Pictet Asset Management has released its January Barometer. According to Luca Paolini, Chief Strategist, Pictet Asset Management, “The global economy continues to face challenges – weak growth and tightening monetary conditions – however, there are encouraging developments in emerging markets.”

Macro: Deterioration in global economic conditions is gathering pace.

A recession will be unavoidable this year, but it should be both shallow and short before the economy begins to recover in the middle of 2023. Global inflation is likely to decline this year to 5.2 per cent from 7.7 per cent in 2023, helped by weaker commodity prices and falling wage demands and rental prices.

We therefore have chosen to retain a defensive stance; we remain underweight equities and overweight bonds.

Bonds: Weakness in the dollar

We expect the US currency to fall further in the coming months – bodes particularly well for emerging market debt. In developed markets, we believe US bonds remain attractive as the Fed is arguably further along the tightening cycle than any other major central bank.

We are cautious on European debt, given greater inflationary pressures in the euro zone and the need for more rate hikes.

Equities: We start the new year with a tilt towards Asian and emerging market equities.

We upgrade Chinese equities to overweight from neutral amid signs that Beijing is seeking to normalise its pandemic policies. Pent-up consumption should be a big boost to the domestic economy once it gets past Covid. Following their strong performance and with the yen expected to strengthen over the coming year, we downgrade Japanese equities to neutral from overweight.

We remain cautious on developed market equities. We don’t think investors have fully appreciated quite how dim prospects are for corporate earnings and margins in these markets.