Investments in November: 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. The good economic situation is supporting the equity markets. However, normalization of monetary policy and high valuations are limiting the upside potential. 

The combination of strong global economic growth with already high equity valuations and geopolitical risks confirms our neutral weighting of global equities. In addition to Swiss, euro zone, and Australian equities, we also now prefer Japanese equities. We also recommend underweighting US and British equities.

In the case of bonds, for which our overall assessment is neutral, the focus should remain on investment-grade corporate bonds and bonds issued by financial institutions. Alternative investments such as hedge funds are also helpful to diversify a portfolio. Our overweighting of commodities (especially energy) is tactical, holding the income as additional liquidity.

Economic Recovery Becoming More Broad-Based

The mood in companies is extremely good, both in industrialized countries and in most emerging markets. In the US and the euro zone, optimism has reached the highest level seen for several years. Thanks to low interest rates, falling unemployment, and stable commodity prices, the outlook for the coming months is also good.


Euro Zone: Mood in Industry Continues to Improve 

Purchasing Managers' Indices (PMI)
Source: Datastream, Credit Suisse 

Labor Market Situation in Switzerland Improving at a Slow Pace

Unemployment is falling in Switzerland, but employment growth is faltering. Companies continue to take a cautious approach to recruitment. In addition, they are likely to focus primarily on ways to improve their profits again.

The majority have taken the appreciation of the Swiss franc onto their own books to keep orders and the necessary staff. Despite the expected improvement in the profit situation, only a small increase in employment is likely to be seen (forecast for 2018: 0.5%) and salaries are likely to rise only slightly (0.7%).

Bonds: Normalization of Monetary Policy Leads to Higher Interest Rates

Interest rates on government bonds in Europe are expected to slowly increase in view of the expected normalization of monetary policy. This also applies to interest rates in Switzerland, since rates are closely linked to international developments, particularly those in the euro zone.

We therefore expect that the interest rate risk for bond investors will increase. We continue to favor corporate bonds, including financial bonds, as well as selected bonds from emerging markets, in both US dollars and local currencies.


Interest Rates Seeing Some Upward Movement 

Yields on 10-year government bond as a percentage
Source: Bloomberg 

Currencies: Short-Term Sideways Trend Expected for the US Dollar

The dollar has recently benefited from rising US interest rates, with the Fed maintaining its optimistic economic outlook and interest rate forecasts, and the markets responding positively to proposed tax cuts in the US.

However, if details of the funding and duration of these cuts remain vague and inflation in the US fails to exhibit robust recovery, we still expect the US dollar to move into a sideways trend against the euro and the Swiss franc. On the other hand, if interest rates rise internationally, while the Swiss National Bank (SNB) holds off on rate hikes, the devaluation pressure on the Swiss franc could grow again.


Interest Rate Differential Should Support the US Dollar against the Swiss Franc. 

Source: Datastream, Credit Suisse/IDC

Equities: Japan Now One of Our Preferred Markets

Strong economic growth supports equities from a global perspective, while surprise interest rate increases and high valuations pose a risk. We are therefore maintaining a neutral assessment for equities overall. However, we expect to see significant differences in performance between markets.

In addition to the euro zone, Switzerland, and Australia, we now include Japanese equities in our group of preferred markets. They can be expected to benefit from the combination of attractive valuations, improved profit expectations, a high sensitivity to global growth, and the easing of monetary policy.


Improved Profit Expectations Should Support Japanese Equities

Source: Datastream, Credit Suisse/IDC

Commodities: Neutral Assessment after Rally in the Third Quarter

Rising energy and metal prices have helped commodity indices to achieve a strong third quarter. Increased demand in the summer months and reduced OPEC exports accelerated destocking on the oil market.

However, this process may now be slowing down for seasonal reasons. We have therefore moved to a neutral tactical assessment. A lack of upside potential in other commodity sectors is leading to a neutral view of the overall commodity market. Due to rising US interest rates, we also continue to consider the prices of precious metals to be vulnerable.


Oil Stocks Remain Too High for Stronger Price Increases

Source: OECD, Credit Suisse

Swiss Real Estate: Significant Increase in Vacancies for Rental Apartments

At 1.47%, the empty dwellings rate has reached its highest level for 18 years. This large increase is primarily due to the rental apartment market, while vacancies in owner-occupied properties remain low.

Due to the lack of attractive investment alternatives in the negative interest environment, there has been no reaction to the drop in demand. Remote municipalities in particular are seeing high rates of vacancy. We expect that vacancies will continue to rise in 2018, in the wake of lower immigration rates and continued high levels of construction activity.


Strong Increase in Vacancy Rates for Rental Apartments 

Empty apartment rates by segment
Source: Swiss Federal Statistical Office, Credit Suisse