Pictet Wealth Management, the Swiss firm with SFr559 billion of managed assets, remains negative on equities because it wants to wait for more signs of growing economic momentum before taking on risks. Pictet has cut US equity holdings, concerned about stretched Big Tech valuations.

The recovery in equities this year has been led by a concentrated segment of Big Tech and healthcare firms, while US-China trade tensions create added uncertainties. For these reasons, Pictet said in a note that it is not willing to end its underweight stocks position.

Some inflation expectations have risen following the US Federal Reserve’s commitment to “flexible inflation targeting”. In the tug-of-war debate between inflation and deflation pressures, Pictet said it makes sense to hold gold. It is also positive on “defensive” currencies such as the Japanese yen and the Swiss franc against the dollar.

Although there’s been a rise in COVID-19 cases in several countries, potentially hampering economic recovery, the impact of the virus is becoming more manageable and it is possible that there will be economic growth in the second half of this year, the Geneva-based firm said.

Explaining its cut to US equities, Pictet said that a possible Joe Biden presidency after the November US elections could hit the earnings recovery pencilled in for US corporations. It also said that US technology stocks “appear stretched”. (The note was issued a few days after US equities skidded last week, amid talk over concerns about US equity valuations.)

Pictet also has a neutral position on developed market equities in general, and is underweight global emerging market equities. However, it is positive on northern Asia stocks, because it says economic and earnings dynamics are superior. The region has also made progress on fighting the virus.

“Some cyclical sectors staged a comeback in August, with strengthening demand helping consumer discretionary and industrials as well as US housing. We still await confirmation that the cheapest sectors can catch up on the performance of growth, often tech-related, sectors,” the firm said. 
 

Fixed income
The Swiss firm said that European Union countries’ bonds, which in the past had laboured under a cloud of concern about heavy debt, could become more attractive. The EU has developed new powers to issue debt, covering a pool of bonds worth more than €900 billion by 2024 – a step towards “fiscal union”. “EU bonds will share many of German bonds’ traditional `safe haven’ characteristics," Pictet said.

The firm noted that the US plans to issue a net $5.388 trillion in debt in 2020. “The prospect of increased supply placed upward pressure on US yields in August. The Fed could increase its purchases of long-term US Treasuries although we do not expect it to implement explicit Japanese-style yield curve control this year,” Pictet said. 

As far as emerging market local-currency sovereign bonds are concerned, Pictet said yields are “unlikely to move much lower”. Pictet added that it is “looking closely at Chinese sovereigns, which combine relatively attractive yields considering China’s credit rating and limited currency risk”.

Pictet concluded that “private assets” – equity, debt, real estate and infrastructure – continue to offer “superior average annual returns in the decade ahead in exchange for a certain illiquidity."