Investing in December: Emerging market equities are attractive

Investing in December: Our forecast in brief 

Credit Suisse's perspective on economic and financial market trends over the short to medium term as well as their implications for investors. Equities are still very attractive, particularly those from emerging markets. Following a lengthy downturn, global industry was able to stabilize itself once again.

Invest more in emerging market equities, less in US equities

With an overweight in equities, we aim to benefit from an expected improvement of the economy. At the same time, we are slightly adjusting the allocation by increasing the share of emerging market equities. In contrast, we are reducing our overweight in US equities a little and taking some of the local profits with us.

We are maintaining our underweight of government and corporate bonds with a higher creditworthiness. The expected return for these securities is too low, especially for investors who hold their investments in Swiss francs. We continue to weight alternative investments in accordance with the strategic allocation.

Economy: Signs of a global industry recovery

The manufacturing industry has been in a recession for over a year now. The trade dispute between the US and China, Brexit, strikes, and the weakening automotive industry are depressing world trade and the business climate. Thanks to a political détente and more expansive policies from central banks, the business climate has at least stabilized, as evidenced by the slightly higher levels of Purchasing Manager Indices (PMIs).

This also applies to Switzerland. The PMI for Swiss industry almost reached the growth threshold again in October. This contrasts with the fact that the order backlog in the machine, electronic, and metal industry (MEM) shrank by 14.7 percent compared to the previous quarter during the third quarter of 2019. As a matter of fact, the sector profile is extremely heterogeneous, since consumer goods manufacturers and construction suppliers are doing comparatively well.

Glimmers of hope for industry equities pmis are improving worldwide

PMIs are improving worldwide

Manufacturing Purchasing Managers' Indices (PMIs, growth threshold = 50)
Source: PMIPremium, Datastream, Credit Suisse
Last data point: October 31, 2019

Interest rates: Central banks are waiting until further notice

At the end of October, the US central bank (the Federal Reserve) lowered interest rates – the third interest rate step this year. However, the Federal Reserve simultaneously signaled its intention to take a break now. In the euro zone as well, following the easing measures from the European Central Bank (ECB) announced in September, we do not expect any changes in monetary policy until further notice. This makes it highly likely that the Swiss National Bank (SNB) will leave its negative interest rate at the current level for some time.

Notenbanken stuetzen finanzmaerkte nicht mit weiteren zinssenkungen

Central bank interest rates are remaining stable for now

Key interest rates, in %
Source: Datastream, Credit Suisse
Last data point: November 15, 2019

Currencies: Appreciation potential for US dollars against the euro

Since the start of the year, the US dollar index has provided a significant return. The profit was especially high against the euro, since the latter disproportionately suffers from the global industry weakness. In the shorter term, we see further potential for the US dollar due to the continued higher interest rate level in the US compared to the euro zone. However, if the global economic situation improves as expected over the coming year, the US dollar would become weaker again.

Financial markets us dollar index has been increasing significantly since the start of the year

US dollar index has been increasing significantly since the start of the year

Index (January 1, 2016 = 100)
Source: Credit Suisse
Last data point: November 19, 2019

Equities remain attractive

Diminishing geopolitical tensions and a better-than-feared reporting season have driven the global share indices. The stabilization of various leading indicators, such as the Purchasing Managers Indices (PMIs), the continued defensive positioning of investors and, last but not least, the relative attractiveness of equities compared to other asset classes, lead us to remain optimistic. Equities thus remain our favored asset class.

Stabilization of leading indicators supports equities

Stabilization of leading indicators supports equities

YoY, in %
Source: Datastream, Credit Suisse
Last data point: October, 2019

Commodities: Signs of life from cyclical markets

Cyclical commodities have recently gained as progress in the US-China trade dispute was reported. Gold, in contrast, suffered a setback. A possible recovery of the global economy could further support these dynamics. Copper is likely to have upward potential in such a scenario. In contrast, oil could remain vulnerable until the OPEC makes further output cuts and/or US shale oil production slows down more significantly.

Financial markets strong influence of china on commodity prices

Strong influence of China on commodity prices

Year-on-year comparison, in %
Source: Bloomberg, Credit Suisse
Last data point: October 31, 2019

Real estate: Price growth for residential property once again moderately lower

The growth in residential property prices has recently weakened slightly once again. During the third quarter of 2019, the prices of condominiums still rose by 2.2 percent. The price growth for single-family dwellings, at 3.3 percent, is also only just above the long-term average of 3.2 percent. Thanks to unchanged demand, as well as a decline in construction activity, we expect a price plus in the coming quarters as well. Due to regulatory directives for lending, however, said price plus will remain limited.

Investing in real estate prices for residential property are still increasing

Prices for residential property in Switzerland are increasing moderately

Annual growth rates in %; dotted lines: average 2000 – 2018
Source: Wüest Partner, Credit Suisse
Last data point: Q3 2019

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