Investment Strategies

Pictet Avoids Risks But Smiles On Japan

Editorial Staff 6 September 2022

Pictet Avoids Risks But Smiles On Japan

Inflation may have peaked but the phenomenon is looking "sticky" and riskier assets, such as equities and high-yield bonds, are off the menu for the Geneva-based bank. It does, however, like the look of Japanese stocks.

The chances that the global economy will avoid a recession after policymakers attempt to curb high inflation and deal with supply-chain turmoil looks increasingly unlikely, and that means further falls for riskier assets such as equities, Pictet predicts.

The Swiss private bank, which is taking a cautious view, said inflation looks unlikely to retreat significantly.

“A soft landing for the global economy looks increasingly unlikely. Which means riskier asset classes could see further declines,” Luca Paolini, chief strategist, Pictet Asset Management,” said in a note yesterday. 

“It is too early to get sanguine about inflation. Even if prices have peaked, it is looking sticky. Business and consumer surveys, meanwhile, are turning gloomy even though central banks are likely to ignore these until they feed through to hard economic data. At the same time, valuation and sentiment indicators no longer offer a compelling case to be overweight riskier assets,” Paolini continued. 

The bank remains overweight US treasuries, particularly because the US Federal Reserve’s campaign to push up interest rates has “covered considerable ground,” he said, while bond yields are “beginning to look attractive.” As for Europe, he argued that the region’s weakening economic outlook means that Pictet is underweight European investment-grade and high-yield debt. 

“We also remain underweight European government bonds because we believe the economic fundamentals of the eurozone demand a more aggressive tightening campaign than the one currently in place,” he said.

The bank reckons that Chinese equities are due for further falls.

"Chinese stocks are looking vulnerable with latest consumption and investment data from China having come out weaker than expected. Whilst Chinese equities are looking cheap, we believe the risks are too high in the short term,” Paolini said.

“We also remain cautious on the US and Europe. The former is still by far the most expensive equity market and the latter is on the brink of recession thanks to effects of the Ukraine war on the region’s energy supplies,” he said.

But the bank is sanguine on Japan.

“Japanese stocks continue to be a bright area as the country benefits from a post-Covid pick-up in consumer demand, benign inflation dynamics and better energy security. We also see some opportunities in UK equities, thanks to the market’s defensive characteristics and exposure to the energy sector. Furthermore, a weak sterling should boost the value of international earnings,” Paolini added.

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