.


US oil inventories rising again based on seasonal factors

Source: Datastream, Credit Suisse

Real Estate: Focus Remains on Rental Apartment Construction

The number of building permits for single-family dwellings (-4%) and condominiums (-9%) fell again in 2017. Since interest rates are still low and supply is falling, we anticipate moderate price growth of roughly 2–5% for 2018.

There was also a slight drop in building permits (-5%) for rental apartments. However, supply here continues to significantly exceed demand. As such, we project that rent quotes will decline this year (roughly -1%) and that the trend toward more vacancies will continue.


Building permits for rental apartments still very high

Source: Baublatt, Credit Suisse