Pictet Asset Management
Equity markets have further to run thanks to strong earnings, resilient economic growth and continued investment in AI.
Asset allocation: remaining pro-risk
The global equity rally may have stuttered in July, but we view this as a pause rather than a finale. Economic growth is broadly resilient, supported by AI-related corporate spending, robust earnings and continued expansion in emerging Asia. Technical indicators are supportive, with improved market breadth. Liquidity conditions have tightened somewhat but are still far from restrictive.
In this environment, equities remain our preferred asset class. With limited action expected from major central banks this year, we are neutral on bonds and underweight cash.
Leading indicators for business activity are above neutral across most advanced economies and emerging Asia. We expect that the volatile news flow on the Iran war will keep oil prices fluctuating for the time being, before an eventual decline. While this will put some downward pressure on global growth and lead to higher inflation in the near term, the overall impact is expected to be smaller than in 2022 given lower energy intensity and continued investment, particularly funding linked to AI and the green transition.
Non-residential investment remains the key engine for the US economy, offsetting slowing disposable income growth and softer underlying consumer fundamentals.
In Europe, economic expansion continues to be constrained by the energy shock, but business and consumer sentiment indicators have stabilised and PMIs are showing a gradual improvement across both manufacturing and services. Domestic demand has proved relatively resilient, supported by still-elevated household savings and stable employment conditions.
Some of the best macro conditions can be found in emerging markets, thanks to stronger fundamentals, positive terms of trade and reduced vulnerability to oil price shocks. This should support relative outperformance of EM assets within both government bonds and equities.
Liquidity conditions also favour emerging markets, with conditions in much of the developed world becoming less accommodative.
Faced with growing inflationary pressures, a third of the 30 major central banks tracked by our liquidity model are in tightening mode, half are on hold, and the rest are easing. We expect one more rate hike from the European Central Bank this year, and see a risk of more tightening from the US Federal Reserve.
