Pictet Asset Management has turned bearish on global
equities – although it remains quite upbeat about Japanese stocks – concerned that
markets are likely to become more challenging, especially if or when the US
Federal Reserve begins to wind down monetary easing.

In a report entitled Time
To Turn More Cautious, Luca Paolini, chief strategist at the firm, explains
why the asset manager is pulling in its horns.

“We believe global equity markets are about to enter a more
challenging phase, and are therefore downgrading stocks to underweight from
neutral,” Paolini says.

“Another dark cloud on the horizon for the global economy is
the growing possibility that the Fed’s asset purchase programme – currently
running at $85 billion per month – might soon begin to taper off. Although we
continue to believe that growth is too weak for the Fed to rein in liquidity at
this stage, it remains a risk nevertheless. One bright spot in our business
cycle readings, however, has been the sharp decline in inflation in all
regions. This has supported consumer spending power and has expanded the room
to manoeuvre for central banks,” he says.

He continues: Elsewhere, the recent sell-off in Japanese
equities – which are down 15 per cent from their peak on 23 May – potentially
offers a good entry point into a market that benefits from stronger economic
and earnings momentum. Even so, valuations remain a concern while the boost
companies have received from the weaker yen might soon fade, particularly as
some government officials have issued warnings on the risk posed by the
currency’s rapid depreciation.”

Paolini’s standpoint possibly puts his firm on the more
cautious side of the spectrum; in recent months, wealth managers have been
generally upbeat about stocks as opposed to bonds issued by developed countries.

Bonds

Pictet Asset Management has, after a near 50-basis point
rise in US Treasury yields, taken profits from its bearish stance, and moved to
a neutral stance. “This is a purely tactical decision as we believe that
government bonds in developed markets have already entered what will become a
secular bear market,” Paolini says.

“Elsewhere, we stick to our long position in the US dollar:
despite its trade-weighted gain of some 8 per cent since September, the
currency remains fairly valued and should continue to draw support from
relatively resilient US economic growth, the country’s improving deficit and
persistent speculation that the Fed may scale back its bond purchases,” he adds.

Pictet Asset Management is the asset management arm of the Swiss
private bank Pictet & Cie.