“The favourable environment for risky assets may not last much longer” – Luca Paolini, Pictet Asset Management

“Equities have seen strong recent gains, stretched valuations and there is the prospect of a less favourable growth/inflation mix. While economic conditions continue to improve, there are signs the market rally is running ahead of fundamentals. We have consequently taken profits on global equities, and dialled down our allocation to neutral”, says Luca Paolini, chief strategist at Pictet Asset Management.

“Just four months into 2021, global equity markets have already hit our targets for the year (returns of 10 per cent). That and tentative signs that the momentum in economic and corporate earnings growth may be peaking has led us to take some profits. We therefore downgrade equities to neutral, and trim our exposure to cyclical stocks.”

“The total return ratio of US equities versus bonds is now at a historic high, and a staggering 47 per cent above its long-term trend (see Fig. 2). The gap between stocks’ earnings yields and government bond yields, meanwhile, is at its lowest since the 2008 financial crisis.”

“Globally, stocks’ earnings multiples should come under further pressure in the coming months as monetary stimulus fades.”

“With valuations rising to their highest in more than a decade, stocks will require unusually healthy conditions to continue their rise. In our view, though, the favourable environment for risky assets may not last much longer. US stock markets look particularly vulnerable to a pullback.”

“Our business cycle indicators suggest the global economy is recovering well from the pandemic, but growth momentum has slowed slightly. That’s particularly true in China, where weaker than-expected first quarter data has prompted us to trim our 2021 GDP growth forecast there to 10.0 per cent from 10.5 per cent.

“In the euro zone, the recovery is not self-sustained yet and is fully conditional on successful control of the pandemic, the vaccination campaign and on the persistence of accommodative monetary and fiscal policies. Economic activity in the US, meanwhile, continues to beat expectations – for now. We expect growth to peak in the current quarter, before slowing into the year-end as the fiscal boost starts to fade.”

“As such, we remain neutral Europe and emerging markets fixed income, and maintain our positive stance on US government bonds and Chinese sovereign debt.”

“Strategically, we remain bullish on EM currencies and expect the US dollar to resume its gradual shift lower when the growth outperformance of the US economy comes to an end.”

“We also see some downward pressure on sterling after its recent strength. The pound seems to have shrugged off the impact of Brexit and taken further support from optimism about the success of the country’s vaccine strategy and pending reopening of the economy, but those positive effects seem to have run their course.”


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