Luca Paolini, chief strategist at Pictet, said the firm is retaining an overweight position in equities and an underweight stance in bonds in the belief that the bull market for stocks is set to continue.
“Economic activity is gathering pace again, both in developed and emerging countries,” said Paolini. “Despite central banks starting to withdraw their stimulus, global monetary conditions remain favourable, not least because inflationary pressures are low.”
From a regional perspective, Pictet see the most attractive prospects in the eurozone and Japan.
“The eurozone is enjoying some of the best economic momentum within the developed world whilst Japan is one of the cheapest equity markets,” Paolini said.
“Both should benefit from a likely bounce in the US dollar, which makes European and Japanese goods more completive and boosts the value of exporters’ foreign earnings. Sentiment also plays a part, with investors in Japanese stocks tending to be particularly sensitive to shifts in the yen/dollar exchange rate.”
Elsewhere, Pictet remains neutral on both Swiss and UK stocks, while the “already expensive” US is its least favoured equity region, particularly as valuations have stretched even further in the past month.
“The one saving grace could be its high weighting of financial stocks, as Fed rate hikes should benefit the banks – and we have raised exposure to financials,” said Paolini.
“We have also increased allocations to energy – not only are oil prices close to a two-year high, energy stocks are also under-owned and offer close to 4% dividend yield.
“We also continue to see opportunities in healthcare and technology, but have turned more cautious on telecoms.”
At the same time Paolini thinks now is a good time to take profits on emerging market local currency bonds, explaining why Pictet has cut its position in the asset class from neutral to underweight.
“Valuations are high and a strengthening dollar presents a potential risk,” he said. “The US dollar has suffered this year from Trump’s political travails, but there are signs that sentiment has swung too far. We have kept at overweight in US treasuries, largely because it continues to be a hedge against any sudden risk-off move by the market.”
