Pictet’s multi-asset team has increased its allocation to equities – with a preference for value and emerging markets – and cut back on cash after seeing “glimmers of light” in the global economy. 
Recent months have seen the asset management house put an underweight rating on stocks as it believed their relative high valuations meant they were “priced for perfection”. It also had an overweight on cash.
However, in its latest update the Pictet Asset Management Strategy Unit said: “The US Federal Reserve and the European Central Bank are again pushing on the liquidity pedal. The US and China have relented on launching salvos at each other over trade. And our leading economic indicator is showing positive glimmers.
“Yes, there are still question marks over China. And Germany continues to struggle. But on balance there’s a sense that sunnier skies are opening behind the recent global gloom. Hence our decision to raise our equity allocation to neutral from underweight – accompanied by a reduction in our cash allocation.”
Pictet’s monthly asset allocation grid – Nov 2019
Source: Pictet Asset Management
Pictet’s business cycle monitor suggests that, although global growth prospects remain below potential, there will be some improvements in economic conditions in the months ahead thanks to increasingly positive data from the US manufacturing and industrial sector and to the American consumer’s “surprising” resilience.
Meanwhile, global liquidity conditions look neutral for riskier asset classes. This down to the Fed’s rate cuts and interventions in the repo market in the US and the European Central Bank’s easing programme, as well as rate cuts in several emerging markets – although China hasn’t followed suit.
When it comes to valuations, the asset manager’s indicators haven’t changed materially even though equity and bond markets have sold off in recent months. “Equities are broadly fairly priced, though within the asset class, the US remains very expensive and the UK very cheap,” its strategists said. “And government bonds are expensive, while corporate bonds are extremely expensive.”
Within equities, Pictet sees the brightest prospects for emerging market stocks and the value style of investing.
“Data showing a recent stabilisation in China’s economy, expectations for a truce in the US-China trade war and the likelihood of further US interest rate cuts are likely to support growth in emerging countries,” its strategists said.
“According to our forecasts, emerging market economies will expand 4 per cent this year – well ahead of their developed counterparts. emerging market corporations, meanwhile, are expected to increase their profits by 14 per cent next year – a figure that could be even higher if the dollar weakens further. We have therefore upgraded emerging stocks to overweight.”
However, the firm is “unenthusiastic” about most developed market stocks. Its main worry is about the consensus forecast that corporate profits in the US, Europe, Switzerland and Japan will rise by some 8-9 per cent in 2020 – it believes this is too optimistic.
The underweight stance on US remains in place, owing to its lofty valuations and an expectation that 2020 corporate profits will be flat at best. The UK, meanwhile, has been cut to neutral until there is more clarity on the outcome of the general election and Brexit negotiations, but an overweight to the eurozone remains in place.
Relative 12-month trailing price-to-earnings of ratio of MSCI Value vs MSCI Growth
Source: Pictet Asset Management
The firm continued: “At a time when the world economy is expanding modestly, it is, as history shows, tough for companies operating in the most cyclical industries to increase profits. Instead, the evidence is that value stocks – which trade at a lower price relative to their fundamentals – tend to outperform.
“It is hardly surprising, then, that value stocks have been witnessed a revival in their fortunes in recent months, having lagged their growth counterparts for the past decade.”
Pictet expects this rotation to continue as the business cycle moves to a more mature phase, leading to an upgrade to overweight for financials. It added that European banks, whose share prices have suffered, look particularly attractive.
However, the group continues to have a preference for defensive stocks, remaining overweight the consumer staples and healthcare sectors. Consumer discretionary stocks, which tend to be exposed to fluctuations in economic cycles, have been downgraded to underweight.