Investing in July: 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. Economic growth in the US, Europe, and most emerging markets should be stronger than average in the second half of 2018. Swiss equities are also one of our preferred markets.

We have a positive view of Swiss equities. In terms of regions, we now prefer Switzerland in addition to the emerging markets and the United Kingdom. Whereas we have a positive assessment of the energy, financial, and IT sectors, we are downgrading telecommunications to neutral.

We project that both industrials and utilities stocks will underperform. In the debt segment, we have a positive view of emerging market debt in US dollars and local currency as well as convertible bonds, and remain cautious regarding government bonds. In commodities, we prefer industrial metals.

Economic situation: the Swiss labor market is starting to recover

Global economic growth is strong despite all the political uncertainty. Households in Europe and the US are actively consuming thanks to rising wages and improved labor markets, and companies are investing thanks to robust demand and the persistently favorable financing terms.

The Swiss economy will grow by 2.2% in 2018, which is significantly stronger than in the past three years. In particular, robust manufacturing activity is having a positive effect on the labor market. The first quarter saw the largest increase in industrial employment in ten years. The latest results of the purchasing manager survey that we are conducting along with suggest even faster employment growth in the next few months.


Employment growth likely to persist

Source: Swiss Federal Statistical Office, Credit Suisse

Interest rates: monetary policy normalization continues

The US Federal Reserve (Fed) raised interest rates once again in mid-June. Two more are likely to follow by the end of the year. The European Central Bank (ECB) will end its bond purchase program in late 2018 and will continue to reduce purchases from September to December (tapering). Its first interest rate hike will presumably take place in September 2019. We do not anticipate an interest rate hike by the Swiss National Bank (SNB) until March 2019, i.e. slightly before the ECB's hike.


Another interest rate hike in the US

Source: Datastream, Credit Suisse

FX: dollar/franc rate trapped in wide trading range for now

Although the Swiss franc may certainly benefit from its role as a safe haven in periods of serious political uncertainty, the US interest rate hike should limit any appreciation of the franc against the US dollar. The dollar/franc rate may thus hover within a wide trading range of around 0.97.

Over the longer term, the US's rising budget deficit will create headwinds for the US dollar, and Europe's economic performance may catch up with the US. We expect the US dollar/Swiss franc rate to fall back to 0.94 over 12 months.


Further appreciation of the franc limited by US interest rate advantage

Source: Datastream, Credit Suisse

Equities: Swiss equities now our favorite again

Swiss equities have performed considerably worse than their foreign counterparts this year. They do offer high dividend yields, however. Swiss companies are also exhibiting robust revenue growth based in part on significant exposure to the growth market of pharma and their strong global focus. Considering the attractive valuations and the positive earnings momentum, Swiss equities are one of our favorite markets within this asset class.


Swiss equities with attractive valuations

Source: Datastream, Credit Suisse

Commodities: positive assessment, particularly for industrial metals

Commodity prices have recently shown additional gains thanks to a rise in industrial activity. Our outlook remains positive, although we prefer industrial metals in particular since they are likely to benefit the most from the improved economy.

As for the energy sector, the seasonally stronger summer months are coming up, although the Organization of Petroleum Exporting Countries (OPEC) could expand their output in order to prevent too much of a shortage in the market. Precious metals are vulnerable to rising real interest rates in the US.


High industrial production results in high industrial metal prices

Source: Credit Suisse, Bloomberg

Real estate: equities outpace funds

After their relatively disappointing progress in 2017, Swiss real estate equities have shown solid performance since early 2018. At 2.0%, their total return thus far is higher than that of European real estate equities (1.6%).

However, real estate funds have fallen in the year to date (-3.0%), with an average premium of 22.3% as recently as late May. The prospects of higher interest rates and pressure on rental income for multi-family dwellings are likely to be deciding factors here.


Comparison of indirect Swiss real estate investments

Source: Datastream, Credit Suisse