Luca Paolini, chief strategist at Pictet Asset Management comments on exposure ahead of possible Fed hike.
We are neutral on equities as we see no reason to raise risk at a time when both economic and corporate profit growth are uninspiring.
We have also downgraded bonds to a single underweight because we believe the market’s inflation expectations are too low.
Europe and Japan remain our preferred equity markets – earnings prospects look most positive in these regions. The US is expensive while emerging markets are not yet a ‘buy’.
European and Japanese stocks remain attractively priced compared to those in the US, and this valuation gap could potentially see many European firms become takeover targets for US companies, which would provide an additional boost to the region’s stock market.
Japan’s macroeconomic outlook is also supportive of stocks. While the economy entered into a technical recession in the third quarter, a rebound in export volumes and consumer confidence point to a recovery.
In terms of sector weightings, we are maintaining a moderate tilt towards cyclicals with an overweight stance on information technology and financial stocks – the sectors most likely to benefit once US rates start rising.