House View, August 2019
Pictet Wealth Management's latest positioning across asset classes and investment themes.
While dovish central banks have resulted in an impressive ‘everything rally’ this year, we now need to see an improvement in fundamentals, as 12-month forward earnings for global equities are still 2% below their highs of October 2018. We therefore remain generally cautious on equities, waiting for a correction before we increase exposure.
Trading volumes have declined and market gains are narrowly concentrated. However, we continue to see opportunities in some high-quality cyclical sectors such as industrials. Selection is paramount.
As more developed-market yields turn negative, we are upbeat on local-currency emerging-market debt. Deleveraging could also spell opportunities in EM corporate debt (hard currency). We are underweight EM equities (but neutral Asian EM equities) as we wait for earnings momentum to pick up.
Armed confrontations in the Strait of Hormuz have barely caused crude oil prices to rise over the past month as investors worry about economic slowdown and the risk of oversupply. We expect the price of Brent to fall to USD50 per barrel at the start of 2020 and to remain low for the remainder of next year.
Growth and rate differentials favoured the US dollar in July, which rose to a two-year high against the euro. However, interest rate differentials and its fundamental overvaluation do not point to any further significant USD appreciation in the medium term.
Developed-market equities reached fresh new highs in July, mostly thanks to further valuation re-ratings supported by extremely low government bond yields. Earnings growth remains sluggish (less than 2% for the S&P 500 in 2019), with negative growth expected for Q2 and Q3.
EM equities performed sideways in July, reflecting contrasting fortunes despite a global wave of monetary easing. This is consistent with our view that EM equities should struggle to outperform, absent a true cyclical recovery worldwide or a massive stimulus in China, both of which seem unlikely at this stage. We therefore remain slightly negative on equities.
Some defensive sectors are beginning to look expensive. By contrast, quality industrials could be worth revisiting, with European capital goods stocks continuing to generate superior earnings growth.
In the booming private equity market, entry price, interest rates, leverage and dry powder are all relevant parameters. But human capital (team skills) and active ownership are now more than ever the main drivers of private assets’ long-term performance.
We remain neutral US Treasuries, given that yields look more compelling than for euro sovereigns, whose yields have plunged on indications of renewed ECB easing. We also remain neutral US and euro investment-grade credit for their comparatively attractive yields. Furthermore, ahead of ECB policy easing, we are neutral euro high yield.
We remain underweight US high-yield bonds given the Q1 rise in bond issuance and a relatively high leverage ratio (which signals deteriorating fundamentals).