Luca Paolini, Chief Strategist, Pictet Asset Management said:
“Valuations are creeping back up as financial markets are pricing in a sharp bounce in economic activity and interest rates cuts. However, we see little evidence for this optimism.”
Asset Allocation: We remain underweight equities. Much of the US market’s performance is concentrated in just seven mega-tech stocks, in part down to artificial intelligence (AI) mania. We also remain overweight bonds, particularly US Treasuries, which should benefit from the fact that the Fed is further along the tightening curve than the European Central Bank.
Equities:Wall Street’s trundle back into bull market territory in June seems unconvincing, although there are some segments where we see value. We’ve raised Swiss equities to overweight from neutral. Companies with low leverage and resilient profit margins look attractive when economic growth is tepid. The Swiss market is home to many such firms. Adjusted for medium-term earnings expectations, Swiss equites trade on an abnormally low valuation, offering investors an attractive entry point.
We’ve raised our exposure to industrial stocks from underweight to neutral. The sector will benefit from growing capital expenditure from the green transition, national governments’ desire to rebuild domestic supply chains and growing demand for automation.
Fixed Income:We remain overweight EM local currency bonds. Interest rate cuts are likely to come sooner in the emerging world and this, combined with a likely appreciation of emerging currencies against the dollar, mean EM local currency debt should do better than other risky fixed income markets over the next few months. In credit markets, we prefer US investment grade bonds where investors are currently able to lock in a yield in excess of 5 per cent – an attractive opportunity given that the balance sheets of high-quality corporate issuers remain strong and that US interest rates are unlikely to rise much higher.
FX: The dollar has peaked both in cyclical and secular terms. The overvaluation is significant and our models show the dollar is 20 per cent above its fair value versus a basket of currencies. US productivity growth is weak, fiscal policy is too loose and interest rate differentials are no longer supportive of the US currency. The dollar’s depreciation is likely to be particularly pronounced against low-yielding currencies, such as the Swiss franc.
