Investing in June: Equities still attractive despite trade war

Investing in June: 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. Equities still attractive despite escalation of trade war. Nonetheless, Swiss industry is stagnating.

Global equities remain overweight

We are maintaining our overweighting of global equities with a preference for emerging markets and the US. The latter allows us to participate in the worldwide growth in the technology sector and ought to prove resilient in the current environment of geopolitical tensions.

We are also continuing to favor emerging market equities, but they are expected to have limited potential for Swiss investors as a result of the outlook for local emerging market currencies being downgraded from positive to neutral. Our cash holdings remain low. As for the other asset classes, we are adhering to our long-term neutral weighting.

Economy: Swiss industry stagnating

In spite of the weakness in global industrial production, the gross domestic product of industrialized nations showed robust growth in the first quarter of 2019. Consumer demand, driven by job creation and wage growth in the services sector, was primarily responsible for that. Provided there is no further escalation in the trade dispute, industrial production should return to a growth track after companies have finished the destocking that is ongoing.

The Swiss Purchasing Managers Index (PMI) fell below the growth threshold in April for the first time since 2015. As was the case just over four years ago, the cause in early 2019 can be found in Europe. In 2015, however, industry was mainly suffering from a lack of competitiveness in terms of pricing after the Swiss National Bank abandoned the minimum euro exchange rate. The current weakness in demand in the euro zone can be attributed less to a strong Swiss franc than sluggish industrial activity in Europe.


Swiss PMI slips below growth threshold

Source:, Credit Suisse
Last data point: April 2019

Bonds: Market with selective opportunities

Swiss bonds continue to offer a certain security for phases of heightened risks, but large segments of the market are producing only marginally positive returns. Overall, we believe careful and reasonable selection is necessary in every market.

This applies not only to corporate bonds but also emerging market debt. The latter continues to offer attractive returns, but the influence of both the issuer's profile and the respective country risk must be taken into account during selection.


Prime rate in the US considerably higher than in Europe

Source: Bloomberg, Credit Suisse
Last data point: May 5, 2019

Currencies: Neutral outlook for major currencies

The volatility in the currency markets has increased due to the political tensions, but it remains relatively low for most currency pairs. Accordingly, we have a neutral outlook for the euro-US dollar and the US dollar-Swiss franc rates.

We are changing our stance on emerging market currencies to neutral because the economic prospects are being viewed as more moderate. We have also downgraded our assessment of the British pound and Swiss franc to neutral because the uncertainty about the outcome of the Brexit process has risen temporarily.


Better economic data likely to support the euro and US dollar

Source: Datastream, Credit Suisse
Last data point: May 15, 2019

Equities: Swiss stocks also remain attractive

We remain neutral on Swiss equities and view the upside potential following the previously strong price development as limited for now. We believe the US and select emerging markets have better chances in the current environment.

They have greater monetary policy leeway and a less defensive sector composition than the Swiss market. The US in particular should benefit from its solid domestic economy, lower dependency on foreign trade, and, last but not least, a strong IT sector.


Swiss companies have a strong focus on exports

Source: OECD, World Bank, Credit Suisse
Last data point: 2017

Commodities: Setback caused by new trade risks

Commodity prices suffered a setback as a result of the renewed tensions in the trade conflict. Cyclical industrial metals are especially susceptible to growth risks in China. The price of oil has fared better due to sustained supply risks. OPEC's reaction to the latest shortage of supply will be important to the short-term oil price development.

Because of the uncertainty, our outlook is presently neutral. Heightened geopolitical risks favor gold, but the continued strength of the US dollar has proved to be an obstacle.


Commodities tightly linked to China's economy

Source: Bloomberg, Credit Suisse
Last data point: April 2019

Real estate: High supply weighing on Swiss rents

Over 5% of all rental apartments are vacant. In other words, the supply rate remains close to the highest level seen in the past 13 years. Outside the best locations in the urban centers, market power has therefore shifted from landlords to tenants.

To avoid lengthy vacancies, landlords are increasingly having to lower the amount of rent they charge. According to Wüest Partner, rents for advertised apartments fell by 1.9% in the first quarter of 2019 compared to the same quarter a year ago.


Over 5% of rental apartments are advertised on websites

Source: Meta-Sys AG, Wüest Partner, Credit Suisse
Last data point: Q1 2019

Do you have any questions on this topic?

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