China is the most important “bright spot” for the global economy and Japan’s stock markets perform well despite the country’s economic woes, Pictet Asset Management says as it explains current views on asset allocation.

In a note from Luca Paolini, chief strategist at the firm, he said his firm is maintaining a tactical long position in Japan, aiming to exploit any continued rises in the country’s equity markets. As for China, he is positive, albeit with a caveat: “China is a key bright spot in the global economy, with retail sales construction spending and investment accelerating and property prices rebounding too. Yet, we are concerned that the recovery is too weak to boost global growth yet too strong to prompt fiscal or monetary stimulus in China.”

The firm is, meanwhile, bearish on European equities, concerned about weak lending, excessively optimistic earnings forecasts and a failure by policymakers, it says, to tackle the underlying causes of the region’s malaise.

Pictet AM, part of venerable Swiss private bank Pictet & Cie, remains bullish on emerging market debt and high yield bonds.

“Additionally, we continue to prefer local currency emerging markets bonds over their US dollar-denominated counterparts, chiefly because we believe the currency component should provide a strong source of return.  The ultra-easy monetary policies implemented by the US and euro zone continue to encourage investors to seek higher-yielding markets’ improving structural dynamics relative to the developed world should also prove a magnet for investment inflows,” Paolini said in a note.

“We are encouraged by the improvement in emerging markets’ economic growth and earnings prospects, but our cautious view on risk prevents us from adopting a more positive stance on emerging market stocks,” he said.