The Geneva-headquartered firm is adding to gold stocks due to concerns that central bank money printing will lead to debasement of money. More positively, it is becoming more optimistic on emerging markets.

Pictet Asset Management is warming to emerging market equities because of diminished fears for the time being of financial instability in China. Meanwhile, it is adding to gold holdings while central banks continue to print money. 

The Swiss firm issued its asset allocation update yesterday, the same day that the Bank of England trimmed official interest rates, paring the official rate to 0.25 per cent from 0.5 per cent. The move is seen as an attempt to revive flagging growth following uncertainties around the UK’s vote to leave the European Union in June.

“We have raised the score on emerging markets to a single plus. Economic fundamentals have improved as the perceived risk of near-term financial instability in China has receded. There are signs that strong US domestic demand is finally beginning to lift exports in some Asian countries, while Russia and Brazil are beginning to come out of deep recessions,” Luca Paolini, chief strategist at PAM, said in a note.

“US equities may be trading at more expensive multiples than European counterparts, but we think there is still room for the equity market to appreciate. A Federal Reserve that is unlikely to raise interest rates before December should also help underpin risky assets. Valuations in US stocks are nowhere near bubble territory yet, while those in bonds have reached far more excessive levels,” he continued. 

“Europe on the other hand is cheap for a reason – it has failed to address a wide range of growth-sapping structural problems and the region remains vulnerable to political instability ahead of presidential elections in France and Germany. Concerns over Italy’s debt-laden banks could also shake the region. The ECB [European Central Bank], which has been the only institution keeping the currency bloc together, may start to run out of ammunition. We are also sceptical about the efficacy of further monetary stimulus in the euro area,” he said. 

Paolini said the firm has an overweight exposure to the UK and Japan, as it expects a policy stimulus in both countries (his note was written just before the BoE's announcement on its decision).  

“Most developed market government bonds remain at extreme valuations. Indeed, some became even more expensive in the wake of the Brexit referendum as investors anticipated further monetary policy stimulus to mitigate the poll’s economic fallout. As a result, we have kept our positioning on these bonds unchanged, staying underweight on all except for US Treasuries. Only the US retains any residual value at the long end, which we view as one of our last safe haven assets. Even the case for long-dated Treasuries isn’t clear-cut after yields collapsed during the month,” he said.

“The US economy’s fundamentals are increasingly positive. Growth momentum has improved, as has consumption, more than offsetting any weakness in manufacturing activity. Wage growth, meanwhile, has been accelerating. The Fed’s own measure shows wages have been rising at 3.6 per cent a year, which is broadly around the Fed’s target levels,” Paolini said.

“Nonetheless, the market is ascribing only a 28 per cent probability to a Federal Reserve rate rise in September and only a 50 per cent chance in December,” he said.

“Finally, we continue to overweight gold bullion as a long-term hedge against significant monetary debasement, which seems an inevitable ultimate consequence of ever more aggressive central bank policy. Especially now that experiments in direct monetisation of fiscal spending no longer seem to be anathema to policymakers,” he added.