Deceptive calm, ‘Perspectives’, October-November 2017

The strong equity gains of early 2017 petered out over the summer, in spite of buoyant earnings, reflecting the market’s belief that remaining upside in equites remains limited, especially in the absence of meaningful tax stimulus in the US. Reflecting relatively modest prospects, Pictet Wealth Management (PWM) recently moved from a positive to a neutral position on a number of sectors in both the US and Europe. And yet, as PWM’s Frank Bigler, Head of Equity and Credit Research, argues in the October-November edition of Perspectives, “while we no longer expect any meaningful breakthrough on this front…we think the market can still be wrong-footed by any kind of political breakthrough.”

Christophe Donay, PWM’s chief strategist, is likewise “not at all confident that the Trump administration will prove capable of finding the political consensus needed to push through lasting tax cuts and reforms of the sort that would lift the fortunes of corporate US. Echoing Bigler, Donay believes, however, that what he terms the “growing skepticism of investors” can be seen in the steep decline in annualised returns from equities since March, in large part due to the limited potential left for earnings growth.  And yet Donay believes there is “scope for positive surprises and for disappointments, with politics in the US capable of delivering either”.

In spite of all the uncertainties surrounding US politics, as well as a frayed geopolitical backdrop, PWM’s chief investment manager, Cesar Perez Ruiz highlights just how calm equity and bond markets have been and argues that “currencies have been providing an escape valve for pressure that would otherwise be building up on markets more broadly.” Perez broadly believes that equities are “well anchored” and that there is a “lack of strongly compelling alternatives”, but also that it is “important to be well hedged”, with PWM buying protection on its equity allocations this year.

But protecting investors’ portfolios and providing positive returns is no longer enough. As Marianne Johnson, responsible for sustainability at PWM Equity Research PWM points out, “we are being tasked with becoming ever more active when managing the portfolios of clients anxious that we reflect their concerns.” At the same time, as Johnson points out, adding an extra layer of analysis based on economic, social and governance metrics often leads to better evaluation of the play-off between risks and returns. So socially responsible investing “is not simply a matter of altruism,” she writes.