Monthly Investment Strategy Highlights, May 2017

Pictet Wealth Management’s latest positioning in fast-evolving markets.

Asset Allocation

  • Markets are starting to revise their expectations for the Trump administration. We still see some prospect of a US fiscal stimulus, but it is likely to be later (not kicking in before 2018) and less ambitious than hoped.
  • Improving economic performance and strong earnings growth support our positive stance on DM equities, despite high valuations. However, room for disappointment is limited.
  • We expect core sovereign bond yields to rise as economic growth strengthens and inflation expectations pick up.
  • Favourable economic fundamentals do not favour buying gold, but a call option on gold offers a way to hedge geopolitical risk.

Currencies

  • Although the US dollar’s up-cycle is mature, the greenback should remain strong in 2017.
  • With hard Brexit still the most likely scenario and the UK economy starting to suffer, upside potential for sterling is likely limited.

Equities

  • Earnings growth has surprised positively and we see good momentum for 2018.
  • Positive profit margin momentum in Europe supports our overweight in European equities.
  • The strong performance of European equities also supports our view that it is better to play EM through DM.

Fixed income

  • Peripheral euro area bond spreads could widen on anticipations of ECB tapering, as well as the approach of Italian elections in 2018.
  • We continue to favour high yield within fixed income. Although spreads have fallen, they retain some potential to decline further.

Alternatives

  • Hedge funds are enjoying significant alpha. Despite the elevated geopolitical risks and high equity valuations, we continue to favour the long/short equity strategy.
  • We expect private equity to continue to display attractive returns. The environment is challenging, but there are good opportunities in less obvious places and beyond plain vanilla strategies.
  • Valuations, and potentially risk, are high in core real estate. However, there are attractive opportunities elsewhere, including in real estate debt—particularly the mezzanine tranche.

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