The asset management arm of the Swiss private bank is cutting equity exposure and raising bond holdings, preparing for equity markets to run out of steam.

Pictet Asset Management, part of Swiss private banking group Pictet, is preparing for an end to the decade-long bull market in equities by moving to a neutral position on this asset class and bonds.

The firm, which oversees about $193 billion of client money (as of 31 March), has boosted its allocation to bonds, Luca Paolini, chief strategist at Pictet Asset Management, said in a note.

“The global economy is changing gear and investors need to be prepared for markets to react as this unfolds,” Paolini said. “It’s still a little bit too early to call time on the equity market rally, but the outlook for bonds is improving. We are therefore moving to neutral positions across asset classes,” he said.

The change in stance comes at a time when asset allocators continue to debate whether equities are due for a significant pullback or not. 

The cyclically-adjusted Shiller PE Index, which tracks price-earnings ratios and takes economic cycles into account, shows that the S&P 500 Index of US stocks is 85.2 per cent above its long-term average of 16.9. Its historical high is 44.2. At a first glance, therefore, US equities are historically expensive.

Higher US 10-year Treasury bond yields have risen at a time when there are some concerns about the momentum of global economic growth, Paolini said. 

A concern, for example, has been whether the rise in protectionist rhetoric – and some action – involving the US, China and potentially other nations could hit global growth and corporate earnings in the medium term.

“That’s not to say we expect economies to roll over – but that the gap between hitherto very bullish sentiment surveys and more moderate underlying economic data is closing,” Paolini said. “This could signal that the two are coming back into synch again, or simply that growth momentum has peaked,” he continued. 

“If the latter is the case, then there’s reason to expect the Fed to rethink the pace of tightening. The rise of US 10-year T-bonds yields above 3 per cent is already starting to be felt by some interest-rate sensitive sectors of the economy. The US government’s fiscal spending programme is likely to mitigate some Fed tightening, but won’t reverse it entirely. If the Fed does recalibrate, we think the five-year part of the Treasury curve is most compelling,” Paolini said. 

“The best value in the fixed income markets remains emerging market local currency debt followed by US Treasury bonds. Within developed equity markets we prefer energy stocks which should draw strength from rising oil prices,” he added.

Paolini said Pictet Asset Management is still bearish on defensive equities but it may add to positions in this space if global economic growth weakens. 

“Some cheap cyclicals like financials and materials are currently more attractive but are becoming less compelling based on their relative valuation to defensives. At a country and regional level, we prefer the euro-zone to the more expensive US market and see likely Euro weakness as a catalyst for outperformance. We still like emerging markets in the longer term but remain neutral on emerging market equities due to strengthening headwinds,” he concluded.