“While financial markets are unsettled by the emergence of the Omicron Covid variant, investors shouldn’t panic” says Luca Paolini, chief strategist at Pictet Asset Management.
“There are good reasons why riskier asset classes are trading at or close to all-time highs.”
“Consumer and industrial demand is robust, supply bottlenecks look set to ease, and corporate earnings and margins remain healthy.”
“This augurs well for equity markets over the near term, but needs to be balanced against the emergence of a new threat to the economy.”
“Though it had fallen down the list of investors’ worries, the recently identified Omicron variant of Covid shows the pandemic hasn’t faded away, and markets were clearly spooked by its emergence.”
“But the picture is not universally negative.”
“Although Covid has caused distortions and supply bottlenecks, economies have by and large adapted remarkably well to the vagaries of the pandemic.”
“We see no signs of ‘froth’ in the shares of companies that would have benefitted from a full reopening of the economy.”
“Valuations for Covid-sensitive stocks suggest investors had been largely sceptical of a smooth reopening of the economy.”
“So, despite the heightened uncertainty, the direction of travel is still towards reopening and near-normalisation of economies worldwide.”
“All of which leads us to maintain a neutral positioning on equities and remain negative on bonds.”
“Further reasons for optimism include our belief that inflationary pressures should peak in the coming months, before moderating through the rest of 2022.”
“As a result, we anticipate a fresh burst of growth and a long-awaited recovery in the services sector.”
“This growth spurt should benefit parts of the equity market which are most exposed to the economic cycle and support corporate earnings.”
“We are optimistic about corporate profits across most regions, reflecting our above-consensus views on economic growth. Globally, we see profits rising by 16 per cent next year, compared to analyst consensus of around 7 per cent.”
“Stronger-than-consensus profit growth is more likely in the euro zone and Japan.”
“We turn more positive on consumer discretionary stocks, upgrading the sector to neutral from negative.”
“Financials remain our preferred sector for several reasons: attractive valuations despite this year’s rally; bank profitability looks set to improve as bond yields rise, and hurdles to dividend distribution have been largely removed by regulators.”
“Equally, we like real estate equities for its attractive valuations and as an inflation hedge.”
“We are more cautious on defensive sectors, whose performance is vulnerable to any pick-up in economic growth. Utilities and consumer staples are downgraded to underweight from neutral.”
“We downgrade US Investment Grade corporate bonds to underweight. With spreads close to record lows, we are concerned that the asset class is priced to perfection leaving little room for uncertainty.”
“The only bright spot in fixed income is Chinese government bonds, in which we remain overweight. Elsewhere, we remain neutral across almost all government debt, except for Swiss bonds where we retain an underweight stance.”
