Luca Paolini, Chief Strategist, Pictet Asset Management said:
“China’s re-opening has failed to deliver a market rally, US banking sector remains jittery and inflation is proving sticky. We extend our already cautious stance by shifting more positions to neutral.”
Asset Allocation: We favour bonds over equities. Despite resolution of the US debt ceiling drama, the global economic outlook remains uncertain. With the US economy slowing, China’s post-Covid performance starting to disappoint, and Germany’s economy wobbling, investors are increasingly taking a more balanced view of risks not just from inflation remaining high but also of growth turning weaker. That’s one reason equities failed to respond more positively to what was a strong first quarter earnings season.
Equities: While Chinese equities present attractive valuations, we believe it is time to downgrade to neutral due to underwhelming corporate earnings and economic recovery. We still see long-term potential for Chinese assets, but for now, we need to need better clarity on a cyclical recovery. On the other hand, we close our underweight on European equities given the resilience of economic growth and neutral valuations. We maintain our overweight stance on emerging market stocks excluding China. In terms of sectors, we prefer communication services and consumer staples. We upgrade technology to overweight, while downgrading healthcare and financials to neutral and underweight, respectively.
Fixed Income: High quality sovereign and corporate bonds now offer cost-effective insurance against worsening economic conditions. We remain overweight US government bonds, a safe-haven asset that is also supported by falling price pressures. We expect the Federal Reserve should pause its tightening campaign, supporting our overweight on US investment grade bonds. We are less pessimistic about Euro zone high-yield debt than before and like emerging market local currency bonds outside China.
FX: In currency markets, the dollar should remain under pressure and maintain an underweight stance on the US dollar against gold and the Swiss franc.
