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Pictet WM Continues To Smile On Developed Market Equities, Frowns On Sovereign Debt

Tom Burroughes, Group Editor , 18 December 2017

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The Geneva-headquartered firm has set out its asset allocation stall as the end of 2017 looms over the horizon.

Pictet Wealth Management retains its bullish, aka overweight, stance on developed market equities because it expects further momentum in the global economy and from corporate earnings, while it urges clients to mitigate risks as uncertainties linger.

Emerging market equities should continue to rise in 2018, the Swiss private banking house said, but it said the most active area will switch to value stocks from growth stocks. There remain specific opportunities in local- and hard-currency emerging market debt, the firm continued. 

The case for active management – as opposed to more “passive” approaches – will strengthen because markets are not as closely correlated as before, and because volatility, and “disruptive” merger and acquisition, are rising, Pictet WM said. 

The firm is commenting at a time when, more than nine years into a bull market in equities, debate is intensifying on whether, or when investors should hedge against the risk of a significant pullback in equities. The cyclically-adjusted price-to-earnings ratio on developed market equities is about 24 times, below the level above 40 seen at the height of the late-90s bull market and below that seen prior to the 2008 crash (source: Rothschild Private Wealth, December 2017). In a briefing to journalists recently, Rothschild Private Wealth said that in general, stock markets are not “troublingly expensive” and remain the most “likely source of inflation-beating returns”. 

Pictet WM spelled out specific sectors it likes and dislikes.

“We remain generally bullish on euro area and Japanese equities. We are less bullish on richly valued US equities, although that would change if there were positive surprises on tax reform,” Pictet WM said, referring to the current tax legislation debates going on in Washington DC. (One of the headline reforms is a cut to corporate US tax from 35 per cent to 20 per cent.)

“We favour value over growth stocks for 2018. Cyclicals need accelerating growth to keep outperforming. We are neutral on tech stocks. But while some high-profile tech stocks with an earnings deficit look overbought, good cash generation means we do not expect a tech bust,” it said.

On commodities, the bank said that although a temporary surge in oil prices could happen amidst geopolitical risks, it sees limited potential for prices to rise because of the underlying supply/demand position.

It estimates there will be an equilibrium price over the next 12 months of $55-58 per barrel for West Texas Intermediate, close to where it is at the moment.

Turning to the currency front, Pictet WM sees limited further depreciation in the euro against the dollar and continues to expect the greenback to weaken next year, with a euro/dollar rate at at 1.24 by the end of 2018.

On fixed income, the firm said US 10-year Treasuries should have a yield of around 2.6 per cent by the end of 2018, rising from 2.4 per cent at present; the expected yield on German 10-year bunds is 0.9 per cent. The firm is remaining underweight core sovereign bonds and is short duration, expecting yields to rise.  

“As interest rates could rise gradually, we prefer quality in credit (investment grade). We are cautious on US high-yield, given tight spreads and the potential for default rates to rise,” it said.

Pictet is upbeat about hedge funds, arguing that the gradual shift in monetary policy and other developments should benefit most strategies; it particularly likes the long/short equity, relative value and merger arbitrage strategies. On private equity, it said: “We expect private equity to keep its illiquidity premium to public equities, and despite high prices, we continue to see opportunities.”

 

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