Luca Paolini (pictured), Chief Strategist at Pictet Asset Management, explains why equities should continue to outperform…
An improvement in global economic conditions should eclipse concerns over the looming withdrawal of US monetary stimulus, and lend support to equity markets heading into year end, traditionally a favourable period for stocks. We therefore maintain our overweight stance on stocks and stick to our underweight position on bonds.
The outlook for bonds is less encouraging. With the US Federal Reserve about to shift to a less expansionary monetary policy and with inflationary pressures unlikely to ease any further, the scope for gains in government bonds is limited. In our regional portfolio, we continue to prefer emerging market equities and Japanese stocks.
In emerging markets, valuations are especially compelling as stocks are trading at a 24 per cent discount to their developed counterparts on a price-earnings basis.
Our preferred markets are China and Russia, where valuations are especially attractive. We remain cautious on countries with significant economic and financial imbalances such as Turkey and South Africa. Overall, we expect the dispersion of returns among individual EM countries to increase further in the months ahead. Elsewhere, Japan’s equities are set to benefit from a further depreciation of the JPY – we believe Japanese authorities are targeting a rate of Y110-15 to USD. We are also encouraged by a pick-up in domestic economic growth.
