Pictet Wealth Management (WM) has been advising clients to move out of cash into credit and other asset classes going into 2025.
Stronger US economic growth relative to the rest of the developed world means the US dollar and US equity markets are better positioned going into 2025.
This is according to Dong Chen (main picture), chief Asia strategist and head of Asia research at Pictet Wealth Management, who told a media briefing in Hong Kong that the firm expects US GDP growth to come in at 2.3% this year.
“We favour US equities and Japanese equities for slightly different reasons,” he said. “One common factor is that we expect economic performance to be positive in these two countries, but in Japan’s case, also combined with much more reasonable valuations.”
Chen added that the US market leaders still have “strong cash generation capability” and therefore the currently high valuations should hold. Although he did warn that if interest rates were to move higher, they could pose a downside risk.
When it comes to earnings growth, Chen expects it to come in broadly lower than current consensus across all regions, not just the US.
He said: “We think the current consensus probably is too optimistic about earnings growth, so we are more conservative.”
Cash is no longer king
When it comes to fixed income, Chen favours European bonds over US bonds because of the different outlook for rate cuts from the Fed and the European Central Bank.
“Cash is no longer king in this environment because the yield or return on cash is going to drop because of rate cuts by central banks, particularly in Europe,” Chen said.
“Relative to cash, we recommend clients move from cash into credits where the yield is dropping slower,” he added.
“We favour Euro or Swiss franc denominated investment grade credit over US dollar investment grade because we expect more rate cuts in Europe than the US.”
Accordingly, Chen thinks there is more room for government bond yields to drop in Europe than the US.
He added that with the rising term premium demanded by investors for the US 10-year Treasury, US bond yields are likely to stay higher relative to the Europe.
Since 2015, the term premium for longer dated US Treasuries was negative but has recently turned positive as investors demand more compensation for holding longer duration paper.
Chen said: “We think one of the reasons for this to happen is the concerns on the widening US deficit.”
On the other hand, when it comes to the nation’s currency, Chen expects the US dollar to remain strong throughout 2025 due to US economic strength and higher yields.
One of the firm’s other core convictions this year is the revival of private equity on the back of increased M&A activity and favourable regulatory changes in the US.
“We think one potential catalyst [for private equity] is additional deregulation by the new administration which could potentially provide more exit opportunities for private equity investors,” Chen said.
Another reason to favour private equity is the fact that over the past several years, more value has been created before companies go public as companies stay private for longer.
“A much, much bigger chunk of the value was already materialized before IPO. So to capture that you have to be a investor in the private space,” Chen added.
“I think this is a very important structural trend. So that’s why we have been big advocates for private equity for a long time.”
