Monthly Investment Strategy Highlights, March 2017
Pictet Wealth Management’s latest positioning in fast-evolving markets.
- We remain comfortable with our overweight position in developed-market (DM) equities and believe there are good reasons to be positive on Japanese equities.
- With volatility low and risks looming in the short term, this is a good time to add protection to portfolios. We have bought derivative protection on EUR high-yield bonds and a call option on gold.
- Expecting yields on core sovereign bonds to rise further this year, we sold our German Bund positions in EUR and CHF grids in March.
- Equities in DM are likely to offer superior returns and less volatility than emerging-market (EM) in 2017. However, EM assets may offer attractive opportunities on a tactical basis.
- Our core scenario does not favour buying gold at present. However, while gold contains a significant opportunity cost, call options constitute a relatively cheap way to build some protection against more extreme risks.
- Earnings growth is the key component in our expected returns for equity markets. Expectations have risen through the reporting season for Q4 2016, and earnings growth looks robust for all markets.
- Rotation to ‘value’ and ‘cyclicals’ at the expense of ‘defensive’ stocks has taken a pause in the past couple of months, as the value/cyclicals trade had become over-extended, but we expect that this will be only temporary.
- Within fixed income we favour credit, and especially high yield, which offers more of a cushion against rising sovereign yields. But valuations are high at present, and it would be better to wait for a bout of volatility as a more attractive entry point.
- Positive sentiment in markets worldwide continues to benefit hedge fund performance. February saw mostly positive performances across the board, albeit with some pockets of losses across strategies.
- We expect private equity to continue to display attractive returns.
- Prime real estate may be asymmetrically exposed to geopolitical and macroeconomic risks. Nevertheless, attractive, more niche opportunities abound elsewhere thanks to transformational trends (e.g. value add and opportunistic real estate) and structural imbalances in the market (e.g. real estate debt).