“There is a lot of uncertainty around inflation and monetary policy in the United States. This clouds the outlook for equity markets. In the long term, Asian equities offer the best investment opportunity.”
This is what Frédéric Rollin, an asset allocation specialist at Pictet Asset Management said in a recent interview with Investment Officer Belgium (Investment Officer Luxembourg’s sister publication). Earlier this year, he declared himself positive on equity markets and cyclical sectors, but recently he said he has become neutral on equities again. “That’s why we are more cautious than the rest of the market, which remains generally positive about the future evolution of stock prices.” That caution is mainly driven by rising inflationary pressures in the US, which are prompting short-term caution, he explained.
Falling inflation
In the longer term, however, he said he believes this price rise will be transitory. “If we filter out all the elements specifically caused by the Covid crisis, we get core inflation of about 1.6% in the United States. We are also seeing some signs that this inflationary pressure is starting to ease since June, such as in second-hand car prices.”
He also points to the recent evolution of commodity prices, which are consolidating in the wake of monetary tightening by the Chinese central bank. Oil prices, on the other hand, remain at high levels, as some OPEC members are reluctant to increase production. “We believe an agreement will be found to gradually increase production quotas”.
Finally, US production is also starting to pick up, which is another argument in favour of earlier falling oil prices in the coming months.
US risk
In the long run, Frédéric Rollin expects the pandemic to bring rather deflationary pressure. “For instance, certain regions, such as the eurozone, will find it difficult to reconnect with their long-term growth trend. Moreover, many developed countries have also accumulated significant debt during this period. Overall, we think that in this environment we should rather expect an economic slowdown from the fourth quarter of 2021 onwards.”
Moreover, the US central bank may tighten its monetary policy more quickly than expected in the coming months. “The Federal Reserve has rarely had such a loosening monetary policy as it is doing now. But economic growth is also historically high.”
“This is creating a large spread,” he continued, “and the Fed needs to adjust its discourse if it wants to remain credible.”
Worried about the US
As for his investment strategy, Frédéric Rollin stresses that valuations are not easy to interpret at the moment because results are particularly volatile. “However, US equities are trading at a worrying valuation. It is possible that they will correct when the US central bank starts to tighten, leading to an economic slowdown in the coming months”.
“From a strategic point of view, we prefer Asian equities to European equities, mainly because of the increasing imbalances between the European core and periphery and the political problems that will return to the fore once the region emerges from the crisis.” He also notes that Western investors remain largely underweight in Asian equities, even though these countries have generally better handled the Covid crisis.
Sectors
The investment strategy has cut cyclical sectors such as commodities or cyclical consumption. “We are again investing in more defensive values and in themes such as water, food and healthcare.”
On bonds, Frédéric Rollin said he believes the US high-yield corporate bond market calls for caution, as valuations are particularly high today. “We remain very positive on Chinese bonds, which offer attractive yields. Inflation in China is low and they offer diversification compared to the other bond markets.”