Private equity, an antidote to prospect of weak returns?

The summer months were good for risk assets, though things may get bumpier in the months ahead. But alongside this study in chiaroscuro, the September issue of Perspectives offers a brighter picture of investment opportunities.

Pictet chief strategist Christophe Donay admits that “prospects for portfolio returns look far weaker than they did in the past” as the extraordinary measures introduced by central banks to combat low growth and inflation continue to bite. Yet all is not lost. In-house research suggests that private equity has consistently outperformed equities since the beginning of the century. Top-quartile private equity funds manage to generate sufficiently high returns to compensate for the long-term nature of the investment., with private equity vintages launched at the height of the financial crisis proving particularly successful. “It is therefore no surprise that private equity is becoming a standard feature of large portfolios,” concludes Donay.

Emerging markets continue to look relatively attractive too, if only because of their superior economic growth. Pictet’s Senior Economist, Dong Chen, believes that the Chinese economy will achieve GDP growth of the order of 6.5% this year. Yet, he writes in the September issue of Perspectives, “important structural reforms remain” and there is no concealing that Chinese growth is slowing. Step up Indonesia and India, which, according to Chen, “could be two bright spots” within the broader emerging-market space. Both countries (especially India) have seen improvements in their current accounts and foreign-exchange reserves. “With favourable demographics and reform-minded leaders, the growth outlook for the two economies is quite positive in the medium term,” he writes.

The markets quickly shrugged off concerns about the Brexit referendum result. Alongside the resilience of the European economy, the US seemed to rebound after a disappointing first half. Equities have picked up accordingly, and may still have some potential in spite of spurts of volatility, according to Pictet’s analysts.

Yet downside economic and political risks in the US persist while in Europe “resilience in the face of Brexit does not mean that political and economic issues have gone away,” writes Donay. “Growth remains low and uneven [and] there is no consensus on the need for fiscal stimulus even as the limits of monetary policy become more apparent”. The glass remains half full (or half empty).

Read ‘Perspectives’ here