Other improvements include a weaker dollar, a less hawkish Fed, and recovering commodity prices, Paolini said.
As emerging markets benefit from economic improvements in China and elsewhere, Pictet sees opportunities in materials and US high yield bonds.
The firm is sticking with its overweight stance on equities and remains underweight bonds as monetary stimulus should underpin economic growth, Paolini added.
Steady Chinese improvement
The most powerful boost comes from a steady economic improvement in China – a result of Beijing’s aggressive fiscal and monetary policy during the past year, noted the strategist. The rebound in construction activity has led to stabilisation in the country’s manufacturing sector.
“Over the longer term, we expect the euro to appreciate against the US dollar, but are reluctant to overweight the currency ahead of the UK’s referendum on EU membership.”
“We retain our overweight stance on sovereign dollar denominated emerging market bonds – which are less volatile than their local currency counterparts – as these enable us to capitalise on improved economic conditions in the developing world while remaining insulated from potentially turbulent conditions in the currency markets,” explained Paolini.
Japanese and European stocks also look appealing, as the trend of falling European and rising US corporate earnings is about to reverse, according to Paolini.
Consumer influence
Meanwhile the asset manager maintains a cyclical sector tilt, preferring stocks that stand to benefit most from an increase in consumer spending.
“Strong job growth and low inflation will boost household budgets, benefiting consumer discretionary companies. Telecom stocks look good value and prospects for growth have improved with the first price rises in both Europe and the US in 20 years,” he continued.
The recent stabilisation in China and emerging markets and a recovery in commodity prices support materials, noted Paolini, who also views the near term prospects for US high yield bonds as bright.
In the long run, Pictet expects default rates to climb to around 5%, concentrated in the energy sector.
Developed debt
Pictet remains underweight developed market government debt based mainly on valuation. Investment grade European bonds are not attractive either, in Paolini’s view, as he believes the effects of the ECB’s extended bond purchase programme are already reflected in the market.
“Over the longer term, we expect the euro to appreciate against the US dollar, but are reluctant to overweight the currency ahead of the UK’s referendum on EU membership,” he said.
