As the half-way point of 2024 approaches, a number of private banks and wealth houses are updating their asset allocation recommendations and explaining their thinking.

The art of finding investment Alpha can fall out of fashion – as when markets rise for years in a row – but more demanding conditions put the case for stock-picking and a focus on themes back in the frame.

This is the stance now of Pictet Asset Management, as it recently explained its asset allocation views to journalists in London at roughly the half-way point of the year.

The Swiss firm is seeking to add to quality stocks and specific growth themes, such as holding IT, pharma and industrials stocks, it is boosting credit assets relative to equities, and lifting its fixed income weighting to the benchmark level. The broad shape of financial markets is more "normal" than it has been for some time, the firm said.

Another takeaway, Pictet said, is focusing more on managing risk than maximising returns.

Pictet also wants to diversify away from US equities to reduce dangers of over-concentration – a fact underscored by the “magnificent seven” stocks (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla and Meta Platforms) accounting for more than 29 per cent of S&P 500 Index performance, given their large market cap. 

Pictet also argues that certain Chinese firms are investable, but says a tailored, selective approach is needed because Beijing’s interference with sectors such as tech in the past adds to risks.

Overall, equity markets are likely to outperform bond returns by about 50 per cent over the next five years, Luca Paolini, chief strategist, told a briefing in London. He spoke alongside Arun Sai, senior multi-asset strategist at the firm.

Valuations in the US stock market, such as the S&P 500 look “challenging” although a number of lingering forces – interest rates, disinflation and tech-driven productivity – should be supportive. The S&P 500 has an implied forward price-earnings ratio of just over 20. “We think 19X is fair value,” Paolini said. Central banks are likely to remain “on standby” to support markets if needed. (Paolini spoke before the European Central Bank cut its key lending rate to 3.75 per cent, down 25 basis points, last Thursday.)

Bond yields have returned to more long-term equilibrium levels after two decades of ultra-low interest rates and quantitative easing, aka “financial repression,” Paolini continued.

His colleague argued that while inflation has weakened since the pandemic aftermath, the world economy is still in more of an inflation phase than a growth cycle. In the short run, it made sense to be tactically overweight on stocks, Sai said. 

Pictet data showed that there is an historically low spread of returns across asset classes and equity regions. It expects European equities and emerging market Asia equities to re-rate relative to the US market.

UK feeling unloved
Pictet data shows that the UK stock market, while not at the bottom for returns over the past five years per annum (China is bottom, at minus 1.8 per cent), it is 6.7 per cent, below Europe at 9.5 per cent, the US at 15.3 per cent and Japan at 15.5 per cent. (Japan’s equity market has improved significantly, aided by corporate reforms requiring firms to unlock cash surpluses and pay out higher dividends.)

And, in an election year for the UK, the domestic market isn’t likely to win over legions of fans soon, Pictet argues.

“The UK is defensive, well-managed, and cheap…it is difficult to fall in love with the UK stock market,” Paolini said. 

A Labour victory in the 4 July general election is priced in. There is a risk that if Labour wins a large majority, it may be tempted to indulge in anti-business policies, but at this stage this seems unlikely, Paolini said.

Reflecting on changes to tax, the uncertainties post-Brexit, and other moves, Paolini said “the UK as a place of doing business is becoming less attractive.”

Turning to China, he said it was a mistake for investors to be so concerned about the country's recent increase in state interference that they remove it from all portfolios. “For me, completely writing China off is a mistake…but it is not a growth story any more.” In some areas though, such as technology, China is leading the rest of the world.

On currencies, Paolini said he expects a “moderate” decline in the structural strength of the dollar; he also expects a rebound in the yen exchange rate.