Investing in May: 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. Given the concerns about trade conflicts and uncertainties regarding the intentions of central banks, fluctuations on the financial markets remain significant.

After the recent equity market weakness due to geopolitical tensions, the focus is now on the reporting season for the first quarter of 2018 and hence on the good fundamentals of companies. We are therefore staying overweight in equities. Emerging markets equities look particularly attractive to us. The strategy is now neutral for US and euro zone equities.

In terms of sectors, we favor IT, financial, energy, and telecom stocks. We are still rating bonds as neutral, with a preference for emerging market bonds in local currency and convertible bonds. However, we do not expect any further outperformance from inflation-linked bonds and financial bonds. We are also ending our overweight in global real estate equities. Within the segment, Swiss real estate stocks are underweighted.

Trade Disputes Are Not a Major Impediment

A few leading indicators have recently slipped, and the ongoing trade disputes clearly present downside risks for the economic outlook. Fundamentally, however, the global economic situation remains robust: Consumers worldwide are benefiting from strong labor markets, more companies are investing, and international trade is in fact gaining momentum. At the same time, core inflation remains relatively low and should rise only slightly during the year.

Catch-Up by the MEM Industry

In 2018, the mechanical, electrical, and metal industry (MEM industry) and the chemical industry should be among the main winners in the export business. These sectors previously suffered most from the strength of the Swiss franc and the sluggish economy in Europe. They are now benefiting all the more from the weaker franc and the boom in neighboring countries.

By contrast, the pharmaceutical industry, which was the guarantor of growth during the crisis years, has lost momentum. In this context, expiring patents are more important than the economy and the exchange rate.


Swiss export growth: no longer just pharma

Source: Swiss Federal Customs Administration, Credit Suisse

Interest Rates: New Federal Reserve Head, Same Price

The US Federal Reserve, under its new head, Jerome Powell, has raised interest rates again, adding a quarter point to its benchmark rate in March. In light of the additional stimulus to the economy in the form of tax cuts and spending increases, we expect three further rate hikes in the US in 2018.

The European Central Bank (ECB) is likely to end its quantitative easing program in September and begin raising base rates in 2019. The Swiss National Bank (SNB) will probably also start turning the interest rate screw in 2019.


US central bank raises base rate again

Source: Datastream, Credit Suisse

Currencies: Euro-Franc Exchange Rate on an Uptrend Toward 1.20

The recent rapid rise of the euro to Swiss franc ratio may lose some momentum – but the uptrend should continue over the coming months. According to our calculations, the franc remains slightly overvalued against the euro.

Risks such as global trade disputes and the as yet unsuccessful efforts to form a government in Italy seem scarcely to affect the euro-franc exchange rate, probably because the economic outlook in the euro zone remains positive. The favorable global economic environment and low interest rates reduce demand for the "safe haven" of the Swiss franc.


Currencies: Euro-Franc Exchange Rate on an Uptrend Toward 1.20

Source: Bloomberg, Credit Suisse

Equities: Neutral Assessment for the US and the Euro Zone

The slight fall-off in economic activity and the headlines about international trade ensured that equity market volatility was high last month. We believe, however, that the strong reporting season for the first quarter of 2018 should have a positive impact on equities.

Because strong earnings momentum from US companies is likely to continue, we have raised our assessment for US equities to neutral. Performance for euro zone equities should be similar. Emerging market equities remain our preferred segment.


Euro revaluation weighing on equities in the euro area

Source: Datastream, Credit Suisse

Commodities: Upside Potential in Industrial Metals

Commodity prices reacted nervously to the recent geopolitical tensions and trade disputes. The price of crude oil (Brent) has risen once again to over 70 dollars per barrel, even though stocks are not currently low. Nevertheless, record-high long positions on the market reflect concerns about potential supply interruptions.

Investors also bought gold, but the prices reacted very little. We expect a continued sideways trend here. For industrial metals, on the other hand, we are seeing price rises, at least temporarily, thanks to seasonally stronger demand in China.


Higher prices for industrial metals

Source: Bloomberg, Credit Suisse

Real Estate: Affordability Hurdle for Residential Property Remains High

In 2017, an average-earning homeowner had to spend 18.6% of his income on his mortgage, amortization payments, and maintenance for a new medium-standard dwelling. Nevertheless, many households are finding it impossible to get on the housing ladder. The main hurdles are the capital requirements and the affordability criteria, as defined in the regulations. In 2017, an average household would have had to spend an imputed 38.4% of its income for a new condominium – a figure significantly over the critical threshold of 33%.


Affordability of Residential Property

For the average household in % of income with the following parameters: new construction, 1% maintenance, 80% loan-to-value ratio, amortization to 2/3 within 15 years
Source: Credit Suisse