Investing in August: Our forecast in brief
Credit Suisse's perspective on economic and financial market developments over the short to medium term and their implications for investors. The recovery on financial markets points to a brighter future, although progress is likely to be slow.
Reducing risk ahead of volatile summer months
Although the economy is expected to continue its recovery, fresh outbreaks of the virus and political risks could lead to increased volatility. After a three-month rally, we are therefore taking some of our profits and reducing our equity allocation as well as our weighting of high-yield corporate bonds to a strategically neutral level. Medium-term, we nevertheless see attractive potential returns for both asset classes. We are retaining our overweight in investment-grade bonds, as they are likely to continue benefiting from purchases by central banks.
Economy: Swiss economy is recovering
Global economic activity recently picked up again significantly as numerous governments eased their lockdown restrictions. Pent-up demand gave an immediate boost to consumer spending. However, the next phase of the recovery is likely to prove fairly sluggish. In the US, for instance, there are already signs of a slowdown in the economic recovery.
Switzerland has seen a pronounced economic recovery since the end of the lockdown, with the Purchasing Managers Index (PMI) for the service sector almost back to its pre-slump level. Demand is rising, especially in sectors where supply was temporarily unavailable, i.e. restaurants, bricks-and-mortar retailing, and parts of the healthcare industry. However, the second phase of the recovery will be a slower process: Consumers are anxious, and international trade has been impaired.
Interest rates: Central banks keeping key interest rates unchanged
The leading central banks are unlikely to cut key interest rates any further in the foreseeable future. Instead their focus will be on using bond purchases to support the supply of credit, thereby keeping long-term interest rates low. In addition, they are "subsidizing" the refinancing of banks. The medicine is working: The example of the US shows that the volume of credit is actually increasing, unlike in previous recessions. The widespread availability of liquidity is helping companies to weather the loss in earnings during lockdown.
Currencies: SNB restricting Swiss franc's potential appreciation
The Swiss franc is still much stronger against the euro than it was in the 2018-2019 period – even if it has not broken through the 1.05 level. However, the Swiss National Bank (SNB) is unlikely to tolerate any further appreciation and, if necessary, will likely weaken the Swiss franc by intervening on the foreign exchange market. Conversely, we see upward potential for the euro once agreement is reached on the EU reconstruction fund and the global economic recovery beds down. The Swiss franc will then lose some of its safe-haven appeal.
Equities: Chinese equity markets are promising
Along with Swiss equities, we see good opportunities in the somewhat more cyclical German equity market. In addition, we recently added China to our list of preferred equity markets. The country was the first to be affected by the crisis, and also emerged from it ahead of all others. It also benefits from attractive valuations, and, despite ongoing tensions, we do not expect any immediate escalation between China and the US.
Commodities: Bull market in gold likely to persist
Commodity prices have recently risen across the board, with gold having reached the symbolically important level of USD 1,800 thanks to lower US real interest rates and a weaker dollar. Interest rates are likely to remain very low in nominal as well as real terms, thereby supporting gold. Gold would also benefit from a weaker US dollar. Moreover, the recovery on the oil market is continuing – even if it has slowed somewhat of late. Medium-term, we therefore expect to see oil prices slightly higher than they are at present as the economy gradually recovers.
Real estate: Residential property market is reviving
The COVID-19 crisis initially created paralysis in the Swiss residential property market, the outcome of which is likely to be a slight decline in prices across the year as a whole – especially in the high-end segment. Nevertheless, the market already seems to be emerging from its state of shock – especially given that conditions for purchasing residential property remain attractive. For example, average mortgage interest costs for a homeowner have more than halved since 2008 and currently stand at just CHF 4,750 per year.