Investments in March: Our forecast in brief
Credit Suisse's perspective on economic and financial market trends over the short to medium term and their implications for investors. Global equities reduced to neutral.
Neutral outlook for global equities
Because the strong rally over the past few weeks has driven up valuations, we have reduced our outlook on global equities to neutral. Real estate was changed to neutral since yields have become more attractive compared to bonds. We are also now giving even the traditionally defensive consumer staples sector a neutral rating, whereas we have reduced the financial sector to neutral due to tighter loan conditions and persistent political risks.
We have updated the communication sector rating to underperform due to recently increased regulatory risks. At the asset class level, our tactical weightings are now identical to the strategic weightings while we maintain our emerging market preference within the equity and bond sectors.
Economic conditions: Swiss export economy weakens
This year, the growth of global industrial production is likely to be lower than its long-term average for the first time since 2016. Activity has slowed particularly in Asia, as the escalating trade conflict between the US and China is negatively affecting the business climate and has led to a sharp reduction in inventories. As a result, the growth of the global gross domestic product will be lower this year than in the previous year (2.9 percent versus 3.2 percent).
The Swiss export economy is unable to escape the global slowdown in growth. However, at 0.9 points, the Credit Suisse export barometer, which measures foreign demand for Swiss products, still indicates solid export growth. Nowadays, the barometer value is only as high as it is thanks to the US. In contrast, Europe is the main reason for the barometer's fall since early last year, and negative sentiment in China is also dragging the export barometer downwards.
Bonds: No key interest rate hike in Switzerland until 2020
Weaker global economic growth and the wait-and-see attitude of other central banks, including the US Federal Reserve and the European Central Bank, are the main reasons why the Swiss National Bank (SNB) is also acting cautiously – i.e. waiting.
In addition, the threat of inflation is limited for the time being. Currently, we assume that the SNB will leave the key interest rate unchanged at –0.75 percent in 2019 and we don't anticipate an initial interest rate hike until June 2020.
Currencies: Continued neutral outlook for the euro and Swiss franc
Political and economic uncertainties will probably continue to burden the euro and support the Swiss franc in the near term. However, the clear signal from the Swiss National Bank that it does not intend to tighten its monetary policy anytime soon is counteracting any appreciation in the Swiss franc.
We therefore expect a sideways trend from the euro and Swiss franc over the next few months. An appreciation of the euro against the Swiss franc should only occur once recovery becomes visible in the economic data for the euro zone and the first interest rate moves of the European Central Bank emerge.
Equities: The air is getting thinner in the Swiss market as well
The Swiss stock market was also able to keep its momentum. Nevertheless, the air is getting thinner here too. In particular, we believe there are risks due to global political uncertainty and the less dynamic global economic growth. This is due to the fact that Swiss companies are typically strongly geared toward foreign markets.
In this fragile market environment, option strategies can be an interesting portfolio addition to reduce reliance on the market while simultaneously generating revenue.
Commodities: Oil goes back to neutral
Commodities – and oil prices in particular – have increased significantly since the start of the year. Production cuts and a reduction in inventories have contributed to this situation. This significant increase should cease shortly – which would suggest more stable oil prices – unless major unexpected geopolitical tensions occur, such as in the Middle East and Venezuela.
In addition, due to the slowdown in global industrial production, we expect a sideways trend for commodity prices as a whole. Gold is likely to remain well supported in the current environment, which is characterized by macroeconomic uncertainty and low interest rates.
Real estate: Setback partially offset
In the difficult trading year that was 2018, even indirect real estate investments experienced value corrections. Consequently, the price-risk ratio of real estate funds in particular is once again looking quite attractive, which was used by investors as a buying opportunity at the start of the year.
At the same time, real estate investments are continuing to receive a strong tailwind from the interest rate front. The yield premium on real estate funds versus ten-year Swiss government bonds has exceeded the threshold of 300 basis points for the first time in almost two years.