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Investing in October: 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. The US financial markets are performing well this year. In contrast, defensive markets such as Switzerland ensure risk diversification.

Growth-focused investment strategy remains attractive

The recommended investment strategy continues to reflect our positive expectations regarding global growth. We are therefore maintaining an overweight in equities and commodities. In addition to the home market, we also expect emerging market equities to deliver above-average performance after the recent setbacks.

In contrast, we are rather cautious with regard to euro zone equities. Overall, we remain underweight in fixed-income investments, with a preference for corporate and emerging market bonds. For commodities, we currently have no sector preference. 

Economy: The US financial markets are advanced in the cycle

The global recovery should continue despite trade disputes, the fragility of some emerging markets, and political uncertainties in Europe. This is because wages are increasing and companies are actively investing. Due to scarce capacities, gradually increasing inflation is expected. In contrast to Europe, the US has now once again achieved the goal of its central bank.

In Switzerland, the real gross domestic product increased by 0.7% in the second quarter of 2018 compared with the previous quarter. The current situation for the export sector, however, is no longer looking quite so positive: Our export barometer has dropped recently. The Swiss franc tends toward strength and the overload in the industry seems to be already decreasing.

foreign-demand-for-swiss-goods-decreased

Export barometer is taking a plunge, from the top

Source: PMIPremium, Datastream, Credit Suisse

Bonds: Short terms on the home market preferred

The bond markets are still caught between robust economic and political uncertainty. In light of the appreciation surges of the Swiss franc, the Swiss National Bank (SNB) will likely be cautious and wait to purchase foreign currencies or carry out an initial interest rate hike until the European Central Bank (ECB) has itself carried out an interest rate hike. This should be the case in autumn 2019.

Nevertheless, we anticipate a gradual rise in bond yields and favor short terms for Swiss franc bonds. Medium-quality corporate bonds offer moderate additional returns compared to government bonds. After the recent setbacks, emerging market bonds are once again attractive. 

the-financial-markets-expect-a-late-interest-rate-increase-by-the-snb

The financial markets expect a late SNB interest rate increase

Source: Bloomberg

Currencies: Swiss franc likely to remain in close range against the US dollar

The dollar-franc exchange rate has appreciated somewhat over the past two months. However, despite the recent franc profits, short-term investors are relying more on an appreciation of the dollar against the Swiss franc. Over three months, we expect a slight depreciation of the Swiss franc in the direction of 0.98.

Uncertainty in emerging markets and in European politics continues to pose appreciation risks for the Swiss franc, especially since the volatile budget process is about to begin in Italy. In contrast, the stabilization of growth in the euro zone is a plus for the euro. In the short term, however, we see little appreciation potential for the euro.

financial-markets-are-showing-euro-franc-exchange-rate-fluctuations

The euro-franc exchange rate fluctuates with the Italian risk premium

Source: Datastream, Credit Suisse

Equities: The US equity market performed well this year

The rather defensive positioning of the Swiss market with a high proportion of sectors such as the pharmaceutical industry should be a plus in a market environment characterized by uncertainty. However, because the Swiss economy is heavily globalized, its companies cannot escape the global environment.

In contrast, the US equity market this year clearly outperformed Europe and emerging markets in general. In light of the many risks, however, it makes sense to pursue a more defensive country and sector weighting. We therefore remain positive regarding the domestic market. However, investors should expect ongoing fluctuations. In the emerging markets, we expect a recovery after the setbacks.

equities-from-the-healthcare-sector-are-less-sensitive-to-economic-fluctuations

Higher earnings growth in healthcare expected

Source: Datastream, Credit Suisse

Commodities suffering from the strong US dollar

Uncertainty also remains high on the commodity markets. Positioning data shows a marked pessimism on practically all commodity markets, which we do not share due to our positive growth expectations.

Currently, however, geopolitical factors seem to have the upper hand and growth concerns prevail. Despite all these worries, even gold can’t shine. This is probably due to the continued strength of the US dollar and the modest physical demand.

commodities-suffering-from-the-strong-us-dollar

Gold suffering from strong US dollar

Source: Bloomberg, Credit Suisse

Real estate: Contractual rents decreasing for the first time in 12 years

For the past three years, online housing advertisements have shown declining rents. In the meantime, actual concluded rental agreements also indicate decreasing rents.

The contractual rents have decreased for the first time in almost 12 years in the second quarter of 2018 year-on-year – by 1.2 percent. But those signing a rental agreement in Switzerland are still paying on average 17 percent more rent than in 2005. In major centers, rent inflation even reaches 23 percent.

all-measurement-methods-show-a-decline-in-rents

All measurement methods show a decline in rents

Source: Wüest Partner, Credit Suisse