Investments in March: Earnings per share are looking good

Investments 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. The economic recovery is likely to continue and boost inflation in the short term. Thanks to the improving economic environment, earnings per share are once again at their pre-crisis levels.

Economic recovery can lead to rising interest rates

Despite all the short-term risks, the economic recovery is likely to continue at an accelerated pace during the year. We are therefore maintaining our cyclical orientation by way of an emerging market equities and commodities overweight and by favoring German and UK equities. However, the recovery will probably also lead to rising interest rates and thus bring bond prices down. We are therefore reducing our exposure in investment-grade and emerging market debt in hard currency. This is because their interest rate advantage has decreased and can only partially offset the price losses.

The economy: Inflation temporarily overshoots

In light of the massive fiscal stimulus from the Biden administration with a simultaneously unchanged expansive monetary policy, inflation expectations in the US have recently increased. Inflation rates are likely to significantly increase in the coming months. However, this increase is likely to be only temporary and mainly due to the much higher oil prices compared to the first lockdown. As long as worldwide unemployment and uncertainty are so high, the risk of inflation is likely to be limited.

In Switzerland, the price level should stop decreasing in April. On the one hand, energy prices will then likely be well above their 2020 levels. On the other hand, with the opening of the economy, certain price trends related to COVID-19 should go back to normal. However, inflationary pressure remains very mild. After the decline in consumer prices of 0.7% in 2020, we forecast an inflation rate of 0.3% for 2021.

Financial markets: US inflation expectations increase

Inflation expectations in the US have increased

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

Interest rates: No prime rate changes to be expected

It should be assumed that central banks worldwide will not react to the short-term rise in inflation. Within the euro zone, the inflation rate should remain below the inflation target of 2% in any case. The US central bank (Federal Reserve) has also already announced that it will tolerate intermittent overshooting of this target value. Prime rates worldwide will therefore remain close to or even below zero even longer – including in Switzerland. In the wake of growth recovery, however, the long-term interest rates can still continue to rise.

Interest rates: Central banks will not change prime rates

Inflation is below the target of central banks

Source: Thomson Reuters Datastream
Last data point: January 2021

Currencies: The euro shows appreciation potential

This year, the Swiss franc should be less sought after as a "safe haven" than during the crisis year 2020. As soon as the expected economic recovery starts, the euro should tend to appreciate somewhat once again. Since interest rates in Switzerland are only slightly lower than in other industrialized countries, the depreciation scope of the Swiss franc is limited. In the event of short-term upward pressure on the Swiss franc, the Swiss National Bank (SNB) will likely continue to intervene on the foreign exchange market. And this in spite of the fact that the US government has referred to Switzerland as a "currency manipulator."

Investing: Euro will likely appreciate once again

Sideway trend of the EUR/CHF exchange rate to be observed

Source: Bloomberg, Credit Suisse
Last data point: February 15, 2021

Equities: Corporate figures support share prices

The slowly improving economic environment has also been confirmed by corporate results for the 4th quarter of 2020. Most companies have even exceeded forecasts and, overall, earnings per share are above what they were in the 4th quarter of 2019. In this environment, the sectors somewhat lagging behind the overall market are precisely the ones offering potential. This includes financials as well as equities from the UK and Germany.

Equities from the UK and Germany offer potential

Earnings per share are above pre-crisis levels

Source: FactSet Estimates, Credit Suisse
Last data point: February 9, 2021

Commodities: Prices have increased

Commodity prices have risen sharply due to budding inflation concerns, among other things. The ongoing economic optimism mainly spurs on cyclical commodities, such as oil, while production is lagging behind demand in oil and industrial metals and inventories are decreasing. In contrast, the boom in more defensive commodities, such as gold, has somewhat slowed down, because US bond yields have gone up. In the future, slightly higher interest rates will likely also limit the price increase of gold.

Investing: Commodity prices are increasing significantly

Cyclical commodities prices are rising sharply

Source: Bloomberg, Credit Suisse
Last data point: February 12, 2021

Real estate: Unexpectedly strong price momentum for residential property

Strong demand, combined with the declining supply, has significantly increased the prices of Swiss residential property. Over the course of the year, prices of condominiums rose by 5.1% and those of single-family dwellings by 5.5%. Due to the continuing excess in demand, rising prices should continue to be expected. However, this price increase is expected to flatten out, since it is limited by strict financing requirements (forecasts for 2021: condominiums +3%, single-family dwellings +4%).

Financial markets: Strong demand increases residential property prices

Residential property prices are showing above-average growth

Source: Wüest Partner
Last data point: Q4 2020

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