House View, December 2018

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

Asset Allocation

• We remain neutral on global equities overall, seeing relatively limited potential for developed market stocks in particular as earnings growth declines. We favour companies with pricing power as well as measurable growth drivers and low leverage.
• We have moved from underweight to neutral in US Treasuries, as the rise in yields slows. But we have shifted from a neutral to underweight position in core euro area bonds ahead of monetary policy normalisation.
• We have moved to underweight from neutral in corporate bonds, as rising rates threaten to expose vulnerable parts of the credit market.
• We continue to diversify into alternative assets to compensate for falling expected returns for traditional asset classes.
• We have recently made a push into Indian and Chinese equities, believing emerging markets’ long period of underperformance against developed markets is coming to an end.

Commodities We expect global oil demand to remain mostly unchanged next year, with the impact of weaker global economic growth offset by the effects of declining oil prices, which have fallen below our estimate of their long-term fundamental equilibrium price (USD64 per barrel for Brent, USD56 for West Texas Intermediate). Currencies We believe factors that supported the dollar this year are likely to abate progressively in 2019, especially as the European Central Bank embarks on policy normalisation and the growth gap with Europe declines. Moderation in global GDP growth should help defensive currencies like the Swiss franc and Japanese yen next year. (The latter should also be helped by its extreme undervaluation). Equities Cash returns (dividends and share buybacks) should be the main driver of total equity returns in the middle single digits in Europe and the US next year, in line with earnings growth. The strong derating of emerging market equities this year has encouraged us to build exposure in this asset class lately. Earnings growth potential remains high in select markets like China and valuations are attractive on a historical basis. Within a cautious stance on equities overall, we favour sectors and companies with structural growth drivers and healthy balance sheets, as well as strong cash flow metrics. While we like parts of the healthcare sector and while the recent hefty correction has made tech look more interesting, we are more sceptical about sectors like industrials and consumer discretionary.

MSCI China and Emerging Markets Performance, 2018 - Click to enlarge

Fixed Income

• We have turned neutral on US Treasuries overall, with their relatively high coupon providing some protection against the further, limited rises in US rates we expect next year. We also believe German Bund yields will rise modestly next year as the ECB moves away from monetary easing.
• Increasing rates and slowing growth are making the climate more challenging for credit. We have moved to an underweight position in corporate credit overall.

Alternatives

• The resurgence of volatility, dispersion and a renewed focus on fundamentals will drive our hedge fund strategies next year. We are reinforcing positions in relative value and arbitrage-focused strategies, as well as global macro
• With competition for deals high and valuations challenging, our private equity strategy is focusing more intently than ever on manager selection.