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Pictet Asset Management Turns More Confident On Global Outlook, Remains Overweight Equities

Tom Burroughes

6 September 2016

It appears that some of the shock of the UK decision to leave the European Union as well as other sources of market turbulence have abated, at least as far as Pictet Asset Management is concerned, as it reaffirmed its bullish stance on equities.

“The UK’s shock vote to leave the EU already appears to be a distant memory. Economic conditions are by and large improving in many parts of both the developed and developing world while central banks appear ready to do everything in their power to contain risks to growth, even as fiscal constraints are relaxed to some extent. What is more, corporate earnings are gathering strength, even in emerging markets. We therefore maintain our overweight stance on equities and our underweight position in bonds," Luca Paolini, chief strategist at , said in a note yesterday.

“We keep our preference for equities in Japan, where valuations are at­tractive and an expanded monetary stim­ulus package is set to lift growth and stands to boost corporate earnings," Paolini said.

“Japan is the developed market that will benefit the most from accelerating global growth. And with our indicators pointing to an expansion in growth rates worldwide, we expect corporate Japan to overcome some of the forces that have recently held it back, such as a strong yen, which has dented the attractiveness of its exports, and slowing growth in China. Also likely to support Japanese stocks is a rise in global government bond yields - which we see as highly likely," Paolini said.

At the start of August, the firm said it hard warmed to emerging market equities because of diminished fears for the time being of financial instability in China. Meanwhile, it added to gold holdings while central banks continue to print money.

The Swiss firm's latest commentary suggests it has become more positive about the market environment.

“Elsewhere, the prospects for emerging market stocks are also encouraging. Beijing’s fiscal and monetary stimulus measures have managed to stabilise the Chinese economy for the time being and helped shore up investor con­fidence after a surprise currency devaluation at the beginning of the year had unsettled sentiment. Even so, with emerging market stocks having gained some 15 per cent year to date, flows in some areas having built up too far too fast and as global monetary easing gradually becomes less effective, the rally may slow somewhat in the coming months," Paolini said.

“Separately, while the euro zone seems to have weathered the shock of the UK vote to leave the EU, little has been done to address the fundamental vulnerability of Italy’s weakest banks, which may need to be recapitalised. This is why we are reluctant to lift our exposure to the region, even though it appears relatively inexpensive when measured against both its growth prospects and other major equity markets," he continued.

Paolini said that at a time when bond yields are at historically low levels, there remains some value to be found in European high-yield credit. In general, Paolini said he remains cautious about fixed income markets and expects the downward pressure on yields to reverse as global economic conditions improve.

US in favour

Paolini said he regards the US credit market as attractive, but that it has limited potential to gain strongly from here. Pricing suggests the implied level of default for speculative-grade borrows are fair; tougher bank credit standards suggest the credit cycle is going to enter a "more challenging phase", Paolini said.

“In currencies, we remain underweight the Japanese yen. We anticipate weak nominal GDP to trigger further and per­haps more extreme heterodox mone­tary measures in Japan, which makes the currency vulnerable to a correction giv­en that it is at its most expensive level in at least 15 years on our valuation met­rics. By contrast sterling is likely to sta­bilise as post-Brexit growth risks are less severe than we and much of the rest of the market had anticipated," he said.

The firm continues to have an overweight position on gold as a way to insure against turbulent markets, particularly ahead of the US elections in autumn, he added.