“Slowing growth, rising inflation and less expansive monetary policy could act as a dampener on equity markets and riskier corporate bonds,” says Luca Paolini, chief strategist at Pictet Asset Management.
“The global economy is expanding at a solid pace. Developed countries are responsible for much of that growth thanks to the rapid vaccine rollout and the lifting of lockdown measures.
“But economic momentum is beginning to ease as central banks prepare themselves to scale back monetary stimulus in response to rising price pressures.
“A less favourable mix of growth and inflation, tighter liquidity conditions and high valuations for riskier asset classes lead us to maintain our neutral stance on equities.
“The UK is the cheapest equity market and offers a favourable mix of value oriented and high quality defensive stocks which we believe would perform best in the current phase of the cycle.
“Europe is also increasingly attractive. The post-pandemic growth relay has shifted from China to the US and now to the euro zone. Economic prospects and liquidity conditions for the region are better than elsewhere while equity valuations are reasonable.
“We believe that Asia ex-Japan equity markets appear attractive from a strategic stand-point. The region is forecast to grow at twice the rate of the rest of the world over the next five years with a lower inflation rate. Also, the relatively conservative monetary and fiscal response to the Covid crisis means that economies in the region have more policy headroom.
“We remain underweight in US equities given valuations.
“Within equities, we are underweight economically-sensitive sectors – including consumer discretionary stocks and remain overweight financials and real estate– while in fixed income we are underweight riskier bonds such as US high yield debt.
“At the same time, we continue to hold overweight positions in defensive assets such as US Treasuries and Chinese local currency bonds.
“US Treasuries look attractive relative to other developed market government bonds.
“We see the most potential in Chinese government bonds. The asset class is enjoying significant inflows, which are set to accelerate as authorities allow foreign investors greater access to the market and as Chinese debt becomes a bigger feature of global bond indices.”