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Investing in August: 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 world economy remains strong despite trade conflicts. Switzerland continues to be among our preferred markets.

Broad diversification aids in risk minimization

As a whole, we confirm our overweight of equities. Currently preferred markets include Switzerland, the emerging markets, and the United Kingdom. In terms of bonds, we remain positive toward emerging markets and convertible bonds. Returns on most of the highest quality bonds remain very unattractive.

While our overall view of commodities remains positive, within this asset class we are now neutral on industrial and precious metals. Furthermore, we have upgraded Swiss real estate investments from negative to neutral after setbacks.

Economy: Global economy defies trade conflicts

Export sentiment remains high among Swiss SMEs. According to a recent survey by Switzerland Global Enterprise, more than half of all SMEs anticipate that exports will continue to rise in the third quarter of 2018; only 5% expect a decline. Our export barometer casts a similarly positive image.

Global industrial production recently accelerated, while global risk tolerance dropped significantly. Our indicator, which measures the latter, is back to levels that, in the past, have been associated with a sharp slowdown of industrial momentum. However, we remain optimistic.

lower-risk-tolerance-on-financial-markets-despite-growth

Lower risk tolerance despite better growth

Source: Thomson Reuters Datastream, Credit Suisse

Bonds: Returns likely to rise in general

Solid growth and gradually rising inflation suggest further normalization of monetary policy. For example, the Fed is likely to increase the prime rate in the second half of the year by an additional 50 basis points. So, bond yields should continue to rise gradually.

As a result, we prefer bonds with rather short terms. Within fixed-income investments, we favor corporate bonds and, in particular, bank bonds. Convertible bonds and emerging market bonds also offer interesting additional returns.

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Sluggish rise in long-term interest rates

Source: Bloomberg, Credit Suisse

Currency: Dollar/franc rate in wide trading range

The US dollar is benefiting from yield advantages on dollar investments, but the economic momentum in the euro zone (improving again) and the solid Swiss economy are limiting its upside potential. The Swiss franc is also likely to remain in demand as a safe harbor in view of the political uncertainties.

The dollar/franc rate should hover within a wide trading range around 0.97. In the long term, the growing US budget deficit will create something of a headwind for the US dollar. We expect the dollar/franc rate to fall slightly over 12 months.

dollar-franc-rate-does-not-currently-follow-the-interest-rate-differential

The dollar/franc rate does not currently follow the interest rate differential

Source: Datastream, Credit Suisse

Equities: Defensive Swiss market back in demand

The Swiss Market Index recently recovered slightly against the global market. The rather defensive positioning with the high proportion of less economically sensitive sectors like the pharmaceutical industry is an advantage in a market environment characterized by a high level of uncertainty.

Additionally, the valuations (price-earnings ratio) and dividend returns are both attractive. Accordingly, Swiss equities are among our favorites and we prefer small and mid-caps.

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Swiss small caps beat the big boys

Source: Datastream, Credit Suisse

Commodities: Industrial metals losing potential

The trade disputes and worries surrounding China have recently dampened commodities. We believe that the fundamental background has not significantly deteriorated and we maintain our positive overall assessment.

However, due to increased macroeconomic risks, we have neutralized our previous pro-cyclical sector allocation. We are withdrawing our preference for industrial metals as we view precious metals as being slightly more positive because of the risks. Energy remains neutral.

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Sideways trend for gold

Source: Bloomberg, Credit Suisse

Real estate: Fix mortgage interest rates likely to rise

We continue to expect a first interest rate move by the Swiss National Bank in the first quarter of 2019. But since the three-month LIBOR may remain in negative territory, we do not expect LIBOR mortgage rates to rise over the next 12 months.

By contrast, Fix mortgages with medium and long terms are likely to gain 20 to 50 basis points. Interest rates overall remain low, but are gradually moving away from their lows. As before, upward and downward spikes are to be expected.

mortgage-rates-trends-and-forecast

Mortgage rates: Trends and forecast

Source: Credit Suisse