Pictet Asset Management, the asset management arm of the Swiss
private bank Pictet & Cie, has lifted its outlook on equities as the firm
maintains a moderate risk-on stance, encouraged by an improving macroeconomic
outlook. Yet the firm’s sentiment readings suggest investors might have become
too complacent about market conditions, it says.

As with other wealth management houses trying to work out
the effect of any central bank halt to quantitative easing, PAM has been
following the moves of the US Federal Reserve closely and as such, took the recent decision to wait on "tapering"
the programme of quantitative easing has been a big factor to the new constructive outlook on equities.

“The Fed’s decision to wait for evidence of a broader US economic
recovery before it starts tapering asset purchases has removed one of the biggest
risks facing equity markets,” Luca Paolini, chief strategist at Pictet
Asset Management, said in a note.

The firm also said that it was encouraged by a positive
earnings season in the US, giving evidence that companies are capable of
delivering decent profit growth at a time when nominal GDP growth remains well
below the historical norm.

“Finally, a stabilisation in emerging markets – where
leading indicators have improved, volatility seems to have abated and investor
confidence has returned – is another positive signal,” said Paolini.

As such, Pictet suggests that equities will outperform bonds
over the next three months.

“Our business cycle readings point to a solid recovery in
the US that is broadening to
Europe and emerging markets. Among developed
markets, the US remains on track to post a doubling in annual growth to 3.1 per
cent in the first quarter of 2014, driven by rising investment spending and a
fading fiscal drag,” said Paolini.

Looking at the bigger picture, the growth outlook for Europe has also brightened due to improvements in bank
lending and an easing of political tensions in the region’s periphery.

However, the biggest improvement comes from emerging
markets, the firm said.

“China’s
economy grew at an annual 7.8 per cent in the third quarter, amid strong
business confidence indicators and a booming construction sector. The Philippines and Korea
are also growing above trend,” explained Paolini, noting that the positive
developments do not include India
and Indonesia,
as on-going monetary tightening cycles look to combat inflation in these
countries.