Pictet | Frankfurt, 04.03.2016.
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Equity markets underestimate recovery potential, Luca Paolini, chief strategist Pictet Asset Management
“Investor sentiment remains fragile thanks to some uninspiring economic data. Some market gauges already imply the US is heading into recession. We believe a US recession is off the cards,” says Pictet Asset Management’s chief strategist Luca Paolini.
“Our main scenario remains one of continued, albeit slower, growth, underpinned by a steady improvement in economic conditions in China. Whilst an interest rate hike from the Fed threatens to provoke more market disruption, other central banks are likely to be mindful of the fragility of their own economies and act accordingly.
“As a result, we are maintaining our overweight in stocks and our underweight position in bonds.
“In terms of equity sectors, we have a moderate cyclical tilt. Materials stocks are the most exposed to a recovery in China, and stocks have already ticked up on the back of easing measures. We also like consumer discretionary and technology companies, which stand to benefit from a rise in consumer spending. Consumer staples, meanwhile, look unattractive as they trade at their most expensive levels ever relative to other industry sectors.
“Regionally, we keep our preference for equities in Europe and Japan, where central banks are expected to deliver additional monetary stimulus to support their economies. We also retain our overweight on emerging market stocks.
“Japanese equity remains very attractive. Corporate profitability has held up well, whilst valuations haven’t expanded yet.
“In Europe, corporate profit margins should receive a boost from low energy costs and a recovery in exports. Monetary policy should also become more expansionary, and we expect the ECB to deliver more stimulus as early as its next meeting in March and we cannot rule out that the ECB will start buying some senior bank debt to alleviate the funding pressure in the sector.
“Risks to Europe’s recovery have grown in recent weeks. Italy’s banking system has been rocked by a spike in non-performing loans on the balance sheets of some regional lenders while the UK is due to hold a referendum on whether to remain in the European Union. UK equities have been upgraded to neutral as sterling weakness will likely benefit exporters.
“In the fixed income markets, we retain our underweight stance on government bonds and our overweight position in US high yield debt. Valuations for US high-yield bonds look particularly attractive, implying that that bond default rates will climb to levels of around 13 per cent. Such deterioration in the creditworthiness of high-yield debt issuers is difficult to reconcile with the positive trends we see unfolding over the coming months.
“For one thing, we expect the US economy to continue its expansion, fuelled by buoyant consumer spending. In addition, oil prices should also stabilise.
“Emerging market local currency bonds are also attractive. Our proprietary indicators suggest economic activity has picked up considerably over the past three months across emerging markets, and we expect manufacturing-based countries within Asia to lead the recovery over the coming months.
“We are underweight in sterling versus the US dollar as we expect the pound to decline further in the lead-up to the UK referendum on EU membership. We also retain our long euro, short US dollar position as we expect euro zone economic growth to gather strength. Our decision to retain an underweight stance on the US dollar is in keeping with our view that investors are overly bullish on the US’s prospects.”
Notes to the Editor
The Pictet Group
Founded in 1805 in Geneva, the Pictet Group is one of the premier independent asset and wealth management specialists in Europe, with EUR 402 billion in assets under management and custody at 31st December 2015. The Pictet Group is owned and managed by seven partners with principles of ownership and succession that have remained unchanged since foundation. Based in Geneva, the Pictet Group employs more than 3,800 staff. The Group has offices in the following financial centres: Amsterdam, Barcelona, Basel, Brussels, Dubai, Frankfurt, Hong Kong, Lausanne, London, Luxembourg, Madrid, Milan, Munich, Montreal, Nassau, Paris, Rome, Singapore, Turin, Taipei, Tel Aviv, Osaka, Tokyo, Verona and Zurich. Pictet Asset Management includes all the operating subsidiaries and divisions of the Pictet Group that carry out institutional asset management and fund management. Pictet Asset Management Limited is authorised and regulated by the Financial Conduct Authority. At 31st December 2015, Pictet Asset Management managed EUR 139 billion in assets, invested in equity and bond markets worldwide. Pictet AM has seventeen business development centres worldwide, extending from London, Brussels, Geneva, Frankfurt, Amsterdam, Luxembourg, Madrid, Milan, Paris and Zurich via Dubai, Hong Kong, Taipei, Osaka, Tokyo and Singapore to Montreal.
