Pictet Wealth Management (Pictet WM) favours investment grade bonds in the US and Asia as inflation moderates, despite a dismal performance in 2022.
“We want to avoid the high yield zone in the US given the [expected] recession,” said Hugues Rialan, Asia chief investment officer and head of discretionary portfolio management at Pictet WM.
“A potential climb in the default rate and the rise of floating-rate debt in the high-yield space are among the reasons why we prefer investment-grade bonds, which offer attractive coupons without having to take on too much duration or credit risk.”
Meanwhile, Rialan also favours Asian investment grade bonds as the credit spread is higher there than elsewhere.
“In Europe, the spread and the carry are smaller than that in Asia and in the US. Not that it is a bad market per se but you are going to make less money,” he added.
When it comes to equities, Pictet believes the asset class will start to gain traction in the second half of this year.
The equities market is likely to face a tougher first half of the year due to a fall in earnings expectations, Rialan said.
Compared with emerging markets, developed market stocks such as those in the US are likely to face higher margin compression.
Pictet favours the energy sector, including oil and gas stocks, as they have attractive valuations, plenty of free cash flow and are set to pay out solid dividends.
Pictet also prefers value sectors such as healthcare, which it believes could prove resilient in face of a mild recession.
“Growth sectors such as technology are not ready for a rebound yet,” said Rialan. “Investors should also avoid sectors that are too expensive.”
In terms of geographical location, Pictet thinks China is going to rebound in 2023 as the country has pivoted on its clampdown on the property sector and reopened its borders recently.
“Consumption will return to China, which is sitting on a big pile of savings after three years of lockdown.”
Meanwhile, semiconductor exporters such as Taiwan and Korea are likely to be weighed down due to waning global demand, whereas India and Asean are set to benefit from supply chain relocations, said Pictet.
