The investment climate appears to be getting harsher. Global economic growth is slowing, inflation is rising, no resolution appears in sight for Russia’s invasion of Ukraine and new Covid-related lockdowns are sweeping through China, impeding growth.
Faced with these challenges, investors could be forgiven for adopting a defensive stance.
Yet we prefer to remain neutral rather than underweight equities. And that is largely because investor positioning has become excessively bearish, reducing the scope for further market declines in the near term.
Indeed, the picture emerging from our technical indicators shows that both positioning and sentiment among investors is unusually pessimistic, discounting a significant loss of economic momentum in the months ahead. Yet history tells us that shorting equities in a bull market, even during the later phase of the cycle, when sentiment is very depressed is always very dangerous.
That said, we have tweaked our positions to adopt a slightly more cautious stance, but – for now – have decided to keep an overall neutral weighting on both global equities and global bonds.
While government bonds are looking increasingly good value after steep sell offs, we would prefer to wait until US inflation and inflation expectations have peaked before upgrading them.
Our business cycle indicators support our broad asset allocation stance. Although we have, yet again, reduced our economic growth forecast for 2022 to 3.4 per cent – from 3.5 per cent a month ago and 4.8 per cent at the start of the year – our estimate remains above both the long-term trend and the market consensus.
The US economy, in particular, continues to look solid: US real GDP contracted in the first quarter but final demand continues to gather strength thanks to an exceptionally strong labour market and positive trends in investment spending. Our US leading indicator is rising at a stable pace and remains in line with its historical average. In Asia, meanwhile, Japan and some of the region’s emerging economies are seeing improvements in activity and in consumer confidence.
Things look more problematic in the euro zone – not least due to its closer economic and geographic ties to Russia and Ukraine. A technical recession is a real risk, especially in Germany where consumer confidence has fallen to all-time lows.
The Chinese economy is also struggling. Purchasing manager indices are falling below 50, while exports are peaking. Authorities are offering some stimulus, but, so far, not aggressively enough to offset the weakness in the property sector and the consequences of the strict Covid lockdown in some major cities.
Our liquidity indicators show that China is easing policy much more slowly than US is tightening. Yield differentials between US and Chinese government securities suggest that the renminbi could fall to around 7 per dollar over the coming months.
Valuations look particularly concerning for euro zone investment grade bonds; US investment grade bonds appear more attractively priced by comparison.
For equities, valuations are generally looking more attractive, with the 12-month price-to-earnings ratio on MSCI All Country World Index having dropped to 15.5 times – roughly in line with the average of the past 20 years.
However, this looks less attractive when considered in the context of rising bond yields and a deteriorating outlook for corporate earnings. Globally, analyst earning downgrades now outnumber upgrades for the first time since August 2020. This reflects economic reality, as the trend mirrors a decline in the ISM New Orders Index (see Fig. 2).
Technical indicators, by contrast, paint a positive picture for risky asset classes. The equity put/call ratio – a measure of bearish equity positions relative to bullish ones – has risen to near top of historical range, signalling that positioning on stocks is exceptionally negative. This is also reflected in sentiment indicators, with the American Association of Individual Investors investor sentiment survey’s bull share near 30-year lows. In such an environment, any market gains could provoke a wave of position adjustments, further fuelling the rally.
Opinion written by Luca Paolini, Pictet Asset Management’s Chief Strategist.
Discover Pictet Asset Management’s macro and asset allocation views.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
Important notes
This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation.
The information and data presented in this document are not to be considered as an offer or sollicitation to buy, sell or subscribe to any securities or financial instruments or services.
Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management (Europe) SA, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management (USA) Corp (“Pictet AM USA Corp”) is responsible for effecting solicitation in the United States to promote the portfolio management services of Pictet Asset Management Limited (“Pictet AM Ltd”), Pictet Asset Management (Singapore) Pte Ltd (“PAM S”) and Pictet Asset Management SA (“Pictet AM SA”). Pictet AM (USA) Corp is registered as an SEC Investment Adviser and its activities are conducted in full compliance with SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref.17CFR275.206(4)-3.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in Canada to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc is registered as Portfolio Manager authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA.