Pictet Asset Management’s Luca Paolini: “Omicron wave won’t sink stocks”

by | Jan 10, 2022

“The Omicron Covid variant may have led to more restrictions but the economic recovery remains resilient nevertheless, which means stocks don’t appear particularly vulnerable to a correction” says Luca Paolini, chief strategist at Pictet Asset Management.

“The global recovery remains resilient, thanks to a strong labour market, pent-up demand for services and healthy corporate balance sheets.”

“Given our positive outlook for the economy, we are looking for opportunities to raise our weighting in stocks in 2022.”

“The global economy is on track to grow 4.8 per cent in 2022 with the US experiencing a strong recovery in both manufacturing and services.”

“Price pressures are more persistent than expected, however. Inflation is still running way above the central bank’s official target. We expect core inflation to peak in early 2022, which should prompt the US Federal Reserve to raise interest rates by as early as June 2022.”

“The euro zone economy remains resilient, we expect the region’s economy to grow 4.4 per cent, higher than the market consensus.”

“Adding weight to our neutral stance on equities, liquidity conditions for the US are turning negative as the Fed moves to rein in a surge inflation with tighter monetary policy. The picture is very different in China.”

“The People’s Bank of China (PBoC) is creating liquidity at a quarterly rate of USD232 billion, by far the fastest pace among all major central banks.”

“Although valuations are more favourable than a year ago for both equities and bonds, it is difficult to find good value in any major asset class.”

“Notwithstanding our tactical neutral stance on equities, our outlook is positive. Strong US growth and resilient margins leave us feeling far more positive than the market.”

“Chinese equities could yet set the pace as they are attractively valued following their losses during 2021.”

“At a time when monetary policy is tightening across the developed world in response to surging inflation, government bonds continue to look very vulnerable and unlikely to deliver positive returns. Attractive opportunities are in short supply.”

“One of the few bright spots is Chinese government bonds as the PBoC is now easing monetary policy, bucking the trend in the rest of the world. Second, inflation remains under control, and we don’t expect it to exceed PBoC’s 3 per cent target thanks to more muted demand than elsewhere and a strong currency. The third buy signal is valuation. China’s government bond yield remains attractive compared to what is on offer elsewhere.”

“When it comes to currencies, US dollar is likely to appreciate a bit further in the short-term but, longer term, the economic growth gap between the US and the rest of the world will start to shrink, undermining the greenback.”

“We remain negative on sterling. The UK economy is lagging the rest of the world, and activity is still 1 per cent below pre-Covid levels. We don’t expect three or four more hikes in 2022, which is what the market is currently discounting.”

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