The Geneva-based firm is not putting many chips on the table as far as developed country equities and bonds are concerned, taking a cautious approach.

Pictet Wealth Management says that it is treading a delicate balance in a “fragile environment” for the global economy and markets, being neutral on developed countries’ equities and government bonds.

In an update on its asset allocation position, the Geneva-based firm said that changing messages about US-China and other countries’ trade disputes are pushing markets back and forth, between “disappointment and hope”.

“With this in mind, we have a neutral stance on government bonds and developed-market equities alike, although we still see select opportunities in equities and appreciate the protective function of safe-haven bonds. Geopolitical events such as the tensions between the US and Iran will lead to volatility, which can be exploited tactically. Potential spikes in volatility also mean we have a positive stance on gold,” the firm said. 

“We also favour illiquid assets to mitigate volatility and boost returns in a low-return environment. As equities’ 2019 performance is unlikely to be repeated, an ‘endowment style’ approach to investing that includes recourse to alternative asset classes such as private equity is recommended,” it continued.

Pictet has in recent months voiced concerns that after a bull market in equities lasting a decade, upside from here in countries such as the US is limited. It has not moved to take all risk off the table, however. 

“After a stellar 2019, we expect lower, but still positive, total returns of around 5 per cent from developed-market equities in 2020, driven essentially by cash returns. Equity valuations look rich, but are being made digestible by low bond yields. We favour structural growers that can grow independently of the market cycle as well as quality cyclical growth stocks with pricing power. Dividend-growing companies at a time of weak earnings growth are another focus of attention,” Pictet said. 

As far as emerging-market equities are concerned, the wealth house managed to chalk up double-digit returns last year with these assets and, with some short-term support, it could continue to do so, but prospects depend on the global economy regaining momentum.

Fixed income
Pictet noted that the fixed income sector fared strongly in 2019, supported by central monetary easing, tightening credit spreads. 

“We have a neutral stance on global bonds and remain constructive on emerging market sovereign debt in local currency. However, we expect total returns from EM bonds to be more moderate in 2020, in the low single digits. We expect total returns to be in the low single digits in fixed income generally this year, except in US high yield, where returns may be negative due to widening spreads and higher default rates. Along with US high yield, we are underweight euro sovereign bonds due to low yields,” it said. 

The Swiss firm said that it expected weaker US growth in 2H 2019 and renewed Federal Reserve easing should depreciate the US dollar; it also predicts that there will be a return of uncertainties about the exact way in which the UK leaves the European Union, putting pressure on sterling.