Pictet Asset Management
With the global economy proving more resilient than expected, we upgrade equities to overweight.
Asset allocation: Moving to overweight equities as economy stabilises
Global economic prospects are improving as a record four out of five major central banks are cutting interest rates and global business confidence is recovering from the negative impact of higher US tariffs. While the US government shutdown may provide fresh uncertainty, corporate profit and revenue growth remain healthy. All this suggests to us that there is upside in riskier asset classes in the medium term.
In contrast, government bonds look vulnerable. In the US, the asset class is not sufficiently discounting the risk of inflation given there is growing evidence of a tariff-induced spike in consumer price growth. At the same time, we are concerned that the Trump administration’s interference in the US Federal Reserve’s policymaking and governance could undermine the central bank’s independence and lead to a higher risk premium and steeper yield curves in US government bond markets. What is more, after falling to near 4% , 10-year US bond yields are now below our estimate of the long-term neutral levels.
In the rest of developed markets, while central banks are still easing, we estimate that on average policy rates are approaching a floor. This, in turn, should limit upside potential for fixed income.
Taking this into account, we upgrade equities to overweight, and downgrade bonds to underweight. Cash remains neutral.
