Pictet: Opportunities emerging through the trade storm

Asset Allocation

“Equity markets may not be cheap, but there are some bargains that are beginning to emerge,” says Luca Paolini, chief strategist at Pictet Asset Management.

08.08.2018 | 14:34 Uhr

“We’ve upgraded emerging equities to positive from neutral. The asset class has been under pressure for months as a stronger dollar, higher US interest rates and escalating trade tensions have cast a cloud over earnings prospects.”

“However, there are signs that the worst may be over - developing economies’ real GDP is growing faster than developed economies, and the recent decline in energy and commodity prices should offer additional support to manufacturing.”

“China is a particularly bright spot, with strong consumption and construction activity. Monetary policy easing is improving liquidity conditions, and authorities have also announced fiscal stimulus plans.”

“Emerging equities now trade at a discount of more than 20 per cent to developed markets, the sort of valuations that could encourage bargain hunters.”

“Much of the bad news may already be factored into valuations since USD 9 billion has flowed out of emerging equity funds from April (1).”
“Despite ongoing trade wars, the global economy and markets remain surprisingly resilient.”

“Improvements in economic and financial conditions prompted us to rethink our overall stance on equities and lift them to neutral from underweight, trimmings bonds to neutral.”

“Japan remains our favoured developed equity region, but we are cautious on Europe, given the possible impact on growth from US trade measures, especially on export dependent Germany.”

“We remain underweight expensive US stocks, particularly as US companies look unlikely to repeat their blockbuster earnings performance of recent months.”

“We remain neutral on technology and cautious towards industrials, financials and consumer discretionary. We remain overweight in healthcare, a defensive sector insulated from trade tensions.”

“Inflation pressures are cooling, a contrast with the weather of late. A peak in inflation would have a couple of consequences.”

“First, the Fed may have more reason to pause. Second, it may cause a downward repricing of the inflation premium – making assets viewed as an inflation hedge less expensive relative to other investments.”

“The above would be good news for treasuries. Hence, we retain a strong overweight in this asset class.”

“Emerging market government debt also offers good value given the improvement in the fundamentals of developing economies. Trade tensions with the US remain a risk, but we think a modest overweight is justified.”

“Europe’s corporate bonds, by contrast, look expensive, which is particularly worrying as credit ratings have fallen.”

“Separately, when it comes to currencies, we think any dollar strength will likely be most pronounced against the euro.”

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