Investing in October: Our forecast in brief

Tech stocks back to neutral weighting

The rally on the equity markets has led to excessive valuations here and there in some market segments. For autumn we expect several risk factors with the slowing recovery, new virus infections, and the upcoming US election. We are therefore reducing the risk in our portfolio by eliminating the overweighting in IT and energy stocks, in some cases taking immense profits. We also believe that Swiss investors should mix cyclical German or Chinese securities into their portfolios. In the bond segment, we still consider investment-grade and emerging market debt in hard currencies to be attractive.

Economy: Swiss economy gets a quick pick-me-up

Following the sharp rebound, global economic growth could slow down again over the next few months. One reason for that is that the boost from fiscal policy is tapering off. The US Congress, for example, has thus far failed to agree on another stimulus package. On top of that, consumers are nearly finished making the purchases they had deferred, and the situation in the labor market remains depressed worldwide. Finally, although we do not anticipate nationwide lockdowns, a return to regional restrictions could slow the momentum.

Switzerland is also experiencing a speedy recovery following the unprecedented economic downturn in the first half of 2020. For example, retail sales are 10% higher than last year's level. Accordingly, we are standing by our relatively optimistic forecast of a 4% decline in gross domestic product (GDP) this year. Heading into the future, the recovery is likely to continue at a rather sluggish pace and take the shape of a "tilted V." GDP is not likely to return to the level achieved at the end of 2019 until the end of 2021.

Interest rates: Investment-grade bonds relatively attractive

Interest rates around the world remain stuck near their historic lows. Government bonds in Switzerland and Germany are even earning negative interest. The interest rates on corporate bonds have also fallen, but their absolute yield level is still higher, with purchases by central banks giving them a boost. We favor bonds with higher credit ratings (investment grade), which are not expected to default, and generally prefer short to medium maturities.

Currencies: SNB restricting Swiss franc's potential appreciation

Since the beginning of the economic recovery and the agreement on an EU recovery fund, the euro has increased a little in value against the Swiss franc. That is because the demand for Swiss francs as a safe haven has declined somewhat recently. If the global economic situation takes another turn for the worse or there is an escalation in geopolitical risks, demand would rise once more. In such an event, however, it can be assumed that the Swiss National Bank (SNB) would intervene in the foreign exchange market to prevent the Swiss franc from appreciating excessively.

Equities: Taking profits in the IT sector

The economic recovery and continued, strong willingness on the part of central banks to provide assistance remain good arguments for equity investments – so does the lack of alternatives. Given the numerous short-term risks, such as the US elections, Brexit, and a second wave of the coronavirus, a certain degree of caution seems called for. The strong price gains over the past few months have also resulted in valuations in several sectors occasionally reaching their limits. For that reason, we are taking some of the hefty profits, particularly in the tech sector.

Commodities: Mixed price recovery

The recovery of commodities prices was a little shaky in September. The volatility of cyclical commodities will probably remain high because the recovery in industrial production is temporarily losing momentum. For gold, we see renewed upside potential following a brief period of consolidation since real interest rates will remain negative, and the US dollar is expected to weaken further. Oil prices are likely to climb again in the fall after their seasonally weaker phase.

Real estate: Real estate funds remain on the road to recovery

Swiss real estate funds have recovered, posting a slightly positive total return of 0.6% since the beginning of the year. By contrast, Swiss real estate equities are still in negative territory, having fallen 10.7%. On a worldwide scale, real estate stocks have even lost 11.5% of their value. Investors have been avoiding shares of real estate investment trusts (REITs) with a focus on offices, hotels, and retail spaces. By comparison, REITs that specialize in industrial and logistics properties have benefited from the crisis.