Pictet Asset Management advises its clients to remain underweight in equities and maintained an overweight view on US Treasury bonds. In its latest market outlook, the Swiss-based firm said it reduced the risk in its portfolio by downgrading Chinese stocks to neutral.
Presenting the latest edition of its Barometer of financial markets and its September markets outook, Pictet made clear that further declines can be expected in riskier asset classes. “A soft landing for the global economy looks increasingly unlikely,” said Luca Paolini, chief strategist at Pictet, “which means riskier asset classes could see further declines.”
A few days before the European Central Bank, on Thursday, announces its latest decision on eurozone interest rates, Paolini said he believes it is still too early to get soft on inflation.
‘Looking sticky’
“Even if prices have peaked, it is looking sticky,” he said. “Business and consumer surveys, meanwhile, are turning gloomy even though central banks are likely to ignore these until they feed through to hard economic data. At the same time, valuation and sentiment indicators no longer offer a compelling case to be overweight riskier assets.”
Addressing China, equity valuations suggest that stocks look cheap, but Pictet believes that the risks are too high, in particular on the short term. IT said that the policy reactions so far have been insufficient to address the underlying weaknesses.
“Chinese stocks look somewhat vulnerable,” Paolini said in a note to investors. “The latest consumption and investment data from China have both come out much weaker than expected. There are also tentative signs of a peak in export growth. Our Chinese leading index is now declining. And, perhaps more worryingly, there is no end in sight to the problems engulfing the property market.
Pictet also remains cautious on US and European equities, anticipating a possible deterioration in corporate earnings while Europe is on the brink of a recession.
‘In Treasuries we trust’
Addressing fixed-income markets, Pictet noted that a sharper-than-expected deceleration in US consumer prices has convinced investors that the Federal Reserve’s approach to monetary policy is working.
“We remain overweight US treasuries, especially as the Fed’s tightening campaign has covered considerable ground and yields are beginning to look attractive,” Paolini said in a note to investors. “In Treasuries we trust.”
In Europe, the region’s weakening economic outlook means Pictet is underweight European investment grade and high yield debt. “We also remain underweight European government bonds because we believe the economic fundamentals of the Eurozone demand a more aggressive tightening campaign than the one currently in place.”