Summary

• Accelerating global growth
• The rise in long rates will spread to all developed countries
• No hard landing in China, emerging countries will continue to grow
• High quality bonds will drop, high-yield bonds remain attractive
• Stocks are no longer cheap, especially defensive stocks. Favor the cyclical and financial sectors
• Currencies: the big return of the euro

Macroeconomics

More than eight years after the global financial crisis, the developed economies are finally doing better. The improvement in the employment and consumption situation is no longer confined to the United States, and countries such as Spain and France have started to recover. Emerging countries benefit from the increase in commodities started a year ago, and China continues to play a role as overall economic stabilizer.

In the United States, we must add the positive factors such as the weakness of the US dollar and the end of the banking crisis, which allowed the revival of credit at all levels, both consumer and business. In Europe, the eight years of lean cows have forced companies to become more competitive and many companies in Europe have grown despite the strengthening of the Euro. The same holds true in Switzerland, where the dynamism of SMEs helped offset the declining activity of banking and large companies.

2017 should be a good year without major surprises, with an increase in inflation and the beginning of the end of negative rates which will be positive for both savers and businesses. Indeed, the banks will be able to improve their margins of interest which will push them to increase credit whereas so far, the negative rates have, contrary to what was imagined at the beginning, reduced the credit made available by the banks to companies.

Shares

The overall positive environment is expected to help grow corporate profits. As far as equities are concerned, this positive aspect will be partially offset by not necessarily cheap valuations and the risk of contraction of multiples with rising interest rates. Cyclical stocks and financials are the sectors with the biggest upside potential. Conversely, defensive stocks and pharmaceuticals will be penalized by high valuations and sectoral turns in favor of more cyclical stocks whose potential price increase, depending on each case, could be more than 20% in 2017!

Bonds

Bond investors have outperformed equity investors for many years, at least for those who have preferred corporate bonds and lower quality. This could end in 2017, and we could see the bond performance be lower than that on equities. Long-term rates are expected to increase in most countries, including Europe and Switzerland, where the yield on 10-year bonds should reach 0.50% against -0.20% today. High quality bonds are absolutely to be avoided, as are the real estate funds, because their low coupons will not withstand the rising rates. Corporate bonds and high yield should be able to achieve performances of 4% to 6%.

Currencies

The Swiss franc is expected to weaken this year against the euro and the dollar. But in 2017, it is mainly the euro that has great potential for growth, as is the Australian dollar. Gold is likely to suffer from the rate hike and does not have significant potential for buy and hold investors.