Economic developments: A spotlight on inflation and financial markets
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Spotlight on the latest economic developments

Opinions on the economic situation and the markets have seldom been so disparate. Is the global economy resilient or heading for recession? Is inflation rising or falling? And what does it all mean for companies, interest rates and raw materials? Examining the signals coming from the stock exchanges, the data, and the latest study by the International Monetary Fund (IMF) can help us to better understand the current situation on the markets.

Current economic situation sending contradictory signals

The economy and the markets are presently at odds with one another to a certain extent. There are good reasons for that. There have been an unprecedented wave of individual shocks in the last three years, including the pandemic, the energy crisis; various periods of surging inflation; the shortage of qualified staff and the USA’s steepest key rate hikes since Paul Volcker’s tenure as chair of the Federal Reserve from 1979 to 1987.

All these events have shaken the established world view and raised a number of questions. Was the effect of economic stimulus during the lockdowns sustainable, or merely an inflationary flash in the pan? Has the energy crisis hampered or accelerated the global transition to clean energy? The answers to this question are likely to differ depending on whose perspective we are talking about, which can make the issue more difficult for investors to grasp. An examination of the current signals being given off by markets reveals the bigger picture.

Market signals and what they mean for investors

Probably the two most important signals that global capital markets are sending about the health of the global economy stem from inflation. Inflation is characterized by stubborn resilience while also experiencing a sustained decline. In the year to date, equities and sovereign bonds around the world have gained an average of 9 percent and 2.2 percent, respectively. Specifically, this means the following:

  • Stocks indicate the markets’ confidence that corporate earnings have further growth potential for 2024
  • Rising government bond prices, or receding capital market yields, reflect expectations of falling inflation.

It is worthwhile to look at some of the key aspects of these messages in further detail, but this examination will not be exhaustive.

Under the spotlight: Data and its interpretation using crude oil, energy, and copper

The signs undoubtedly point to resilience in the global economy: According to the latest Global Oil Market Report from the International Energy Agency (IEA), global demand for crude oil is likely to reach a new record of more than 100 million barrels a day this year. China alone accounts for more than half of the jump in demand. Together with India, the People’s Republic looks set to be one of the key drivers of global growth this year. More than half of the growth in demand is coming from China. Together with India, the People's Republic is likely to be one of the most important drivers of worldwide growth in 2023.

In addition, the strategic cut in oil production by OPEC Plus countries has certainly had its intended price effect. Credit Suisse's commodities experts expect a longer period of elevated oil prices.

Various stakeholders are benefiting from the strong crude oil and commodity markets:

  • OPEC+ countries: the markets of the Gulf Cooperation Council offer additional, attractive diversification opportunities for investors.
  • Energy service providers and integrated production companies: As well as profiting from high energy prices, some of these firms are among the largest investors in renewable energies. European crude oil companies, for example, have invested billions in this sustainable sector, a fact barely reflected by the stock markets thus far.
  • Energy and mobility transition: Rising crude oil prices indirectly have a positive impact on the energy and mobility transition, acting as a catalyst for the shift to renewable energies and bolstering the sales of electric car manufacturers.

Further confirmation of the good health of the global economy or, at least, the industrial momentum of the energy transition is the rise in copper prices since the beginning of the year. The same applies to other industrial metals. The IEA estimates that the energy transition could cause demand for critical metals and minerals to rise sixfold, unless they are replaced by cheaper options. From an investing perspective, Credit Suisse prefers to back investments in the energy transition than individual exposures to industrial metals as, unlike raw materials, equities and bonds generate risk premiums.

Economic outlook: Increased demand for critical commodities

Energy transition could multiply demand for critical metals and minerals

Source: IEA, Credit Suisse

Economic development: Falling inflationary pressure expected

Both the declining capital market yields and the latest “World Economic Outlook” issued by the IMF suggest that a large share of the current inflation can be blamed on the shocks in recent years. By the end of 2024 the IMF expects inflation to fall back substantially both in the US – to just 2.3 per cent – and in the eurozone, to 2.9 percent. For their part, the capital markets are looking for inflation to drop even more sharply.

Inflation looks set to remain consistently low in Asian emerging markets. This is relevant to investors because it will give central banks in the region greater scope for stimulus measures. Furthermore, Brazil benefits from falling inflation and its vast reserves of raw materials. In the US, inflation for physical goods is nearly on target already. However, it remains higher for services. In part, this is due to the pent-up demand following the pandemic for vacations, eating out, and cultural activities.

Inflation already falling again in the US

Inflation already falling again in the US

A glance at US inflation illustrates that consumer goods inflation has largely faded, while demand for services is still sending wages and prices higher
Last datapoint: March 2023
Source: Haver, Credit Suisse

Resilient global economy and luxury goods in demand

Asian consumers – particularly in China – are increasingly asking for global luxury goods from France, Italy, Spain, and Switzerland. That goes for everything from brand-name fashions, designer handbags, and sunglasses to luxury watches. China is currently the strongest driver of the global economy. The positive effects on European stock exchanges are above average:

Global Equities (MSCI World)

+9%

Nasdaq

+16%

Euro Stoxx 50

+15.8%

Italy (FTSE MIB)

+17.5%

France (CAC 40)

+13.7%

Germany (DAX):

+13.8%

Spain (IBEX):

+14.6%

Source: Bloomberg,
Last Datapoint: 18.04.2023.

It is not possible to invest in an index. The index returns shown are not the outcomes of actual trades in investable assets or securities. Investors who pursue a strategy aligned with an index may generate lower or higher returns and must take the attendant costs into account.

Resilient global economy and luxury goods in demand

Asian consumers – particularly in China – are increasingly asking for global luxury goods from France, Italy, Spain, and Switzerland. That goes for everything from brand-name fashions, designer handbags, and sunglasses to luxury watches. China is currently the strongest driver of the global economy. The positive effects on European stock exchanges are above average:

Global Equities (MSCI World)

+9%

Nasdaq

+16%

Euro Stoxx 50

+15.8%

Italy (FTSE MIB)

+17.5%

France (CAC 40)

+13.7%

Germany (DAX):

+13.8%

Spain (IBEX):

+14.6%

Source: Bloomberg,
Last Datapoint: 18.04.2023.

It is not possible to invest in an index. The index returns shown are not the outcomes of actual trades in investable assets or securities. Investors who pursue a strategy aligned with an index may generate lower or higher returns and must take the attendant costs into account.

Alongside the resilience of the global economy, the bumper performance in the year to date also illustrates three current investment themes:

  • First, Europe's luxury goods manufacturers – the biggest in the world – are benefiting from Asia’s purchasing power and appetite for consumption.
  • Second, the supertrends of energy transition and infrastructure expansion are buoying Europe’s industry.
  • Third, technology accounts for more than half of all business investment worldwide, and it comes with high pricing power. Above all, US IT stocks have rebounded.

Another reason to look on the bright side is that while the IMF expects the global economy to grow by 2.8 per cent, it forecasts significantly higher growth of 5.3 per cent for emerging Asia.

In a nutshell, in its latest World Economic Outlook the IMF is therefore anticipating more green than red.

Economic outlook: International Monetary Fund

International Monetary Fund's economic outlook

Sources: International Monetary Fund, Credit Suisse

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