Pictet Asset Management

Equity markets are caught between tighter liquidity conditions and increased geopolitical uncertainty on the one hand, and solid economic growth and corporate earnings on the other. We have consequently reduced our exposure to stocks leading into year end.

After a nine-month rally in equity markets and a recent spike in bond yields, some investors may see fit to reduce their exposure to stocks. On the surface at least, bonds appear to offer better value than equities. The gap between stocks' earnings yields, the inverse of the price-to-earnings ratio, and bond yields is narrower than it has been in two decades.

At first glance, allocating to emerging markets appears to add diversification to a portfolio. Look more closely, and the reality is more nuanced. In the late 1990s, the MSCI EM index was dominated by materials and telecoms, driven by the growth of mobile telephony and the internet bubble.

The war in Iran and the risk that it could lead to a wider regional conflict have roiled global financial markets. Oil and European gas prices have spiked while equity markets have seen sharp declines.

Gold’s stomach churning volatility – up some 30% in less than a month since the start of the year, only to subsequently lose 20% in a matter of days – has, unsurprisingly, left some investors doubting its role as a hedging asset.

Returns from emerging market bonds hinge on five factors, our economic research suggests. And for the first time in two decades, four of these are now favourable, heralding a new phase of outperformance for the asset class.

With the global economy proving more resilient than expected, we upgrade equities to overweight.

While equity markets are buoyant worldwide, emerging markets stocks and bonds are the only assets that merit an 'overweight' allocation.

Instead, a new group dubbed the “Terrific 20” — spanning real-economy sectors like financials, energy, industrials, and consumer — has led the rerating. Their forward valuations have risen ~50% in two years, making a larger portion of the market look expensive.

We upgrade equities to neutral from underweight as falling interest rates and improving economic conditions in emerging markets offset uncertainty over US tariff policies.

We remain underweight most developed market stocks as US tariff policy is still unclear but are more enthusiastic about emerging market assets.

Macroeconomic and structural trends are finally moving in favor of emerging local currency bonds, after recent setbacks.

As the effects of US import tariffs begin to emerge, we shift our stance on equities to underweight.

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