Pictet Asset Management has released its November Barometer. According to Luca Paolini, Chief Strategist, “prospects for riskier asset classes look weaker as interest rate hikes continue to curtail economic growth worldwide.”

Asset allocation:

Prospects for the world economy are gloomy with a recession on the horizon, falling corporate earnings and high real rates. We therefore remain underweight on equities, whose valuations are even more difficult to justify after the recent market rally. We remain overweight on bonds; US Treasuries in particular are trading at levels that offer inexpensive protection from ongoing economic weakness.

What would make us turn more positive on equities? Corporate earnings forecasts to stabilise, a steeper yield curve and better relative valuations for cyclical equity sectors.

Equities:

Our defensive stance remains unchanged where we hold neutral or underweight positions in all markets and sectors bar Japanese, health care and energy stocks.

There is no end in sight to the downward shift in analysts’ corporate earnings forecasts. We therefore stick to our underweight stance on US stocks.

China is among the emerging market economies least vulnerable to rising US interest rates. Nevertheless, we are reluctant to alter our stance on Chinese stocks at this juncture – we have been neutral since September and we will remain so until we get a clearer sense of the government’s immediate priorities, which should emerge in the coming months.

Fixed income and currencies:

We remain overweight US Treasury bonds as the Fed takes a grip on inflation, but remain underweight European bonds as the ECB falls behind the curve. We are underweight risky credit and remain positive on gold, which still represents a hedge against rising inflation and, alternatively, should benefit as US interest rates reach their peak and the dollar’s overvaluation starts to correct. The Swiss franc remains a haven, too, while the yen looks cheap after hitting multi-decade lows against the dollar, so we retain an overweight on both. By contrast, China’s 20th party congress reinforces concerns about political risks, which keeps us negative on the currency.