Equity markets are not cheap, but bargains are beginning to "emerge", according to Luca Paolini, chief strategist at Pictet Asset Management.
“We’ve upgraded emerging equities to positive from neutral. The asset class has been under pressure for months as a stronger dollar, higher US interest rates and escalating trade tensions have cast a cloud over earning prospects.
“However, there are signs that the worst may be over - developing economies’ real GDP is growing faster than developed economies, and the recent decline in energy and commodity prices should offer additional support to manufacturing,” he said.
Mr Paolini described China as a particular “bright spot, with strong consumption and construction activity,” whilst “monetary policy easing is improving liquidity conditions, and authorities have also announced fiscal stimulus plans.
“Emerging equities now trade at a discount of more than 20 percent to developed markets, the sort of valuations that could encourage bargain hunters. Much of the bad news may already be factored into valuations since $9 billion has flowed out of emerging equity funds from April but despite ongoing trade wars, the global economy and markets remain surprisingly resilient.
“Japan remains our favoured developed equity region, but we are cautious on Europe, given the possible impact on growth from US trade measures, especially on export dependent Germany,” Mr Paolini stated.
“We remain underweight expensive US stocks, particularly as US companies look unlikely to repeat their blockbuster earnings performance of recent months.
“We remain neutral on technology and cautious towards industrials, financials and consumer discretionary. We remain overweight in healthcare, a defensive sector insulated from trade tensions.”
Additionally, “Inflation pressures are cooling", and "a peak in inflation would have a couple of consequences."
Firstly, "the Fed may have more reason to pause. Second, it may cause a downward repricing of the inflation premium – making assets viewed as an inflation hedge less expensive relative to other investments." This would be "good news for Treasuries. Hence, we retain a strong overweight in this asset class,” he continued.
Furthermore, “Emerging market government debt also offers good value given the improvement in the fundamentals of developing economies. Trade tensions with the US remain a risk, but we think a modest overweight is justified. Europe’s corporate bonds, by contrast, look expensive, which is particularly worrying as credit ratings have fallen.
“Separately, when it comes to currencies, we think any dollar strength will likely be most pronounced against the euro,” Mr Paolini concluded.
Headquartered in Geneva, Switzerland, Pictet employs more than 4,200 people and has 27 offices in: Amsterdam, Barcelona, Basel, Brussels, Dubai, Frankfurt, Geneva, Hong Kong, Lausanne, London, Luxembourg, Madrid, Milan, Montreal, Munich, Nassau, Osaka, Paris, Rome, Singapore, Stuttgart, Taipei, Tel Aviv, Tokyo, Turin, Verona and Zurich. At 30 June 2018 Pictet Asset Management managed £144 billion in assets, invested in equity and bond markets worldwide.