Investing in August: Overweighting of equities premature

Investing in August: Our forecast 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. The easing of COVID-19 restrictions is allowing the Swiss economy to continue recovering, and the recovery is expected to cause a bump in corporate profits and long-term interest rates to rise.

Practicing patience and prudence when investing over the summer

Even if long-term interest rates have recently fallen, the experts from Credit Suisse expect them to begin climbing again over the coming months as a result of the economic rebound. For that reason, they are keeping government bonds underweighted. The recovery could also lead to unusually strong growth in corporate profits, thereby increasingly justifying the current stock valuations, which are slightly overpriced. However, investor optimism still appears to be exaggerated at the moment. In other words, it could be too soon to overweight equities. Investors ought to wait until better tactical opportunities present themselves before spending their excess cash on stocks.

Economy: Swiss mobility still feeling the effects of the pandemic

Restrictions are being loosened in many places. The reopening of the economy is leading directly to an economic recovery. Accordingly, it is anticipated that the global gross domestic product will soar by 6.1% this year. In the meantime, year-over-year baseline effects, disruptions in the supply chains, and the rising demand for goods have recently caused inflation to shoot through the roof, especially in the US. However, this upward pressure is likely to subside gradually.

The Swiss economy is recovering quickly. Nevertheless, it could take a while before the end of the pandemic and for things to completely return to normal. For instance, the way Swiss citizens behave when it comes to using transportation is still different from their pre-pandemic behavior. The changes in public transportation use and commuting are especially noticeable. A look at the countries that are ahead of Switzerland in their vaccinations and easing of restrictions suggests that will be the case for some time to come. 

Economy: Pandemic affecting Swiss mobility

Swiss mobility continues to be shaped by the pandemic

Sources: Google COVID-19 Community Mobility Report, Credit Suisse
Last data point: June 27, 2021

Interest rates and bonds: ECB would tolerate higher inflation

Like the Federal Reserve (Fed), the European Central Bank (ECB) has set a new inflation target. Now, inflation should be on average around 2% over time and no longer "close to but below 2%." The new target thus allows the ECB to tolerate a temporary overshooting of inflation. Since the euro was physically introduced, core inflation (excluding food and petroleum) in the euro zone has remained persistently low. To achieve its new target, the ECB will probably have to maintain its policy of low interest rates.

Interest rates and bonds: Euro zone inflation persistently low

Euro zone inflation persistently low

Sources: Datastream, Credit Suisse
Last data point: June 2021

Currencies: Euro displays temporary weakness

The euro once again recently lost some ground against the Swiss franc. This period of weakness should be only temporary, however. We still expect the euro to regain some of its value against the Swiss franc by the end of the year. There could be less demand for safe harbors like the Swiss franc as a result of the economic recovery and the overall return to normal. The narrow spread in interest rates between the Swiss franc and the euro for the time being is putting tight limits on the euro's potential for appreciation.

Financial markets: Euro expected to recover against the Swiss franc

Euro expected to recover against the Swiss franc

Sources: Bloomberg, Credit Suisse
Last data point: July 17, 2021

Equities: Corporate profits much higher than last year

In the coming weeks, investors' attention will turn to the reporting season for the second quarter of 2021. According to surveys by data company FactSet, the majority of analysts are predicting that profits will be more than 80% higher than in the same quarter last year, when they were suffering from the effects of the pandemic. Every sector will likely contribute to the positive trend, with profit growth expected to be highest in the cyclical sectors, as it was in the first quarter.

Equities: Expected profit growth contribution by sector

Expected profit growth contribution by sector

Sources: FactSet, Credit Suisse
Last data point: July 7, 2021

Commodities: Volatility returns

Commodity prices have recently fluctuated more heavily again, and the nervousness that reflects is likely to persist. A slowdown in manufacturing activity could relieve some of the pressure on supply chains. At the same time, the lack of agreement between OPEC+ member states at their July meeting led to uncertainty. This is causing experts to take a more neutral stance towards oil due to a lower risk-reward profile. Gold has also had its ups and downs as of late, with expectations concerning Fed policy remaining the determining factor.

Investing: Fluctuating commodity prices

Fluctuating commodity prices

Sources: Bloomberg, Credit Suisse
Last data point: July 9, 2021

Real estate: Home ownership often remains a pipe dream for young adults

Numerous surveys indicate that home ownership is also highly popular among younger adults. However, this dream is getting harder and harder to turn into reality because of the high price level that has been reached and the strict barriers placed on financing. As a result, roughly 80% of 35-year-olds are renting the place they live in, reflecting a rising trend. For Generations Y and Z, that means the dream of owning their own home will remain just that in many cases, and they will not be able to realize this dream until they have gotten much older.

Real estate: Most young adults rent their place of residence

Most young adults rent their place of residence

Source: Swiss Federal Statistical Office, Credit Suisse
Last data point: 2019

Do you have questions about this topic?

Schedule a consultation This link target opens in a new window
We will be happy to assist you. Call us at 0844 844 007.