Asset Allocation: Resilient Emerging Markets, Lower Rates Underpin Stocks

Pictet has upgraded equities to neutral from underweight, as falling interest rates and improving economic conditions in emerging markets offset uncertainty over US tariff policies.

It would be reasonable to assume that the escalating conflict between Israel and Iran adds to the risks facing global markets. But investors have remained calm, refusing to engage in a panic sell-off.

There is some justification for that.

The resilience of emerging market economies, expectations for interest rate cuts from major central banks, and hopes for continued growth, particularly in technology and artificial intelligence, are strong arguments for maintaining an optimistic stance.

Even so, there are dark clouds on the horizon. The US' major trading partners still have no clarity on any trade deal ahead of the expiry of the Trump administration's 90-day tariff pause on July 9. The conflicts in the Middle East and Ukraine are far from being resolved. And the US economy faces the very real prospect of a stagflationary shock while global corporate earnings are likely to disappoint expectations.

Taking all these factors into account, Pictet has become less concerned about the short-term outlook for risky assets than a month ago. They have thus upgraded equities from underweight to neutral and hold benchmark weightings in both bonds and cash.