Investing in August 2023: Our views in brief

Investing in August 2023: Our views in brief

Credit Suisse gives its perspective on economic and financial market developments over the short to medium term and looks at the implications for investors. With the risk of recession rising and inflation falling, it is a good time to invest in bonds. Credit Suisse is therefore increasingly opting for government bonds and stable corporate bonds. Commodities prices are also expected to rise in the current environment. Why is that, and what does it mean for investors?

Hitting the brakes to slow the economy

Although economic growth to date has been surprisingly positive, the monetary tightening strategies used by the central banks is likely to take increasing effect in the second half of the year. The experts at Credit Suisse expect the economy to slow as a result, and are therefore rating equities as less attractive. Certain segments do, however, offer catch-up potential – such as value stocks or emerging markets equities.

Fixed-income assets remain the preferred option given that bond yields have risen and now sit above inflation expectations. Credit Suisse is focusing on government bonds and investment-grade corporate bonds, since default rates on high-yield bonds are likely to increase as the risk of recession grows.

Economic situation: Weak global demand weighing on export industry

The reopening of China's economy has not led to significant growth in the global economy. This is due to muted consumer sentiment slowing growth in China, while excess housing supply is weighing on the real estate market. Foreign trade is also falling short of expectations. Moreover, neither monetary nor fiscal policy in China are aimed at stimulating rapid growth; rather, the focus is on maintaining growth at just above 5%. China is thus contributing to weakness in the industrialized nations rather than offsetting it.

Demand from abroad continues to weaken. The Credit Suisse export barometer, which maps foreign demand for Swiss products, thus continues its downward trajectory, and in June, it was well below the growth threshold. The gloomy mood in the industrial economy is already being reflected in declining export momentum. Exports from the mechanical engineering, electrical engineering and metals (MEM) industries, which account for around 16% of Swiss exports, have recently stalled. Exports of pharmaceuticals and watches, conversely, have increased.

Economic situation: Swiss export industry continues to weaken

Credit Suisse export barometer continues downward trajectory

Source: Haver Analytics, Datastream, Credit Suisse
Last data point: June 2023

Interest rates and bonds: End of interest rate hikes beckons

Inflation in Switzerland, the euro zone, and the US has fallen faster than most economists predicted. The cycle of interest rate hikes pursued by central banks in these regions is therefore likely to end soon. In Switzerland, the experts at Credit Suisse are expecting the Swiss National Bank (SNB) to raise its policy rate one last time in September, by 0.25 percentage points to 2%. Nevertheless, interest rate cuts are not likely in Switzerland until next year at the earliest.

Interest rates and bonds: End to interest rate hikes in sight

End to central bank interest rate hike cycles in sight

Source: Haver Analytics, Credit Suisse
Last data point: June 2023

Currencies: Swiss franc showing strength

The Swiss franc has appreciated against the euro in recent months. The EUR/CHF exchange rate remained below parity (EUR 1 = CHF 1) and further gains were recently recorded. The Swiss franc has also been strong against other currencies. The SNB's price stability-focused interest rate policy, Switzerland's comparatively lower inflation rate, and the Swiss franc's status as a safe haven are likely to continue underpinning the local currency.

Currencies: The Swiss franc remains more expensive than the euro

Financial markets: EUR/CHF well below parity

Sources: Bloomberg, Credit Suisse
Last data point: July 17, 2023

Equities: Focus on laggards

The recent upward trend in the global equity markets is being driven by just a few sectors, such as technology. The vast majority of sectors remained behind the rally. The experts at Credit Suisse expect laggards – such as equities from emerging markets, defensive stocks, and value stocks – to make up ground in terms of the price headwinds they have experienced. At sector level, utility companies, consumer staples, and industrial companies are preferred, as are high-quality stocks, in particular stable Swiss dividend stocks.

Equities: The global market is recovering only slowly

Dividend yields remain higher than government bond yields in Switzerland

Sources: Refinitiv, Credit Suisse
Last data point: July 17, 2023

Commodities: Upside potential for gold and oil

With US inflation falling, conversations about interest rates have shifted from tightening interest rates to cutting them. This should benefit gold, since in this scenario the US dollar is likely to weaken and real interest rates are likely to fall. Oil has recently recovered in the wake of the decision by the Organization of the Petroleum Exporting Countries (OPEC) to cut production in July and August, while demand is seasonally strong. Price risks are also pointing toward the upside. Unusual weather conditions have caused increased volatility in the agricultural markets, while base metals are trending sideways due to lack of growth momentum from China.

Commodities: Gold and oil prices likely to continue rising

Price of gold expected to rise

Sources: Refinitiv Datastream, Credit Suisse
Last data point: July 14, 2023

Real estate: Rate reversal for fix mortgages in sight

The SNB is expected to raise its policy rate one last time in September, by 25 basis points. This will see interest rates on SARON mortgages increase by a further 25 basis points and then move sideways. Interest rates on fix mortgages are also likely to have peaked and are expected to fall again by as much as 35 to 60 basis points over the next 12 months. However, significant upward and downward spikes as have been seen up to this point are expected to continue.

Real estate: Fix mortgages likely to fall soon

Interest rates for fix mortgages likely to have peaked

*SARON mortgage interest rate from September 21, 2020, previous historical interest rates: Flex rollover mortgage (three-month LIBOR)
Source: Credit Suisse
Last data point: July 11, 2023

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