Reduced recession risk, an approaching peak in interest rates and better-than-expected corporate earnings make us less pessimistic on equities.
Pictet Asset Management
Asset allocation: rewarding resilience
It’s all a matter of perspective.
On the face of it, the fact that corporate earnings are down on last year doesn’t seem to be very good news. But the numbers reported for the second quarter so far have actually been comfortably above consensus expectations. Encouraged, analysts are starting to revise up their forecasts for future profits; for the first time in a year, upgrades now outnumber downgrades.
We see similar signs of resilience elsewhere. Recession remains a risk, but the odds of avoiding one have improved from a month ago. China’s economy has slowed, but the government has shown a willingness to backstop the faltering recovery.
All this leaves us feeling a little more optimistic about the prospects for global equities; we have therefore moved from underweight to neutral. For us to shift to overweight, we would need to see proof that the global economy is reaccelerating rather than just stabilising. So far we see no evidence of that.
At the same time, we have reduced our weighting on cash. With yields expected to grind lower in coming months as central bank monetary tightening reaches a peak, now is a good time to move money out of cash and lock in the relatively high rates still on offer in the bond market, where we are overweight.
