Monthly Investment Strategy Highlights, August 2017

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

Asset allocation

  • We retain a slight overweight in DM equities owing to good fundamentals, but it is especially important at present to be well protected against downside risk.
  • Markets appear unduly complacent, and volatility could rise in the coming months. This will create opportunities for tactical trading and especially hedge funds.
  • Low correlations and a pick-up in disruptive M&A are already creating an improved environment for active management.
  • EM assets have rebounded but a recovery in the USD could check EM assets’ performance. It may still make more sense for the moment for risk-averse investors to play EM through DM – investing in DM multinationals with a large EM footprint.

Commodities

  • Barring a geopolitical shock, our base scenario is for an equilibrium oil price of not far above USD50/b over the next 12 months.

Equities

  • A robust earnings season has helped to support equity markets, but with good 2017 earnings already priced in, currency trends dominated markets in July, with the weaker dollar boosting the S&P 500. However, solid economic and earnings growth should continue to support European equities.
  • The Trump trade has faded, and valuations are high, but we remain positive on prospects for DM equities.

Currencies

  • We continue to expect the dollar to strengthen in the next six months, and think the pace of CHF weakening against the EUR should abate.

Fixed Income

  • We maintain our target for a 10-year Treasury yield of 2.8-3.0% by the end of 2017, although we recognise there is scope for rates to undershoot.
  • In Europe, there are upside risks to our Bund yield target of 0.7%, encouraging us to remain underweight duration in euro accounts.
  • Credit has become progressively more expensive as spreads sink. USD high-yield looks especially exposed to a rise in volatility, which pushed us to sell part of our exposure in June.

Alternatives

  • We remain constructive on the opportunity set for active management in the second half of 2017, as correlations remain low. Equity-focused strategies could continue to benefit from an improving economic environment.
  • Valuations, competition and capital inflows remain high in Private Equity (PE), but there are still good opportunities for attractive returns. China is becoming increasingly hard to ignore in the PE space.

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