The FINANCIAL -- Credit Suisse presented on June 13 its ‘House View’ outlook for the global economy in the second half of 2018.
Its investment strategists predict that strong income and credit flows to households and firms on both sides of the Atlantic will continue to support solid consumer spending and business investment – even as monetary policy becomes less accommodative. In addition, they see the development of leading growth indicators such as the global manufacturing PMI (purchasing managers indices) new orders as a sign that economic activity has stabilized. With a rebound in the US and China, the global economy remains on track for a reacceleration, with much of the new momentum expected from Europe, where growth slowed in the first half of the year. Against this favorable backdrop, Credit Suisse believes that investors can expect positive returns on risk assets like equities over the remainder of 2018, albeit at a lower level than the exceptionally strong performance seen in 2017.
'Supertrends', Credit Suisse's high-conviction equity themes, remain in focus as the bank's Investment Strategy & Research team publishes its first-year update and looks back at the strong results delivered by these themes, according to Credit Suisse.
With companies and households in the US and Europe benefiting from strong income and credit flows, Credit Suisse economists are confident that this will drive continued solid consumer spending and business investment in the second half of 2018 – even as central banks tighten the monetary reins. In the US, growth is likely to be strong on the back of fiscal stimulus and a further strengthening of the labor market. In the Eurozone, Credit Suisse's economists do not expect growth to be derailed by political risks and they anticipate that the European Central Bank (ECB) will end its asset purchase program in 2018, with interest rate rises likely from mid-2019. In Switzerland, the Swiss National Bank (SNB) may start gradually reversing its negative rates policy with a first hike in the first quarter of 2019. In the UK, weak consumer fundamentals suggest more muted growth than previously anticipated. Finally, for emerging markets Credit Suisse expects a stabilization on the back of strong global growth, solid commodity prices and generally solid external balances.
Financial market outlook
After an exceptionally challenging first half for financial markets and investors, Credit Suisse believes that global equity markets have upside potential in the second half of the year. Strong economic growth is expected to boost earnings, while trade frictions are likely to have microeconomic rather than macroeconomic implications.
‘House View’: Credit Suisse continues to favor equities over fixed income but recommends active equity investment strategies to limit exposure in the event of renewed volatility spikes.
Equities: In line with its active equity investment strategy, Credit Suisse has implemented more rotations across sectors and regions in 2018 than before and expects to continue this approach. Credit Suisse's regional equity focus is on emerging markets, UK equities and now also on Swiss equities. Its sector preferences include energy, technology and financials.
Fixed income: Credit Suisse expects bond yields in most developed markets to rise moderately. However, in EUR and CHF in particular, even moderate yield increases could lead to performance losses on government bonds. Credit Suisse is therefore focusing on convertibles and emerging markets bonds in both hard and local currencies that offer the best risk rewards following the recent correction.
Commodities: As part of Credit Suisse's strategic asset allocation, commodities provide diversification while benefiting from growth – like equities. Industrial metals are the most preferred commodities, while precious metals could be challenged by higher yields. Spot oil prices are forecast, per barrel, at USD 65 for WTI and USD 70 for Brent in 12 months.
Currencies: The tightening of the monetary reins by the US Fed is now fully priced, whereas the ECB is not expected to raise interest rates before 2020 according to market expectations. Credit Suisse forecasts that the first interest rate hikes will occur in mid-2019, however, and therefore sees more upside than downside in EUR/USD. Its forecasts for EUR/USD and EUR/CHF are 1.27 and 1.20, respectively, in 12 months.
Supertrends – one year on
One year ago, Credit Suisse launched its five high-conviction long-term equity themes: Angry Societies – Multipolar World; Infrastructure – Closing the Gap; Technology at the Service of Humans; Silver Economy – Investing for Population Aging; and Millennials’ Values. Over the last 12 months, the relevance of these themes has been confirmed and their performance has been strong, even in phases of increased volatility. With around 25 to 40 single stocks per Supertrend, the approach provides strong diversification. Each Supertrend offers a clear thematic focus and is clearly distinct from broader equity market indices.
A number of new features have been added to the Supertrends in the first-year update just published:
In ‘Technology at the Service of Humans’, blockchain has been incorporated into the digitalization sub-theme. Blockchain is an accelerator of digitalization and creates opportunities for investors to further diversify technology investments into new areas to benefit from future technological developments.
In ‘Infrastructure – Closing the Gap’, telecom infrastructure has been added as a sub-theme alongside transport, power and water, and affordable housing. 5G technology is expected to act as a catalyst for significant investments in the sector. In terms of regional focus, additional potential has been identified in the area of infrastructure investments in Africa and Latin America, according to Credit Suisse.
In line with Credit Suisse’s overall efforts to promote an increased focus on sustainable and impact investment, a full ESG overlay has been added to the ‘Millennials’ Values’ Supertrend, ensuring that all selected stocks achieve a high score in this area.