The global economy has been experiencing a slowdown in growth since mid-2006 that was prompted by the sharp cyclical decline in the US. However, the analysts at Credit Suisse expect the world economy to reaccelerate in summer 2007. For one thing, Europe has developed into a growth pole of the global economy and is benefiting from solid domestic economic expansion. Despite slowing temporarily, average annual economic growth in both the euro zone and Switzerland will come in above potential. Moreover, the robust income situation among consumers and businesses suggests that economic momentum in the US is likely to pick up again after a fairly weak winter. Slight upward trend for interest rates
In view of the merely mild and temporary cooling of economic growth − which, on a global basis, will barely relieve the tight utilization of capacity − the experts at Credit Suisse anticipate further gradual interest rate hikes. While the pause in the rate-hiking cycle in the US could last for some time due to the sharp slowdown in growth there, further cautious interest rate increases can be expected in the euro zone and Switzerland. Capital market yields are also poised to resume their historically mild upward path when there are more signs of a US-led acceleration of the global economy. Central Bank policy is the key to the US dollar exchange rate trend
The US dollar has substantially depreciated recently. While the European Central Bank is tightening its monetary policy, the US Federal Reserve has adopted a somewhat reticent stance. Hence, the US dollar is unlikely to have much appreciation potential during the first few months of the new year and could even weaken further. Only when there are increasing signs that the US economy is regaining its footing, and if a few central banks in Europe decide to pause their rate-hiking cycle, would the US dollar benefit slightly from its yield advantage. The interest rate advantage is likely to dwindle but should still exist. That could enable the US dollar, which is undervalued against European currencies, to regain strength in the second half of 2007. The euro will probably stay firm against low-yielding currencies like the Swiss franc and Japanese yen. Commodities: Invest selectively
The slowdown in global economic growth in the second half of 2006 has had a very divergent impact on the various commodity categories. The combination of high inventory stocks and weaker economic growth has triggered a correction on the energy markets while base metal prices, for example, have continued to climb upwards on the back of inventory depletion. The disparate performance of the different commodity classes is likely to remain a main theme for investors in 2007. They should therefore shy away from investing in commodity indices and instead concentrate on specific themes in individual commodity categories such as gold. Real Estate: Cyclically and structurally attractive investments
The outgoing year can be deemed another successful period for investments in commercial property or publicly traded indirect real estate investment vehicles. The experts at Credit Suisse are tipping real estate again for 2007 and are singling out three main investment areas. They advise those investors looking to capitalize on the cyclical upturn in office rents to invest in Germany, France, Sweden, Singapore or Japan. More defensive income-oriented investors should focus on investments in retailing property in the euro zone or Asia. Investors with a higher risk profile can profit from the longer-term potential of emerging markets such as India, China, Brazil, Mexico, Romania and Turkey. Equity markets still have upside potential in 2007
Global equity markets should benefit from solid earnings growth and an attractive valuation in 2007. The experts anticipate that the current uptrend will continue but expect to see increased volatility depending on the US Federal Reserve's interest rate policy. The favored regions on a 12-month horizon continue to include Asia, selected emerging markets, and Europe in preference to the US. The Asian market should continue to profit from vibrant economic growth, particularly in China, whose economy is expected to expand by 9.8% in 2007. Once the recent uncertainties subside, the Japanese stock market will have upside potential on the back of the revival of domestic consumption and robust exports to Asia. In the emerging markets excluding China, the experts continue to recommend markets with low valuations and above-average growth potential, such as Brazil and Russia. In Europe, Germany remains the preferred market in view of ongoing corporate restructuring efforts. Invest in megatrends
The analysts at Credit Suisse recommend investing in selected megatrends since they are likely to play a key role in the medium term. They see good investment opportunities in the infrastructure and alternative energy sectors. Global population growth and the increasing economic participation of countries like China and India that only recently opened their doors to the global economy should further boost demand for infrastructure and energy, which should keep the price of oil at a high level. A sustained high oil price enhances the attractiveness of alternative sources of energy such as solar and wind power. The robust economic growth itself also harbors potential. The boom in emerging market countries has led to a large worldwide increase in the number of affluent individuals, which should benefit private banks in particular. At the same time, luxury goods manufacturers are especially likely to profit from a growing upper-middle class. Changes in underlying political or economic conditions, such as the accession of Romania and Bulgaria to the European Union or as a result of technological advancements, should also give rise to investment opportunities. Bonds: Short to intermediate maturities favored
Given the expected rise in market interest rates amid continued flat yield curves, Credit Suisse's bond investment strategy for 2007 concentrates on short to intermediate maturities (two to four years). It continues to advise holders of government bonds to systematically mix in inflation-protected issues, which bolster the risk-adjusted return of a well-diversified investment portfolio. US Treasury inflation-protected securities present particularly attractive entry opportunities when nominal yields are extremely low. In the corporate bond sector, high valuations and creeping debt leverage call for a defensive investment strategy that favors high-grade issuers in the retail banking, energy and pharmaceutical industries. Mortage bonds also fit well with this strategy. For the emerging markets, the experts at Credit Suisse are directing their focus toward sovereign borrowers that have used the recent economic upturn to reduce their foreign currency debt ratios and/or to enact tax reforms. Bonds from issuers such as these should be in a better position to withstand yield spread widening. Asian sovereign issuers like Indonesia and the Philippines score well in this respect, as do several borrowers in Latin America, such as Brazil. The Credit Suisse analysts also regard selective investments in bonds denominated in local rather than international currencies as an attractive alternative.
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