Pictet Asset Management has reduced its exposure to Chinese equities as concerns mount over the world’s second largest economy.
While remaining neutrally weighted in both global equities and global bonds, Luca Paolini, chief strategist at Pictet, said China’s worst covid outbreak in two years is causing serious disruption to the economy.
“China is the worst-performing equity market,” said Paolini. “Investors are increasingly worried about the economic slowdown at a time when the Peoples Bank of China (PBoC) appears to be reluctant to deliver large-scale monetary easing.”
As a result, while noting that Chinese stock valuations are at levels that now look historically attractive, for Paolini they are not compelling enough to fully compensate for risks from Beijing’s zero-covid policy, last year’s regulatory crackdown or the lack of aggressive monetary stimulus.
“Hence, we are cutting Chinese equities to neutral from overweight – a move that is reinforced by our simultaneous downgrade of the renminbi to underweight,” he said.
On the bright side
In contrast, Pictet continues to be optimistic on UK equities, where Paolini said commodity exporters and defensive companies should help them outperform peers despite a slowdown in the economy.
“We remain underweight US equities,” he added. “Unattractive valuations, a Fed intent on aggressively raising rates and a strong US dollar all augur badly for American markets, which have a relatively high exposure to growth-sensitive stocks.”
In terms of fixed income, after a “brutal” first quarter, Paolini said the signs are that value is beginning to emerge in global bonds.
“We remain neutral, but that stance might soon change as we expect to see a peak in inflation expectations over the coming months,” he said. “For now, we restrict ourselves to upgrading Swiss bonds to neutral from underweight.”
At the same time, Paolini said Pictet has downgraded their position in euro-denominated investment grade bonds to underweight from neutral.
“Higher spreads are insufficient to compensate for the risk of recession in the region and of European Central Bank tightening in the second half of the year,” he explained.
