The prospects for equities are encouraging in the wake of a sharp sell-off as global economic growth and corporate profits should remain buoyant.

Pictet Asset Management Strategy Unit.

Asset allocation: positioned for a rebound in stocks

It’s been a gloomy start to the new year. Economic growth has disappointed, Covid cases have spiked and stocks and bonds have sold off sharply. But we believe the world economy and equity markets might be through the worst – at least for the short term.

Following January's rout, we believe that global equities can return around 15 per cent by year-end, thanks largely to a 13 per cent rise in corporate earnings and a steady trickle of dividends. Global bonds, meanwhile, look likely to deliver capital losses.

Taking advantage of attractive valuations, we have chosen to upgrade equities to overweight. This is a tactical move, conditional on the speed of US monetary tightening and on a successful resolution of the crisis in Ukraine. Reassuringly, our multi-asset risk appetite indicator – which measures the extent to which the market has been rewarding or penalising historical volatility – remains in positive territory, in contrast to past market corrections.