Investing in June: Overweight defensive Swiss equities

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. Despite a good chance of an economic recovery sometime soon, setbacks in the markets are still possible. It is worthwhile for investors to have a look at Swiss equities.

Maintain a defensive overweighting of equities

In the past few weeks, markets have seen a massive buildup of investment demand since not all investors have been benefiting from the recovery thus far. That is boosting share prices. Yet, investors need to be ready for bad news and setbacks at any time. In this environment, the defensive Swiss home market is an especially good choice for implementing a strategy of equity overweighting. Hard-currency bonds from emerging markets and high-yield corporate bonds are attractive at present. In addition, investment-grade bonds at the lower end of the risk scale are interesting because the interest premiums are still reasonable, and central banks are propping up the prices.

Economy: Room for growth in consumer spending is not being fully exploited

Worldwide industrial production is experiencing its strongest decline since the Second World War. If Chinese manufacturing were not already in recovery mode, the current collapse would even be almost as severe as the one that occurred during the Great Depression of the 1930s. However, lockdowns in many places are already being lifted, with governments and central banks stimulating their economies. Accordingly, a recovery is expected to begin soon. Nevertheless, it is likely to take place at a sluggish pace.

Despite the decline in economic output, record-high applications for short-time working assistance, and rising unemployment, Swiss households have put money aside during the lockdown – with estimates averaging CHF 2,000. They managed to do so because their opportunities for spending were limited while the government and unemployment funds provided financial assistance. Given the still high level of uncertainty and the varying degrees to which people are affected, it is likely that only a portion of those savings will initially be used for discretionary spending, and much less for investing in companies.

Financial markets: Swiss households have room for growth in consumer spending

The forced hiatus from consumer spending has enabled Swiss households to save money

Change in household income during the two-month lockdown
Source: Credit Suisse

Interest rates: SNB forgoing interest rate cuts until further notice

No central bank with negative interest rates anywhere in the world has lowered its prime rates any further during the coronavirus pandemic. The Swiss National Bank (SNB) is also refusing to do so for the time being. Cutting interest rates in the current environment would hardly reduce the upward pressure on the Swiss franc, but it would take a toll on banks. So, foreign exchange purchases remain the most important measure for weakening the currency. According to our estimates, the SNB has for the year to date made foreign currency purchases worth 70 billion Swiss francs – more than it did immediately after abandoning the euro minimum exchange rate in 2015.

Financial markets: Sight deposits held by banks at the SNB are increasing further

Bank deposits at the SNB continue to rise

Weekly change in sight deposits held by banks at the SNB, in billions of Swiss francs
Last data point: May 15, 2020
Source: Swiss National Bank, Credit Suisse

Currencies: SNB preventing Swiss franc from appreciating

The Swiss franc was last traded in a narrow range against the euro. The euro exchange rate moved close to – but not below – a level of 1.05 Swiss francs. The SNB's foreign exchange market interventions seem to have prevented further appreciation of the Swiss franc. Considering that the Swiss franc is overvaluated, we expect the currency to grow weaker once more if the coronavirus pandemic continues to subside and global economic activity recovers.

Investing: Swiss franc-euro exchange rate remains stable at 1.05

Euro exchange rate moves close to the level of CHF 1.05

Last data point: May 15, 2020
Source: Datastream, Credit Suisse

Equities: Swiss equities remain solid

Even if the more cyclical markets recoup their losses in anticipation of an economic recovery, Switzerland's defensive equity market remains attractive. That is partially because the pharmaceuticals sector ought to perform well. On a global scale, the technology sector offers upside potential. First of all, the growth drivers remain intact. Secondly, the valuation premium still appears relatively low for the time being given the industry's higher growth rates, margins, and profits.

IT sector shares offer attractive opportunities

IT stocks showing sustained positive trend

Relative performance compared to global equities (Jan. 1, 2011 = 100)
Last data point: May 9, 2020
Source: Datastream, Credit Suisse

Commodities: Oil market shows increasing signs of recovery

Following the most recent turmoil on the oil market, prices have regained some of their footing. Producers have started implementing cuts in production, while demand has probably reached its lowest point. A gradual recovery should enable the price of Brent to rise above the mark of USD 40 again over the next 6 to 12 months. Gold is continuing to benefit from the extremely low interest rates.

Investing: Oil prices on verge of recovery

Oil prices have bottomed out

Last data point: May 15, 2020
Source: Bloomberg, Credit Suisse

Real estate: Mortgage interest rates still extremely low

Interest rates for fixed-rate mortgages had briefly jumped as a direct result of the coronavirus pandemic, but now they have fallen again over the past few weeks. Over the next 12 months, we expect to see a slightly steeper yield curve with a modest increase in interest rates for fixed-rate mortgages. By contrast, interest rates on LIBOR mortgages are likely to persist at their record lows. That means interest rates will remain exceedingly low by historical standards, which, among other things, is expected to prop up the prices of owner-occupied homes.

Investing: Mortgage interest rates remain very low

Mortgage interest rates remain historically low

Last data point: May 18, 2020
Source: Credit Suisse

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