The equity market will struggle to gain much ground over the next few months, Rothschild Private Banking & Trust says, as it explained why it has sharply reduced its exposure to stocks, shifting to an underweight position.

The wealth management house also warned that equity investors may have already priced in positive earnings news into the stock market, suggesting that any strong results will therefore fail to boost prices from their present levels.

“Valuations are undemanding, but sentiment is fragile and if the global economy re-lapses into recession, the earnings forecasts for 2011 would prove far too optimistic and equity markets could fall sharply,” the firm said in a regular asset allocation note.

The private bank, covering both its UK and overseas operations, manages a total of about €12 billion (around $15 billion) of assets.

Meanwhile, the RPBT said it is bullish on the US dollar, Swiss franc and corporate debt, but was wary of government bonds. It also said that it was strongly overweight gold, although less bullish about commodity prices in general, seeing the outlook as mixed.

On hedge funds, the private bank said it was overweight this sector as a whole, arguing that volatile and fast-moving markets created many opportunities for hedge funds to exploit.

RPBT also argued that while AAA-rated government bonds had been popular as investors avoided riskier fixed income products, the bank said such bonds were unattractively priced, and consequently was underweight this asset class.

On property, the private bank cautioned that any further weakness in the world’s banking industry will cause “major problems” for commercial property as banks and other lenders would insist on tougher covenants and there could be problems of forced selling.