Pictet Asset Management: "Struggling for inspiration"

“Corporate profits are barely growing. Almost USD15 trillion of debt trades at yields below zero. And trade disputes are rumbling on. There is not much for investors to be enthusiastic about. Not in the near term at least,” says Luca Paolini, chief strategist at Pictet Asset Management.

09.10.2019 | 14:48 Uhr

“Economic conditions will likely remain sluggish over the next few months. Thus, we remain underweight bonds and equities and overweight safe haven assets.”

“Trade is the economy's biggest problem. Although consumer demand is holding up, export orders are shrinking as a result of tariff hikes and other protectionist measures.”

“In the US, weak manufacturing has pushed the ISM index to its lowest level in three years, and employment has also softened a little. In China, industrial production growth has slowed to a record low.”

“One bright spot is Europe, underpinned by healthy consumer spending. Although retail sales edged down slightly, consumer confidence is still very high and labour market conditions have improved - and lending to the private sector, a bugbear for the region, continues to gather speed.”

“Liquidity conditions are neutral to positive for riskier asset classes primarily thanks to interest rate cuts and opening up of the monetary policy taps (although not as much in China as hoped).”

“But the subsequent global equity market gains represent nothing more than a bear market rally.”

“Whilst, on balance, global equities look fairly priced, there are also huge regional divergences.”

“The US is one of the most expensive equity markets and represents poor value both in absolute and relative terms.”

“On a global basis, value stocks are more attractive than growth. That growth stocks now lag value is perhaps unsurprising given the recent uptick in bond yields – rising yields depress the present value of expected future earnings.”

“But overall we are taking a more cautious view on equity regions and sectors, hence our decision to trim emerging market equities – which have had a good recent run – to neutral from overweight, to trim financials to neutral, also from overweight, and to lift technology to neutral from underweight.”

“We remain overweight euro zone and the UK on valuation grounds.”

“Brexit has left UK equities as the cheapest of all the global stock markets, while sterling is also undervalued. Any resolution to the country’s political turmoil is likely to see a big snap-back. We figure there’s the prospect of a 20 per cent upside to the market.”

“As the year enters its final quarter, stocks should benefit from the traditional seasonal uptick. Plus, investors' unusually bearish positioning limits the scope for any sharp falls.”

"Bonds have become very unattractive, with sovereigns and credit at very lofty valuations.”

“But that doesn’t mean they can be discarded altogether. The investor’s task is to distinguish the expensive from the really expensive."

“We retain a market-weight stance on emerging market (EM) local currency debt which should benefit from currency appreciation as they are undervalued by some 25 per cent versus the US dollar, a discount that is hard to justify given the emerging world’s stronger economic growth.”

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