Pictet AM rates its shares: Overweight in places

Pictet AM upgraded its rating on the stock to "Overweight". It's a short-term move. Luca Paolini, chief strategist at Pictet AM, explains that as interest rates fall, holding cash or cash equivalents will become less and less attractive.

His "tactical" preference for equities is supported by positive technical signals, especially in the US and Japan. Paolini explains that sentiment indicators have normalized and investor positioning is balanced between put and call options, with investors betting on a rebound rather than a fall.

Although we are currently neutral on U.S. equities, we are "overweight" in information technology (IT). In addition, Japan and Switzerland are our preferred equity markets," he explains.

US, Japan and Switzerland

According to Pictet AM's chief strategist, US equities are trading at 20 times 12-month forecast earnings. That level "rarely holds," he warns.

Meanwhile, Japanese equities ("overweight") are on the upswing thanks to signs of economic resilience, corporate reforms and reasonable valuations, with the Nikkei index hitting a 34-year high in January.

Swiss equities, which offer protection and quality in a subdued global growth environment, are also outperforming. 60% of the Swiss index's market capitalization is made up of defensive, pharmaceutical and consumer stocks, the highest among major economies.

In the eurozone, Pictet takes a "neutral" position. Luca Paolini explains this by saying that, despite attractive valuations, it is an unloved region. "Growth in the eurozone, although stable, is likely to be anemic. Nevertheless, these stocks could surprise with an improved outlook for economic recovery in the second half of the year," he notes.

China

The manager is also neutral on Chinese and other emerging market stocks. Relative valuations of Chinese stocks are at historic lows, but investors are hesitant about the readiness for massive fiscal support, the manager acknowledges. In addition, a turnaround in the real estate market, which is key to improving sentiment, is not imminent.

Despite the good news on the state of China's economy, doubts remain as to whether GDP growth can translate into higher corporate profits. The fact that a Hong Kong court ordered the liquidation of Evergrande Group is a reminder of the problems that persist in the real estate market.

IT

By sector, Pictet AM is "outperforming" information technology, where earnings growth forecasts are relatively high. In addition, growth opportunities, especially thanks to advances in artificial intelligence (AI), justify a high valuation in some cases.

"We also like stocks of communications services companies that offer AI opportunities at more reasonable valuations," he notes.

However, they maintain a "neutral" stance on energy companies, where they no longer see value in oil stocks as a hedge against geopolitical risks in the Middle East.

Slowing growth

A leading indicator of global business activity points to a slowdown in growth in the second half of the year. For example, it expects growth in advanced economies to be 0.9% for the whole of 2024, roughly half the rate in 2023.

In particular, the dynamics of non-residential consumption and investment in the US are likely to deteriorate soon, prompting the Federal Reserve to cut interest rates. In addition, the U.S. Treasury is likely to shift to issuing longer-term debt than Letras in the second quarter, with the pace of repurchase agreements slowing, leading to a net reduction in liquidity in the financial system and a likely increase in risk premiums.

"Overall, a further increase in liquidity is unlikely as lower interest rates could keep real rates unchanged."