History suggests investors should lighten up on stocks in the summer. But this year there are many reasons to have disregarded the adage ‘sell in May and go away’,” says Luca Paolini, chief strategist at Pictet Asset Management.
The global economy is extending its broad-based recovery, fuelled by a pick-up in activity in emerging markets – even though the momentum of growth has moderated. Corporate earnings prospects are reasonable while monetary conditions remain favourable worldwide as central banks continue to provide ample stimulus.
This reinforces our case for being overweight equities; UK stocks look good value but US equities remain expensive.
Renewed sterling weakness, attractive stock valuations and the UK economy’s surprising resilience prompt us to upgrade our stance on British equities to overweight from underweight.
The UK’s economy’s resilience in the wake of last summer’s referendum has caught many by surprise. In part, sterling’s sharp subsequent decline has boosted the country’s competitiveness.
There have yet to be any real policy effects – the exit process is only just starting. The BoE’s emergency rate cut last summer and easy monetary policy, is also translating into strong private sector credit creation, underpinning UK money supply growth for the time being.
Hence, the UK is one of only two developed economies to show sharply improved macroeconomic fundamentals during the past month (the other is New Zealand). The UK is the second most attractive major developed equity market on a valuation basis.
Brexit will probably prove a medium-long term drag on the economy. Inflation, boosted by rising import costs, is also likely to take a bite out of disposable incomes despite weaker sterling.
We continue to like emerging market equities. Europe’s corporate sector, meanwhile, is seeing strong earnings growth and solid fund inflows, allowing us to maintain an overweight stance. We have scaled back our exposure to Japanese equities to a single positive as economic momentum moderates.
Among our sector weightings, we have trimmed our exposure to financials and downgraded utilities to neutral. By contrast, we’ve upgraded healthcare to overweight from neutral on the back of earnings momentum and relatively attractive valuations.
In currency markets, the euro has climbed nearly 6 per cent versus the dollar over the past two months and we think it may have further to go. Macron’s victory in France reignited investor appetite for European assets and economic data is also very supportive.
The euro should also benefit from a growing yield advantage over the US dollar. Economic growth will enable the ECB to remove its monetary easing bias and, hence, to further scale back bond purchases.
We have reduced our overweight on US government debt on grounds of both valuation and positioning. We continue to see value in emerging market local currency debt, the cheapest of all mainstream fixed income asset classes.