Recent equity market strength, particularly in the technology sector, is masking underlying weaknesses, according to Philipp Bärtschi, chief investment officer at J Safra Sarasin Sustainable Asset Management.
While the S&P 500 is up 7.91% year-to-date in sterling terms, Bärtschi noted with eight of 11 sectors in the US underperforming the overall market, the dispersion in returns is “extremely high”.
“If you remove the largest seven companies from the S&P 500, the index is unchanged from the beginning of the year,” he said.
“The recent equity market strength is the most concentrated in 25 years and not an expression of robustness,” he added.
Bärtschi said that this picture is also reflected by the recent improvement in earnings expectations, which he noted are also mainly found in the technology sector.
“The performance at index level thus masks the underlying reality to a certain extent,” he said. “With valuations having risen again, a more cautious approach is obvious in this context.”
Underweight
As a result, the house view at J Safra Sarasin SAM is to remain underweight in equities, with a preference to defensive regions and sectors. On the flip side, it is overweight in bonds, cash and alternative assets.
“We remain overweight in bonds, with a preference for high quality bonds, while inflation-linked bonds are also attractive due to the highest real yields since 2009,” he said.
“At the lower end of the rating spectrum, we remain underweight,” he added. “High yield bonds in particular are likely to come under selling pressure as economic activity weakens, with rising credit spreads weighing on the asset class.”
Owing to favourable monetary conditions, Bärtschi said they also like emerging market bonds, especially but not exclusively in local currency.
He noted that some regions, in particular Latin America, are gradually gaining more room for interest rate cuts given “favourable inflationary developments” in order to support their economies.
In terms of cash and alternatives, he said the former was being used to be able to exploit short-term tactical opportunities, while alternatives were an overweight due to the “positive diversification” benefit to the portfolio.
