Pictet AM Smiles On Emerging Markets; Gets Nervous About US, European Stocks

Tom Burroughes

4 December 2013

Pictet Asset Management remains favourably disposed towards global equities but, unlike some of its peers, it is not keen on the US and eurozone markets for valuation reasons, preferring Japan and emerging markets such as Russia and China, the Swiss firm says.

In a strategy update from Luca Paolini, chief strategist at PAM, he says that an overall improvement in the state of the world economy should offset the likely impact of when the US Federal Reserve withdraws the money-printing stimulus, or quantitative easing, it has provided since the financial crisis.

“We therefore maintain our overweight stance on stocks and stick to our underweight position on bonds. If global growth re-accelerates at the pace suggested by our leading indicators, corporate earnings growth should improve, potentially bringing an end to the downward trend in consensus profit forecasts,” he said in a note. Pictet AM is part of , the Geneva-headquartered firm.

“Our readings on liquidity suggest conditions remain positive for riskier asset classes. While we expect the Fed to start tapering in the first quarter of 2014, we believe its outlook for US interest rates will remain dovish,” Paolini continued.

On a less sanguine note, Paolini said he is concerned about a possible credit bubble in China, the world’s second-large economy. He noted that the Chinese central bank is already seeking to curb credit growth, pointing out that 10-year government bond yields have risen over 4.5 per cent, for the first time since 2008.

PAM has a preference for Japanese and emerging market stocks but is negative on the US equity market, he said.

“In emerging markets, valuations are especially compelling as stocks are trading at a 24 per cent discount to their developed counterparts on a price-earnings basis. What is more, the deterioration in developing world corporate profit margins appears to be slowing while investor positioning in the asset class remains bearish, further increasing the scope for a recovery in EM stocks,” he said.

China, Russia

“Our preferred markets are China and Russia, where valuations are especially attractive. We remain cautious on countries with significant economic and financial imbalances such as Turkey and South Africa. Overall, we expect the dispersion of returns among individual EM countries to increase further in the months ahead,” he said.

He said Japanese equities will gain from a further depreciation of the yen exchange rate and understands that the Japanese authorities are targeting a rate of Y110-15 to the dollar.

“We are also encouraged by a pick-up in domestic economic growth and recently-announced plans for a reform of the country’s biggest pension fund, which raises the potential for an increase in flows into Japanese stocks at the expense of bonds,” he said.

“We remain underweight the US and are becoming increasingly cautious on Europe. The two markets look expensive on our scorecard and investor positioning in both is bullish, which suggests a correction may be in store,” he continued.