David Gaud, Pictet Wealth Management
“We have a prudent stance on global equities, as expressed in our decision to book some profits and to invest in put options on large-cap European and small-cap US equities,” said David Gaud, Asia chief investment officer at Pictet Wealth Management in a note detailing the bank’s latest asset allocations.
Pictet revised up its price target for developed market equities to 4%–5% growth at the start of the year, but the firm believes that most of the appreciation already occurred in the first quarter and that current valuations look close to fair value. However, Gaud still likes “quality companies” in the US and Europe.
On the other hand, “emerging market equities have underperformed developed market equivalents this year, in spite of a robust performance from Chinese and Indian [market] equities. Emerging market equities are currently looking for direction, which could come from dollar weakness or a turnaround in the Chinese economy”, which would give them a boost.
Moreover, “our willingness to take on reasonable risk means that the reduction in equities was matched by an increased allocation to local currency emerging market debt, part of a move toward seeking [interest rate] ‘carry’,” he added.
Gaud believes that the dollar will lose ground against other currencies later this year as a result of the Federal Reserve’s shift to a dovish interest rate position.
But, in order to mitigate the currency and interest rate exposure inherent in emerging market bonds, Pictet recently moved from an underweight to a neutral stance in investment grade credits, thereby implementing a barbell strategy.
He particularly likes European investment grade credit, partly because of the accommodative attitude of the European Central Bank, and also because they have “generally better ratings and leverage features than their US counterparts”.
Among developed market government bonds, Gaud expects that this year the US Treasury 10-year yield will rise toward 3%, while German 10-year bunds should move to 0.5% by year’s end from their current negative yields.
Overall, Pictet’s stance is predicated on expectations that “the economic picture [will] brighten” and the decline in corporate earnings forecasts will end.