INVESTMENT COMMENT: Pictet Asset Management Is Neutral On Stocks, Ponders Fed Action

Tom Burroughes

5 September 2013

Pictet Asset Management is neutral about equities and prefers to look for an opportunity to snap up stocks later in 2013 while it waits to see what will be the impact of any slowdown, or “taper”, in the US Federal Reserve’s massive monetary stimulus of recent years.

As with other wealth management houses trying to work out the effect of any central bank halt to quantitative easing, PAM expects there to be some negative effects, at least in the short run.

“We prefer to wait for a buying opportunity later this year, which we believe could emerge after the Fed begins scaling back quantitative easing; another pre-condition for being overweight stocks is a recovery in emerging economies,” Luca Paolini, chief strategist, , said in a note.

“At the same time, we upgrade government bonds to neutral from underweight, funded by a scaling back of our cash position. We have also raised our stance on oil to overweight - stronger economic growth, supply disruptions in Nigeria, Libya and Iraq and renewed tensions in the Middle East should push oil prices higher. We also retain our preference for the dollar as the US economy continues to outgrow its peers and the Fed edges closer to withdrawing monetary stimulus,” he said.

Regions

He said that in his firm’s regional portfolio, Pictet has upgraded Europe to “neutral” from “underweight”.

“European stocks have outperformed recently and we believe the increase in the region’s economic momentum is too strong to ignore. Developments in the eurozone periphery are especially encouraging – growth, competiveness and the fiscal picture are all improving,” he said. Meanwhile, PAM is bullish of US stocks.

“We retain our neutral position on Japanese equities. Growth is solid and reflation policies are still in place but economic momentum is slowing at a time when oil price rises and currency depreciation in Asia could weigh on corporate earnings prospects for Japanese firms,” he said.

“Emerging markets continue to underperform and look cheap but we believe it is too early to raise our exposure. At a minimum, we would need to see an end to the sharp currency depreciation of recent months as well as solid evidence of an acceleration in Chinese growth,” Paolini continued.

Sectors

Within equity sectors, the firm has a slight bias towards cyclical parts of an economy, holding a bullish stance on technology and industrials.

“Technology is the cheapest sector on our scorecard and tech companies will benefit from a new product replacement cycle in the next few months. Industrials are not cheap but will be the biggest beneficiaries of a recovery in capital spending. We maintain our overweight in health care for now but acknowledge that the budget negotiations in the US are a risk for a sector that has done well throughout 2013,” he said.

PAM is the asset management arm of the Swiss private bank Pictet & Cie.