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House View, April 2019

Summary:
Pictet Wealth Management's latest positioning across asset classes and investment themes.Asset AllocationAlthough we expect the economic picture to brighten and the decline in earnings expectations to end, we have a prudent stance on global equities, as expressed in our decision to book some profits on global equities and to invest in put options on large-cap European and small-cap US equities.At the same time, our willingness to take on reasonable risk means that the reduction in equities was matched by an increased allocation to local-currency emerging-market (EM) debt, part of a move toward seeking ‘carry’. Our desire to build a barbell strategy within this framework means we have more recently moved from an underweight to a neutral stance on euro investment-grade credits to mitigate

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

Asset Allocation

  • Although we expect the economic picture to brighten and the decline in earnings expectations to end, we have a prudent stance on global equities, as expressed in our decision to book some profits on global equities and to invest in put options on large-cap European and small-cap US equities.
  • At the same time, our willingness to take on reasonable risk means that the reduction in equities was matched by an increased allocation to local-currency emerging-market (EM) debt, part of a move toward seeking ‘carry’. Our desire to build a barbell strategy within this framework means we have more recently moved from an underweight to a neutral stance on euro investment-grade credits to mitigate the currency and rate risks inherent in EM bonds.
  • While it has been quite strong of late, we believe the US will lose ground against other currencies later this year.

Commodities

  • With the potentially big increases in US oil exports likely further down the road, we believe that supply and demand could remain largely in equilibrium this year, allowing Brent oil prices to remain in a USD60–70 range. Our year-end forecast is USD70.

Currencies

  • The chances of further equity market volatility, the Fed’s dovish shift and the currency’s long-term valuation should be supportive of the yen, and we are sticking to our 12-month projection of JPY100 per USD (compared with around JPY110 in late March).

Equities

  • Having revised up our price target for developed-market (DM) equities to 4–5% growth, we believe that most of the price appreciation occurred in Q1 and that current valuations look close to fair value.
  • EM equities have underperformed DM equivalents this year, in spite of a robust performance from Chinese and Indian equities. EM equities are currently looking for direction, which could come from dollar weakness or a turnaround in the Chinese economy.
  • In March, US cyclical sectors received a boost from the Fed’s decision to end rate hikes for now, while in Europe consumer staples were among the top-performing sectors. The tone in European industrials was cautious, especially given continued issues in the auto sector. We maintain a bias towards quality companies.

Alternatives

  • Among the various real-estate investment strategies,value-add, which offers the possibility of improving buildings, offers particularly attractive risk-return characteristics.

Fixed Income

  • After the fall in yields we saw in Q1, we still expect the US 10-year yield to rise toward 3.0% and the Bund to 0.50% by year’s end, although at a more measured pace than before. Negative yields mean we are underweight German Bunds but we are neutral on US Treasuries
  • We have moved from an underweight to a neutral stance on euro investment-grade credits, in part given the ECB’s renewed dovishness. Euro credits have generally better ratings and leverage features than their US counterparts.
Perspectives Pictet
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