Investing in May: 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 coronavirus crisis is leading to significant drops in GDP across the globe. But equities remain attractive despite the uncertainty.
Swiss equities and global bonds
Despite high volatility, having a slight overweight of equities in the portfolios has paid off since late March. However, as investors can expect continued disappointing macro and earnings data in the short term, there is a risk of temporary setbacks. In this environment, the defensive Swiss equity market will likely continue to perform well. Thanks to their unprecedented liquidity-providing measures, central banks were able to reduce the credit risks of the riskier loans in the short term. In addition to emerging market debt in hard currencies, high-yield corporate bonds have also recently become more appealing.
Economy: A short but deep recession in Switzerland
Over 186 countries across the globe have been affected by the coronavirus pandemic. Measures to combat the virus have weighed heavily on industry and the service sector. For 2020, investors should anticipate a two percent drop in global gross domestic product (GDP). Governments around the world are resorting to unprecedented means to compensate for shortfalls in corporate and household incomes. This will reinforce global economic recovery once lockdown measures are relaxed.
As restrictions are loosened, the Swiss economy should begin to recover as well. However, the recession caused by the lockdown is deeper than previously forecast, and the recovery is likely to be slower than expected, especially in foreign-oriented sectors. Accordingly, we have revised our forecast for economic growth in 2020 from −1% to −3.5%. Although we expect a recovery of 3.5% in 2021, this will not entirely offset the losses from 2020.
Interest rates: Central banks offering targeted measures
The Swiss National Bank (SNB) has responded to deteriorating economic conditions and the stresses within the global financial system with a series of targeted measures. It is purchasing foreign currencies to prevent a further appreciation of the Swiss franc and is providing liquidity on the interbank market in both US dollars and Swiss francs – including backing up the state-guaranteed COVID-19 loans for Swiss SMEs. Additional rate cuts are not currently being considered.
Currencies: Euro under pressure
Although the US Federal Reserve has finally quelled the demand for US dollar liquidity and the US economy was hit hard by the coronavirus, the US dollar has continued to appreciate. The extremely high issuance of US government bonds appears to have attracted significant global capital. The euro, on the other hand, has suffered – in particular, from concerns about the lack of joint liability for national debt in the euro zone. However, the most recent relief measures for Italy and other, weaker EU members should improve risk assessments of the euro and reinforce the currency.
Equities: Equity markets are improving across the globe
Global equity markets have recovered significantly from their lowest points, thanks especially to the large-scale stimulus packages. This uptrend is expected to continue, although the markets will likely remain volatile, not least because of further dividend cuts and profit warnings. The healthcare and IT sectors in particular present opportunities, as their products and services are currently in high demand.
Commodities: Oil prices turn negative, volatility remains high
A historic event occurred on the oil market as WTI prices for May deliveries fell into negative territory. This was caused by the fact that all storage capacity had been depleted due to the current oversupply. However, the massive price drop should accelerate production cuts. As demand slowly recovers during the second half of the year, stock-building is likely to cease and prices should stabilize. Until that happens, the markets will remain nervous.
Real estate: Swiss housing market is a stable anchor
Even the real estate market will not escape the pandemic unscathed. However, we in no way anticipate massive sell-offs of residential property. After all, in comparison to renting, ownership remains the more affordable option in Switzerland, and fiscal policy measures by the federal government will most likely limit shortfalls in household income. In addition, the vast majority of homeowners will be able continue to be able to service their mortgage debts, as they were checked against three to four times higher interest costs when lending.