Investing in May: Return outlook for equities relatively good
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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. Despite growing euphoria on the international financial markets, Credit Suisse is not expecting any significant changes. For this reason, it is keeping its equity allocations at the strategic level for now.

Neutral equity allocation despite signs of euphoria

The equity markets, especially in the US, have been showing signs of overvaluation and euphoria of late. Because there is a lack of appealing investment alternatives, however, any market corrections are expected to be short-lived. The experts at Credit Suisse therefore do not recommend any underweighting of the asset class but are instead keeping equity allocation at the strategic level for the time being. In terms of fixed-income securities, the experts see little potential for returns outside emerging market debt in hard currency. Although the rise in interest rates appears to be taking a break, Credit Suisse is expecting upward movement to continue in the coming months, which is likely to come at the expense of government bonds in particular.

The economy: Swiss GDP reaches pre-crisis level

The administration of Joe Biden is countering the coronavirus crisis with a range of measures including a fiscal stimulus. As part of this, US households are to receive checks for USD 1,400 each. At USD 1.9 trillion, the March/April package is by far the biggest stimulus that has ever been passed. Because US households are responsible for 25% of global demand for goods and supply and value chains extend through various countries, the US government stimulus will indirectly have a positive impact on the rest of the world as well.

Value creation in the Swiss economy returned to pre-crisis levels in early April. The slump during the first wave of the pandemic and the dip during the second wave have been overcome. However, there has been an enormous drop in wealth in the meantime. Taking lost growth into account, coronavirus-related GDP loss amounted to around CHF 36 billion in 2020 and is expected to be roughly CHF 21 billion this year.

Financial markets: Swiss economic activity reaches pre-crisis levels

Swiss economic activity back to pre-crisis levels

Source: State Secretariat for Economic Affairs (SECO)
Last data point: Week 14, 2021 (April 5 to 11, 2021)

Interest rates: Preference for hard-currency bonds in emerging markets

The rise in interest rates on longer-term government bonds has come to an end in the US for the moment. In other regions such as the euro zone, however, we can expect a continued increase in interest rates and thus setbacks for government bonds. The return potential of corporate bonds is limited because their interest rate advantage has diminished significantly recently. Investors are likely to continue to see attractive opportunities for returns on both government and corporate bonds for emerging market debt in hard currency.

Financial markets: Rise in interest rates on government bonds in the US takes a break

Interest rates hold steady after distinct increase

Source: Bloomberg
Last data point: April 21, 2021

Currencies: Moderate upside potential for the euro / Swiss franc

The Swiss franc weakened against the euro in the first quarter, and there is currently much less demand for safe havens than there was in the crisis-hit 2020. Pressure on the Swiss National Bank (SNB) to intervene in the foreign exchange market has abated accordingly. As soon as the economic recovery becomes more sustainable in Europe as well, the euro should even start to gain a little more in value. However, the upside potential against the Swiss franc is likely to be somewhat limited.

Financial markets: Euro gaining value

Euro expected to appreciate against the Swiss franc up to 1.12

Source: Bloomberg, Credit Suisse
Last data point: April 19, 2021
 

Equities: Asset class remains appealing in the medium term

The considerably better prospects for economic and profit growth as well as continued relaxed monetary policy are helping equities. By contrast, some valuation metrics have now moved into the expensive range. In addition, the sharp increase in investor confidence and other short-term tactical indicators point to an elevated risk of setbacks. However, medium- and longer-term return prospects for equities are still clearly better than for most fixed-income assets.

Investing: High investor optimism suggests a setback risk

Investor sentiment is dangerously good

Source: Credit Suisse, IDC
Last data point: April 19, 2021
 

Commodities: Diversification and inflation protection

The increase in commodity prices took a break recently, but prices remain well supported thanks to the upturn in global industrial production. In addition, commodities offer a certain amount of protection against inflation and help to diversify portfolios. Although prices have already recovered markedly, the potential for returns is still positive. Gold prices have again risen somewhat of late thanks to the slight fall in US interest rates. However, interest rate risks remain in the medium term, which is an argument in favor of partial hedging of gold positions.

Investing: Commodity prices maintain same level

Increase in commodity prices took a break recently

Price trend since January 1, 2000

Source: Bloomberg, Credit Suisse
Last data point: April 16, 2021
 

Real estate: Residential property getting out of reach

The price rises of recent years are putting residential property out of reach for an increasing number of households. The main challenge is the imputed affordability, which needs to satisfy regulatory requirements, according to which residential property is financed at a sustained long-term interest rate of 5% rather than the currently very low market rates. This means that in centrally located regions, only a minority of households can finance residential property.

Financial markets: Living centrally no longer financially viable for the majority

There is hardly any affordable owner-occupied properties in central locations

Proportion of affordable advertised properties (single-family dwellings and condominiums) with four or more rooms for middle-income households

Source: Credit Suisse, Meta-Sys, Geostat
Last data point: Q4 2020
 

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