Wealth Strategies

Investors Underestimate Recovery Potential, Says Pictet

Tom Burroughes Group Editor 4 March 2016

Investors Underestimate Recovery Potential, Says Pictet

The Swiss firm says investors are taking too pessimistic a view of economic developments, and is sticking to its own overweight stance on equities.

Investors are not taking sufficient account of a global economic recovery and are unduly pessimistic, argues the chief strategist for Pictet Asset Management, part of Pictet, the Swiss bank. PAM has $419 billion in assets.

“Our main scenario remains one of continued, albeit slower, growth, underpinned by a steady improvement in economic conditions in China. Whilst an interest rate hike from the Fed threatens to provoke more market disruption, other central banks are likely to be mindful of the fragility of their own economies and act accordingly,” Luca Paolini said in a note.

The Swiss private banking house is, he said, retaining its overweight position in stocks and its negative, underweight stance on bonds. 

“In terms of equity sectors, we have a moderate cyclical tilt. Materials stocks are the most exposed to a recovery in China, and stocks have already ticked up on the back of easing measures. We also like consumer discretionary and technology companies, which stand to benefit from a rise in consumer spending. Consumer staples, meanwhile, look unattractive as they trade at their most expensive levels ever relative to other industry sectors,” Paolini continued.

“Regionally, we keep our preference for equities in Europe and Japan, where central banks are expected to deliver additional monetary stimulus to support their economies. We also retain our overweight on emerging market stocks. Japanese equity remains very attractive. Corporate profitability has held up well, whilst valuations haven’t expanded yet,” he said.

“In Europe, corporate profit margins should receive a boost from low energy costs and a recovery in exports. Monetary policy should also become more expansionary, and we expect the ECB to deliver more stimulus as early as its next meeting in March and we cannot rule out that the ECB will start buying some senior bank debt to alleviate the funding pressure in the sector,” he said.

“In the fixed income markets, we retain our underweight stance on government bonds and our overweight position in US high yield debt. Valuations for US high-yield bonds look particularly attractive, implying that that bond default rates will climb to levels of around 13 per cent. Such deterioration in the creditworthiness of high-yield debt issuers is difficult to reconcile with the positive trends we see unfolding over the coming months,” he said, adding that he regards emerging market local currency bonds as attractive.

A number of firms, such as UBS, have argued that fears among investors of recession and market woes have been exaggerated in recent months by investors.


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