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. The economic situation is improving. Investors should increase their exposure to equities.
US equities are particularly attractive
The improving global economic outlook has prompted the Credit Suisse Investment Committee to build up its equity exposure again. For investors in Switzerland, we recommend increasing equity exposure of portfolios through the purchase of US stocks: Although valuations are not particularly attractive, the high IT component – combined with fairly defensive characteristics – is a major plus point.
Emerging market equities should likewise be overweighted, while cash should be reduced. As for the other asset classes, we retain our neutral long-term weighting.
Economy: Global economy is picking up again
Economic numbers are finally producing some nice surprises again after the slowdown that began in mid-2018. The Chinese purchasing managers index (PMI), for example, came in above the growth threshold in March. Central banks in the Western countries are likewise providing support to the economy; meanwhile, increases in government spending are no longer taboo – even in Europe. This makes us confident that a global recession can be avoided.
A weaker impetus from abroad will continue to weigh on the Swiss export sector for the time being. The momentum of industrial production has slowed markedly. On the other hand, the favorable labor market situation – coupled with a slight uptick in immigration for the first time in six years – should help boost consumer demand. Overall, the Swiss economy is likely to grow at a rate of 1.5% this year – more or less in line with its average for the past 10 years.
Bonds: Swiss National Bank unlikely to raise interest rates before 2021
The Swiss National Bank issued two important pieces of information at the end of March: First, the monetary authorities expect prices to rise at a rate of no more than 1.5% in the period to end-2021 – meaning inflation does not pose a threat. Second, data reveals that the Swiss National Bank (SNB) engaged in foreign exchange purchasing in 2018 in a bid to weaken the Swiss franc.
As long as the SNB sees a need to buy foreign exchange, a hike in interest rates can be almost entirely ruled out. We therefore think the bank will keep its prime rate unchanged until at least the end of 2020.
Currencies: Neutral outlook for euro and Swiss franc
The euro remains vulnerable to political risk and European Central Bank policy suggests there will not be an end to negative interest rates any time soon. The expected recovery in the global economy is nevertheless likely to boost European exports, too, which should provide some support for the single currency.
The Swiss franc meanwhile remains overvalued; hence its upside potential is limited. Our euro/Swiss franc forecast currently stands at 1.13 on a three-month basis and 1.17 on a 12-month horizon.
Positive global environment for equities
Leading indicators show signs of an economic stabilization for the first time since the major central banks opted to normalize monetary policy again. Given the improvement in overall conditions, we expect a continuation of the rally in global equities.
We have accordingly upgraded US equities, not least due to our continued preference for IT companies. In addition to the IT, energy, and healthcare sectors, we now favor mining companies as well.
Commodities: Upcoming political decisions increase volatility
Commodity prices have recently been trending upward again. Signs of an economic recovery and concerns about lower oil production were the main drivers, as was the recent decision by the US to end its suspension of Iran sanctions. OPEC's response to this decision will also be key.
In light of the uncertainty, we expect at least an increase in volatility. Right now, we think exposure to commodity equities makes greater sense than direct exposure to commodities.
Real estate boosted by delayed rate hikes
Real estate remains an attractive investment opportunity in the current market environment. The yield advantage on direct and indirect real estate investments versus the Swiss government benchmark bond (10-year) continued to amount to 3-4 percent at the end of March.
With the end of the era of negative interest rates now a more distant prospect following the postponement of further interest rate hikes in the US, real estate equities and investment funds as well as direct investments will likely continue to enjoy strong demand from investors.