Monthly Investment Strategy Highlights, June 2017

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

Asset allocation

  • Markets have continued to rally on strong fundamentals. It has been important to stay invested, and we continue to favour DM equities. However, markets appear unduly complacent, and we have taken advantage of current low volatility to scale back our risk exposure.
  • We reduced our equity overweight in June by selling part of our Global Defensives equities, and also cut most of our US high-yield position. We invested the proceeds in either corporate/aggregate short-term bonds (1-3 years) or in USD cash.
  • Emerging market assets continue to perform well, but the sharp sell-off prompted by the scandal around Temer in Brazil is a reminder of the risks. We still prefer to play EM through DM, but EM local currency sovereign debt could be interesting at more favourable prices.

Commodities

  • Barring a geopolitical shock, our base scenario is for an equilibrium oil price of just over USD50/b over the next 12 months.

Equities

  • Strong earnings growth in both the US and Europe continues to drive a strong performance by equity markets, and has helped to push down volatility. European stocks have closed the performance gap with their US counterparts, helped by a rerating among financials and by margin improvements.
  • ‘Trump trades’ have been unwinding – one sign of this is the underperformance this year of US small caps. Fiscal stimulus in the US, which we still expect, poses some upside risk, and is not being priced in by markets.

Fixed Income

  • US Treasury yields have not risen as we expected so far this year. They have tracked hard data rather than more optimistic survey (soft) data. As economic data improve, we expect yields to rise, and maintain our forecast for US 10-year yields to end the year at 2.8%-3%. But risks to this view have risen as inflation has remained low.
  • Credit spreads on corporate debt have tightened as volatility has fallen. We sold most of our US high-yield allocation in June, as it looked especially exposed to a potential spike in volatility.

Alternatives

  • Hedge funds are enjoying significant alpha. We continue to favour an overweight tactical allocation in Global Macro, which has weathered the waning of the Trump trades through active repositioning of portfolios.
  • Valuations, competition and capital inflows remain high in PE, but there are still good opportunities for attractive returns in regional, industry or mid-market niches.
  • 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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