Pictet: Time to dial down equities

“Against this volatile backdrop, we have cut our equity exposure to neutral from overweight. We upgrade gold, a defensive asset that tends to do well in volatile times, to overweight from neutral. We remain underweight in bonds. Overall, we have reduced exposure to risky assets.

“A possible interest rate rise in the US in the summer, an economic slowdown in China and the UK’s EU membership referendum are among the risks confronting investors.
“In terms of our regional equity weightings, we have trimmed emerging market exposure on concerns that the recent revival in the Chinese economy might prove short-lived. Economic activity across China has cooled, which is all the more worrying as the slowdown comes at a time when authorities appear to be draining some of the liquidity they provided earlier in the year.

“Europe and Japan remain our favourite equity markets in the developed world because of these regions’ ultra-loose monetary policies, which should boost economic growth and corporate earnings.

“We maintain a cyclical sector tilt via an overweight in materials and consumer discretionary stocks. Consumer staples, by contrast, trade are expensive. Utilities are also unattractive.“Developed world bond markets have been factoring in the prospect of a summer US interest rate hike. Further to recent payroll data, however, expectations of a rise have declined dramatically. “We still think a July rate increase is a possibility, more than a one in five chance the market attributes to it.  Due to disappointing jobs data in the US a rate hike in June seems less likely ahead of the UK’s EU referendum. US economic data do not present a particularly compelling case for a tightening of monetary policy over the very near term.

“In corporate bond markets, we believe technical and seasonal factors are beginning to turn in favour of US investment grade debt –the asset class tends to fare better than riskier debt during the summer months, and that pattern should also hold this year. We consequently raise US investment grade bonds to neutral and reduce exposure to US high yield, taking profits as the asset class has out-performed – particularly in the more volatile energy sector.

“Emerging market US dollar denominated bonds are also attractive whilst we retain a neutral stance on emerging market local currency debt. Emerging market currencies could see renewed volatility ahead of the next two rate setting meetings in the US.”

Luca Paolini, Pictet Asset Management

Der vollständige Beitrag als pdf-Dokument