As markets expected, the ECB has slashed its benchmark interest rate to a record low of 0.5 percent. What are the near-term effects? Amid a temporary weak patch in the global economy, the positive environment for equities remains intact. Oil, hedge funds and real estate offer further upside potential, says Anja Hochberg, Head of Investment Strategy at Credit Suisse.
Cushla Sherlock: What's the main effect of the European Central Bank's rate cut?
Anja Hochberg: Most importantly, the actions of the European Central Bank (ECB) show that it has acknowledged the growth problem. However, given the already low interest rate, the pure economic and direct impacts are not very significant. We expect the ECB to engage in further non-conventional measures. This will help to strengthen the monetary transmission mechanism and will particularly benefit small and medium-sized enterprises in the periphery.
The positive environment for equities is expected to remain intact. But is it sustainable for investors?
Absolutely. That's why we continue to be overweight on equities. The markets are very much supported by central banks. While the economy is going through a temporary weak patch, we expect it to gain some strength in the next couple of months. More importantly, market sentiment is not as euphoric as has been in the past, for instance, at the end of last year. In our view, this bodes very well for equity markets.
What are the investment alternatives for investors who don't want to be in risky assets?
Whether risky assets or non-risky assets: this is a very relative expression, at this point in time. For instance, we would not consider government bonds totally riskless – we also have to search for yield in that area. Speaking about non-traditional investments, however, we see a positive environment for hedge funds and – depending on the regions – real estate.
April saw a significant sell-off in commodity markets. Can we expect a near-term recovery? Do individual commodity markets offer better upside potential than others?
In contrast to equity markets, where we are overweight, we stick to our neutral view with regard to commodities. Physical demand from the real economy is very important for those markets and we do not expect this to be the case in the next couple of weeks. However, taking a closer look at some of the individual markets, there are some commodities which profit more from the current supply and demand balance – oil, for instance. Oil supply is peaking and demand is increasing. Therefore, if you invest in commodities, oil should be on your agenda.
Foreign exchange volatility has increased since beginning of the year. Are emerging market currencies still favored?
Absolutely. FX volatility has mainly increased as a result of the Bank of Japan's actions. However, we can expect that to happen. Major currencies will trade in a rather broad range but offer some opportunities as well. From a strategic point of view, investors should definitely own emerging market currencies – we prefer the Chinese Renminbi.