Pictet Asset Management: EM sovereigns remain attractive in a yield-starved world

Even though a number of stock indices have hit record levels in recent weeks, equities are not expensive compared to bonds. We also remain neutral on bonds as the European Central Bank’s quantitative easing programme and improvements in economic growth should exert opposing forces on government debt, keeping yields in a narrow range. Our stance on the USD is unchanged at neutral.

In our regional equity allocation, we keep our preference for Europe and Japan, where we see stronger earnings momentum and more favourable liquidity conditions than in the US.

When it comes to sectors, we maintain a cyclical tilt in our portfolio, with a preference for sectors that stand to benefit from any increase in capital spending. This is expressed through an overweight in industrials, a sector that also exhibits attractive valuations. Technology is another attractively valued sector that should draw support from increased business investment. We also like banks, which have repaired their balance sheets and are poised to capitalise on the upturn in the credit cycle.

With yields on benchmark government bonds at unsustainably low levels, the continued monetary stimulus provided by central banks worldwide should disproportionately benefit areas of the fixed income market where valuations are either close to or below fair value.

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