Investing in November: Our forecast in brief

Credit Suisse's perspective on economic and financial market trends over the short to medium term and their implications for investors. Despite turbulence, the outlook for the global economy remains positive. Emerging market equities appear undervalued.

Corrections create selective opportunities

Equity markets have reacted strongly to uncertainties in US-China trade relations as well as the recent uptick in interest rates. We remain positive on the outlook for growth in the global economy as well as earnings. Following the rate hike, we are upgrading government bonds to neutral. By contrast, global real estate investment trusts (REITs) remain vulnerable in our view.

Our equity focus is on emerging markets, which look undervalued. Along with the IT sector we are also positive on the reclassified communications sector, which now includes stocks from the social media sector as well.

Economy: Solid Swiss equity market is supporting private consumption

Economic growth remains solid in the developed markets. Due to an improving labor market, consumer sentiment in the euro zone and the US continues to develop well and helps support private consumption. However, momentum has faded in many emerging markets as a result of the lower US dollar liquidity.

Although the Swiss export boom is losing a bit of steam, the situation on the country's labor market shows a visible improvement. The unemployment rate has been falling for more than two years and is now at a similarly low level to where it was in previous upturns. Employment is increasing, not only in government-related sectors but now in the private sector too. The healthy situation in the labor market is likely to support private consumption.


Strong growth in employment in Swiss private sector

Source: Swiss Federal Statistical Office, Credit Suisse

Interest rates: Ultra-loose monetary policy in Europe until fall 2019

Although the euro zone and particularly Switzerland are growing at above their potential rate, the European Central Bank (ECB) and the Swiss National Bank (SNB) are leaving their negative interest rates untouched for now – not least due to uncertainties over trade relations and the European political situation.

We expect both central banks to wait until fall 2019 before making their first move on interest rates. Price stability does not appear to be at risk, either in Switzerland or in the euro zone. The SNB wants to avoid sparking another surge in the value of the Swiss franc through a premature rate hike. The Fed, meanwhile, is likely to raise interest rates again in December as well as in 2019.


Interest-rate gap between Europe and the US continues to widen

Source: Datastream, Credit Suisse

Currencies: Euro/Swiss franc exchange rate likely to remain in narrow range

The euro/Swiss franc exchange rate recovered slightly last month. The tensions surrounding the Italian budget process nevertheless continued to weigh on the euro. We think upside potential for the euro/Swiss franc currency pair will be limited for as long as political discussions remain center-stage.

Looking further ahead, however, the stabilization of growth in the euro zone, coupled with the expected normalization of ECB monetary policy, is likely to support the euro. We therefore think the euro/Swiss franc exchange rate will head back toward 1.20 on a 12-month view.


Better economic data is likely to support the currency pair

Source: Datastream, Credit Suisse

Equities: Diversification thanks to defensive Swiss sectors

We maintain our positive view on the Swiss equity market. First, we anticipate positive earnings momentum here too. Second, we see the fairly defensive Swiss stocks as offering better diversification than other markets if – contrary to our expectations – setbacks on global equity markets are repeated.

The slight weakening of the Swiss franc that we are expecting in the medium term will support Swiss equities. In addition, the small and mid-cap segment is likely to recover from its recent setbacks.


Higher earnings expectations for Swiss equities in 2019

Source: Datastream, Credit Suisse

Commodities: Further recovery expected

Commodity prices have recovered in recent weeks. We see further upside, as in our view prices are still factoring in an overly pessimistic scenario for the world economy.

Commodity-specific fundamentals and the dynamics of the forward curve point to fairly tight supply, while investors are cautiously positioned. Positive rolling yields and increased supply risks will support oil prices. The economic stimulus from China is likely to boost industrial metals, while covering purchases could strengthen precious metals.


Gold suffering from strong US dollar

Source: Bloomberg, Credit Suisse

Real estate: Focus remains on rental apartments

Building permits were issued for 49,000 rental apartments in the last twelve months – nearly the same level as in the prior one-year period. By contrast, the number of permits for single-family dwellings (–8.7%) and condominiums (–4.4%) remains on a downward trend.

This trend is also responsible for another significant rise in owner-occupied property prices. Since there are still no signs of a moderation in the construction of rental apartments (+3.5%), the downward pressure on rents is likely to continue.


Production of owner-occupied property still declining

Source: Baublatt, Credit Suisse