Investing in September: 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 Swiss economy continues to grow robustly. We remain cautious with regard to government bonds and continue to favor Swiss equities and emerging market bonds.
Focus on Swiss equities and emerging markets
While we maintain our positive assessment of global equities after the strong reporting season, we now take a neutral view on equities from the UK. However, we confirm our preference for emerging markets and Switzerland over the euro zone.
In the bond segment, we remain cautious with regard to government bonds. In contrast, emerging market and convertible bonds are overweight. Furthermore, we remain neutral on hedge funds and real estate, and take a positive view of commodities due to the solid economy.
Economy: Swiss growth remains robust
Good news from the Swiss economy: It seems the Swiss economy will be able to carry over the strong growth rate into the fall of 2018. The risks of the Turkey crisis are mainly of an indirect nature, given that less than one percent of Swiss exports go to Turkey.
The collapse of the Turkish lira has increased concerns that trade disputes and political risks could stifle the world economy. However, the contagion risks of the Turkish crisis are low, even for Europe: Only three percent of European exports go to Turkey. Even the comparatively high exposure of the banking sector in Spain, France, and Italy to Turkey should not present an excessive risk to the otherwise robust economic situation in Europe.
Bonds: Short bond durations still favored
Political uncertainty has increased demand once again for secure government bonds. This will hold back interest rates in the short term. However, robust economic growth and the concomitant normalization of monetary policy could lead to gradually rising bond yields. We therefore favor bonds with short maturities, since they are less sensitive to changes in interest rates, and see more potential in corporate bonds than sovereign bonds.
Despite the recent appreciation pressure on the Swiss franc, the Swiss National Bank (SNB) has not intervened on the foreign exchange market. The sight deposits of banks with the SNB have not increased for more than a year. Other central banks are also staying on the normalization path: The US Federal Reserve is likely to carry out two further interest rate hikes this year and the European Central Bank (ECB) will end its bond buying program at the end of the year.
Currencies: Depreciation risks for exchange rates
The US dollar is benefiting from the big lead of US interest rates. However, given the growth recovery in Europe and the solidity of the Swiss economy, we consider this appreciation potential to be limited. The Swiss franc is also likely to continue to act as a safe haven in times of political uncertainty. The dollar-franc rate should hover within a wide trading range around 0.97. However, we expect a depreciation of the exchange rate over 12 months to 0.94.
Concerns about the consequences of the crisis in Turkey for European banks caused the euro to depreciate significantly against the Swiss franc. Furthermore, the uncertainty of the Italian budget process in the fall represents a depreciation risk for the euro-franc exchange rate. In the medium term, however, the euro should be supported by the solid economic outlook in the euro area, provided that the economy grows by around two percent as expected and the European Central Bank continues to normalize its monetary policy. We expect the euro-franc exchange rate to be within a range below 1.17 over three months.
Equities: Swiss equities offer several advantages
We maintain our positive assessment of equities, as we still expect continued global economic growth. The resulting extremely robust corporate earnings support the markets. However, we are aware of the risks that may arise from the trade disputes and other adverse shocks. We therefore recommend a mix of defensive and growth stocks. In terms of markets, we are overweight in defensive Switzerland and the more growth-sensitive emerging markets.
The comparatively defensive Swiss equity market is currently one of our favorites. Within the market, we favor financials on the one hand. On the other hand, we like medium and small caps that benefit from the robust Swiss economy and global economic growth. The dividends of many Swiss equities are attractive, especially when compared with bond yields.
Commodities: Still positive, but risks are high
Almost all commodity markets remained under pressure in light of escalating trade tensions and concerns over China. However, the most recent price correction implies a strong economic slowdown, which is not our base scenario. We are therefore maintaining our overall positive view.
However, it will probably be some time until tensions ease on the trade front, as well as until the announced economic policy easing in China significantly supports demand.
Real estate: Solid growth in residential property prices
The growth in residential property prices in Switzerland is continuing. Year-on-year, the prices for condominiums in the second quarter increased by three percent. The increase for single family dwellings was only slightly lower, at 2.6 percent.
Thanks to the good economic situation, persistently low mortgage interest rates, and a decline in construction activity, we also expect a price increase in the coming quarters. However, it is likely to be somewhat below the recently recorded growth rates.