House View, February 2018

Pictet Wealth Management's latest positioning across asset classes and investment themes.

Asset Allocation

  • Current conditions vindicate our continued bullish stance on equities in developed markets and emerging markets (Asia more than Latam). Valuations are high, but they are justified by upwards adjustments to expected earnings growth.
  • But with long-term rates rising, we are expecting a rise in volatility from their low current levels. This should benefit active managers.
  • We remain generally bearish on benchmark US Treasuries and core euro area bonds as yields rise. We are neutral on peripheral euro area bonds, which still have some limited potential for further spread tightening.
  • We believe that quality matters more than ever in credit: now is not the time to take risk. Volatility and increasing dispersion of returns this year should benefit alternative strategies (including hedge funds and real estate assets).

Commodities

  • We still expect crude oil prices to come closer into line with fundamentals during 2018. These fundamentals point towards an equilibrium price of USD 64 /bbl for Brent and USD 58 /bbl for West Texas Intermediate (WTI) oil.

Equities

  • Valuations have risen to high levels in developed markets. But stronger earnings are curbing re-rating, so valuations are not yet a major source of concern.
  • We have upgraded our year-end targets for the S&P 500 on tax cuts, with expected 2018 earnings growth for the S&P 500 revised up from around 12% in December to around 18.5% by end-January. Earnings expectations have also been raised (more marginally) for the Stoxx Europe 600.
  • Along with expensive, bond-like equities, markets have been penalising sectors that are highly indebted, favouring instead those with superior earnings growth prospects.

Currencies

  • Our 12-month forecast for the EUR/USD rate is for one euro to be worth USD 1.24. The first half of the year should see the US dollar rebound based on stronger US activity and a rather cautious approach towards policy normalisation by the ECB.

Fixed income

  • We have upgraded our central year-end forecast for the 10-year T-note yield to 3.0%.
  • As the 10-year Treasury yield looks set to rise further in 2018, we remain bearish on US government bonds, keeping our short-duration exposure.
  • With benchmark government bond yields expected to rise further, their higher coupons and lower duration make high-yield bonds an attractive alternative to investment-grade credit – but we remain selective within this asset class, focusing on high quality.

Alternatives

  • In hedge funds, event-driven managers are optimistic about the opportunity set across sub-strategies, and especially within M&A and special situations.
  • Within real estate, there are lots of opportunities in retail and logistics (which serves e-commerce) – whether that involves reconfiguring warehouses to suit the needs of online retailers or adapting other bricks-and-mortar assets.
  • Offices, which are under pressure to adjust to new trends such as higher-density workspaces and open floorplans, are another area that property investors are interested in at present.

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