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Pictet Asset Management’s Paolini: “Tougher times ahead”

“Times are tough for global financial markets. Monetary conditions are tightening while supply chain bottlenecks are starting to take their toll on the global economy” says Luca Paolini, chief strategist at Pictet Asset Management.

“At the same time, inflationary pressures are proving more persistent than previously expected. We believe fixed income markets will be particularly hard hit.”

“High yield bonds appear especially vulnerable, and equities won’t be immune to market jitters either. Equities should hold up better than bonds because economic growth is still strong enough to allow for positive surprises in corporate earnings.”

“Our global business cycle indicators have turned neutral after a year in positive territory. They still suggest that economic growth will remain well above the long-term trend, at 5.9 per cent this year and 4.8 per cent in 2022.”

“That is consistent with corporate earnings growth of around 15 per cent next year – double the pace of the consensus forecast. Upside surprises in profits are more likely in Europe and Japan, where the economic recovery has further to run.”

“Economic activity continues to slow in China. Sentiment surrounding the vital property sector appears to be stabilising, in part due to debt-laden property developer Evergrande averting a last-minute default.”

“While we expect more stimulus from China, it has been less forthcoming than we originally anticipated, with policymakers prioritising deleveraging over short-term growth.”

“Equity prices around the world have hit all-time highs or hovered near record levels, showing resilience in the face of a growing list of concerns including supply chain disruptions, labour shortages, China’s regulatory crackdowns and persistent inflationary pressures.”

“Our propriety risk appetite indicator is just off the record highs seen in early 2021. Underpinning optimistic sentiment is a strong recovery in corporate earnings.”

“The current macroeconomic backdrop of strong growth and declining central bank liquidity provisions favours value stocks. This supports our overweight position on financials which, combined with energy, attracted investor inflows of more than USD7 billion in October, according to EPFR.”

“We remain overweight in real estate, which has an attractive valuation and should benefit from a further reopening of economies.  In contrast, we think quality stocks will lose ground in this environment having benefitted from Covid-related uncertainties and economic slowdown of the last quarter.”

“We downgrade Swiss equities to a neutral stance, taking profits after recent strong performance. We remain cautious on Chinese equities, retaining our neutral stance.”

“Our overweight position on European and UK equities is unchanged. European authorities have stepped in to keep a lid on prices and we expect activity to rebound next year, particularly in Germany, if supply problems abate.”

“Our biggest overweight fixed income position remains Chinese government bonds. They offer an attractive initial yield of 3.0 per cent against a backdrop of lower inflation risks than elsewhere and expectations that the People’s Bank of China (PBoC) will turn increasingly dovish.”

“We continue to expect policy easing in the coming months albeit lower and later than previously anticipated.”

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