Investing in May: Time to increase equity exposure again

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. 


China's PMI is back in the growth zone 

Purchasing managers index > 50 = growth

Source: Bloomberg, Credit Suisse
Last data point: March 2019 

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. 


Swiss National Bank had to buy foreign exchange from time to time in 2018 

Source: Datastream, Credit Suisse
Last data point: Feb. 2019 

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.


Better numbers should support euro and Swiss franc 

Source: Datastream, Credit Suisse
Last data point: April 15, 2019 

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. 


Easing of financial conditions 

Source: Bloomberg, Credit Suisse
Last data point: April 11, 2019 

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. 


Volatility of crude oil prices likely to rise 

Source: Bloomberg, Credit Suisse
Last data point: April 15, 2019 

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.


Yield premiums for real estate investment remain high 

Source: Credit Suisse, Datastream, most recent annual report of real estate funds
Last data point: March 2019