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Investing in October: 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 geopolitical risks and hurricanes, the economic situation remains favorable. Equity markets have lost momentum, however. After a bout of weakness, Continental Europe in particular offers good recovery opportunities.

Investment Strategy: Add Alternative Investments for Diversification

Our recommended weightings for equities and bonds are close to what is regarded as a neutral stance. By contrast, we are overweight in alternative investments and underweight in liquid assets.

Within the equity portfolio we retain a positive view on equities from Switzerland, the euro zone, and Australia. By contrast, we are more cautious on US equities and – most recently – the UK market, too.

In terms of bonds, we continue to favor investment-grade corporate bonds and bonds issued by financial institutions. In addition, alternative investments should be added to the portfolio for diversification purposes; accordingly we are also overweight commodities and hedge funds.

Global Economy: Positive Start to Second Half

After the sharp acceleration seen in the first half of the year, the world economy began the second half on a very positive note. Business sentiment indicators for most economies have continued to improve.

The hurricanes are unlikely to throw the US economy off its robust 2% growth trajectory, while economic momentum remains strong in almost all European countries. We still expect a slight slowdown for the Chinese economy; by contrast, the recovery in Latin America and Russia is proceeding surprisingly well despite persistently low commodity prices.

Economic Situation: Swiss Statistics Puzzle

A look in the economic rear-view mirror reveals a mixed picture. According to the State Secretariat for Economic Affairs (SECO), there was modest economic growth once again in the second quarter.

Other statistics are significantly more positive, however: Consumer sentiment is above average, the number of overnight stays and capacity utilization rates in industry have risen again, and even retail sales are stabilizing. Leading indicators such as the Purchasing Managers' Index (PMI) and the export barometer are actually close to their record highs.

Swiss economic indicators are positive

Almost All Indicators in Green Zone Since 2017

Source: Datastream, GfK, Credit Suisse

Interest Rates and Bonds: Cautious Central Banks

Despite solid economic growth, inflation remains at a low level in most industrialized countries. This gives central banks sufficient freedom to undertake an extremely gentle normalization of monetary policy. While the US Federal Reserve (Fed) is expected to raise interest rates again in December, rate hikes are still not on the radar for the euro zone, Switzerland, or Japan.

Yields on most fixed income investments remain very low. We reiterate our preference for investment-grade bonds, with BBB-rated corporate bonds seeming to offer the best risk/return profile. In terms of sectors, we are particularly impressed by financial sector debt.

No increase in CHF and EUR short-term interest rates for the time being

Only US Short-Term Rates Rising for the Time Being 

Source: Datastream, Credit Suisse 

Currencies: Euro Remains Robust

The euro remains robust against the Swiss franc, even in these geopolitically uncertain times. The interest rate advantage is too limited at the moment for further appreciation against the Swiss franc.

The EUR/CHF exchange rate is expected to move within a narrow trading range between now and the year-end – we think a break through the 1.15 mark is fairly unlikely for now.

Should our forecast of a further rate move by the Fed materialize, at least a modest USD recovery can be expected. We expect the USD/CHF to remain above 0.95 and increase slightly in the medium term.

Slight fall in US interest rate advantage

US Interest Rate Advantage Falls Slightly 

Source: Datastream, Credit Suisse 

Equities: Swiss Market Remains Relatively Cheap

We continue to believe Swiss equities offer good upside potential due to relatively favorable valuations as well as an attractive sector split and an appealing dividend yield.

Globally, the transition to a less expansionary monetary policy could increase the pressure on prices. We continue to favor Continental European (including Swiss) equities over the US. We now have a negative outlook for UK equities.

MSCI AC World

Equity Valuations at Historically High Levels 

Source: Datastream, Credit Suisse 

Commodities: Recovery Continues

Commodity indices posted further gains in August on the back of rising metal and energy prices. Despite geopolitical risks the potential for gold remains very limited. Falling inventories should boost the price of oil. We are keeping our preference for the energy sector for the time being, and see precious metals as being vulnerable to a correction.

Gold price rose faster than US real interest rates

Gold Rose Too Quickly Relative to US Real Interest Rates 

Source: Datastream, Bloomberg, Credit Suisse 

Swiss Real Estate: Prices for Single Family Dwellings Are Rising Again

After declining for two quarters, residential property prices rose again slightly by 0.6% in the second quarter of 2017. While prices of single family dwellings rose by 1.5%, condominium prices fell by 1%.

However, the latest price increases do not constitute a trend reversal. We expect flatlining prices for the foreseeable future, since the potential demand appears too limited.

Residential property prices are flatlining

Zero Growth in Residential Property Prices 

Source: Wüest Partner, Credit Suisse