Pictet Asset Management Turns Negative On Equities, Sees Some Stormclouds

Tom Burroughes

10 June 2013

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.