Pictet: Change is in the air

“The global economy is changing gear and investors need to be prepared for markets to react as this unfolds,” says Luca Paolini, chief strategist at Pictet Asset Management.

“It’s still a little bit too early to call time on the equity market rally, but the outlook for bonds is improving. We are therefore moving to neutral positions across asset classes.”

“As a result, we’ve increased our allocation to bonds, prompted by a steady rise in US 10-year Treasury bonds yields at a time when there are worrying signals about the momentum of global economic growth.”

“That’s not to say we expect economies to roll over – but that the gap between hitherto very bullish sentiment surveys and more moderate underlying economic data is closing.”

“This could signal that the two are coming back into synch again, or simply that growth momentum has peaked.”

“If the latter is the case, then there’s reason to expect the Fed to rethink the pace of tightening. The rise of US 10-year T-bonds yields above 3 per cent is already starting to be felt by some interest-rate sensitive sectors of the economy.”

“The US government’s fiscal spending programme is likely to mitigate some Fed tightening, but won’t reverse it entirely. If the Fed does recalibrate, we think the five-year part of the Treasury curve is most compelling.”

“The best value in the fixed income markets remains emerging market local currency debt followed by US Treasury bonds.”

“Within developed equity markets we prefer energy stocks which should draw strength from rising oil prices.”

“Whilst we are still underweight defensive stocks, this is an area we may look to add to if and when weakness in global economic growth persists.”

“Some cheap cyclicals like financials and materials are currently more attractive but are becoming less compelling based on their relative valuation to defensives.”

“At a country and regional level, we prefer the Euro-zone to the more expensive US market and see likely Euro weakness as a catalyst for outperformance.”

“We still like emerging markets in the longer term but remain neutral on emerging market equities due to strengthening headwinds.”

For the full Investment Outlook please click here.