House View, June 2018

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

Asset Allocation

  • Overall, we remain cautiously optimistic about risk assets. We expect economic growth to rebound after a ‘soft patch’ and corporate profitability remains strong, as revealed in Q1 earnings reports.
  • But we recognise that the environment is becoming more challenging for investors. The current environment requires active managers’ heightened sense of adaptability.
  • While we are bearish on euro area peripheral debt as Italian political instability looks set to endure, ultimately we maintain our confidence in the backstops that exist at the European and domestic Italian level designed to keep the euro area intact.
  • Quality company debt is emerging as a ‘safe haven’ alternative to government bonds. Local currency debt could look attractive once the US dollar stabilises and important Latin American elections pass.

Commodities

  • A significant premium above our estimated long-term fundamental equilibrium (currently at USD63 per barrel for World Texas Intermediate (WTI) and at USD66 for Brent) could persist for oil prices. These could remain close to USD70 for WTI and USD78 for Brent until year’s end.

Currencies

  • We have adopted a tactically positive view of the US dollar versus the euro because of the US’s superior growth and renewed political tensions in Europe.
  • But our belief that the scope for further upward adjustments to US rate expectations is limited and that global growth remains solid should generally relieve stress on emerging-market currencies – although trade tensions remain a big unknown.

Equities

  • In spite of concerns in some quarters about margins, corporate profitability remains high. The Q1 earnings season saw over two-thirds of US companies substantially beat sales and net income expectations.
  • After nine years of economic expansion, the US capex cycle is showing signs of maturing, with implications for US industrial stocks. But the economic environment and orders are still growing.

 

Fixed income

  • Further volatility in Italian bonds is to be expected with a spread of 200 bp over 10-year Bunds now looking like the lower limit.
  • Despite the short-term challenges facing individual emerging markets, we remain cautiously optimistic on EM debt. At some point, any sell-off could offer compelling opportunities for investors in select countries.

Alternatives

  • As market opportunities grow in Asia and risk management frameworks become increasingly robust, we are prudently seeking to expand our footprint in the region.
  • More than 3,300 real estate transactions worth over USD387 billion were announced last year, eclipsing the previous record and accounting for about 12% of the global M&A market.
  • The high volume of real estate transactions, especially in retail and logistics, could lead to a glut of ‘non-core portfolio’ assets on the market and prompt a shopping spree for opportunistic real estate managers.

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